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Gold market holding gains but unable to break above $1,900 as U.S. government looks to contain bank failures by guaranteeing depositors remain whole

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(Kitco News) - The gold market is holding on to solid gains Sunday evening after a strong open driven by growing concerns that the U.S. banking sector is on the verge of another financial crisis.

The gold market is trading near a five-week high, even as prices have fallen from their session highs, a hair's breadth away from $1,900 an ounce. April gold futures last traded at $1,881.40 an ounce, up 0.76% on the day.

Financial market headlines have been fairly fluid Sunday evening as markets opened to news of another commercial bank, New York-based Signature Bank, which was closed and taken over by the Federal Deposit Insurance Corporation (FDIC). This was the latest bank failure after the FDIC took control of Silicon Valley Bank on Friday, the biggest bank failure since the 2008 Great Financial Crisis.

As contagion risks spread, U.S. regulators have quickly stepped up to stabilize markets and reassure jittery consumers. The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, in consultation with President Joe Biden, announced that depositors at SVB and Signature would be made whole.

"Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system," U.S. Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and FDIC Chairman Martin Gruenberg said in the joint statement. "This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth."

At the same time, the statement noted that shareholders and certain unsecured debt holders of the two banks would not be protected.

While the government and central bank have quickly stepped in to calm markets, analysts said that this could be the start of a domino crisis within the economy as the Federal Reserve's aggressive monetary policy starts to weigh on financial markets.

Bond analysts at TD Securities noted that while the fallout from SVB and other smaller banks might be contained, other more considerable systemic risks are looming.

"After a dramatic period of deposit growth, the Fed hiked at the fastest rate since the 1980s. Since then, we have seen a historic decline in bank deposits and unrealized losses on bank bond holdings. Even if SVB is sold, concerns about the liquidity and capital position of the banking system will remain," the analysts said.

In the current environment of growing uncertainty, many analysts have said that this could just be the start of gold's run higher as investors look for real assets to protect their wealth.

"U.S. financial sector troubles are just starting and gold has a proven record responding to this specific type of crisis," said Colin Cieszynski, chief market strategist at SIA Wealth Management, in a recent interview with Kitco News.

At the same time, analysts note that because of growing stresses in the banking sector, the Federal Reserve could end its tightening cycle before interest rates get to 6%, creating a solid tailwind for gold and silver.

"The Fed should and will likely be more dovish given unforeseen financial instability," said Nicky Shiels, head of metals strategy at MKS PAMP, in a research note Sunday.

Shiels added that she sees upside pressure on gold next week as "markets could get messy."

At the start of last week, markets were starting to price in the potential for the Federal Reserve to raise interest rates by 50 basis points at the next two meetings. However, those expectations have once again dramatically shifted.

Analysts at TD Securities said they see the Federal Reserve raising interest rates by 25 basis points on March 22, in line with current market expectations. They added that they see a terminal rate of around 5.75%.

In a recent interview with Kitco News, Chantelle Schieven, head of research at Capitalight Research, said that she sees gold prices pushing to all-time highs as the Federal Reserve cannot raise interest rates high enough to bring inflation under control.

"At some point, the Federal Reserve will have to back off; you can't have a banking system in crisis," she said.

Ole Hansen, head of commodity strategy at Saxo Bank, said that while he is bullish on gold, the precious metal needs to hold gains above $1,883 an ounce in the near term to signal a sustainable move above $1,900 an ounce.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.