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Wild swings in Fed expectations can trigger $2k gold price, but washout could be 'vicious' - analysts

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(Kitco News) The gold market is attracting the safe-haven trade in a chaotic market environment amid growing fears of contagion from Silicon Valley Bank's (SVB) collapse. Markets are also reassessing interest rate hike expectations ahead of the Federal Reserve meeting on March 22.

There are two major drivers pushing the gold sector higher, senior technical strategist Michael Boutros told Kitco News.

"There is the risk of contagion and the question whether the Fed can continue to tighten as aggressively as they were foreshadowing," Boutros said Monday. "This is helpful for gold."

Gold prices shot up to five-week highs after the SVB and Signature Bank shock and traded comfortably above the $1,900 an ounce level. And according to analysts, there is a lot more upside in the trade, but certain technical levels must be hit first.

"We're coming into the next major critical level, and that's $1,912-$1,918. That six-dollar range is critical because it is this year's high-day close and the 2021 high-day close. It's a pivotal region," Boutros pointed out.

At the time of writing, April Comex gold futures were trading at $1,917.80, up 2.71% on the day.

If gold fails to rise above this range, it would be a sign that it is overbought. Meanwhile, if gold gets a weekly close above that level, it would signal a resumption of the broader uptrend, he added.

"Right now, I would start to be slightly more defensive coming into this level. This is the first major hurdle test for the gold rally," Boutros noted.

The flight to safety and rate hike expectations will remain in the driver's seat for the short term, Blue Line Futures chief market strategist Phillip Streible told Kitco News. The strategist is pricing in a rate hike pause but no rate cuts for this year.

"The Fed raised rates so much so quickly that we knew things were starting to break. Now, the central bank has to rethink its stance. That meeting is just nine days away," Streible said.

With the banking sector in financial distress, there is a concern that banks could start selling off their gold assets to raise capital, which would be a short-term negative, Walsh Trading co-director Sean Lusk told Kitco News.

Lusk is watching a close under $1,880 an ounce as a negative sign. "What I'm looking for here is a close under $1,880. That could open the door to $1,840, and then we got a double bottom around that $1,812 level. Those are the technical levels I'm watching," he said.

However, if the gold market can get a close over its daily high of $1,913 an ounce, this rally has more upside potential. "You have a real good chance of making a run for at least up to $24 in silver and $2,000 an ounce in gold," Lusk said.

Live 24 hours gold chart [Kitco Inc.]

Can't forget about Tuesday's CPI report

Tuesday's CPI release will be paramount for gold. "It's make-or-break time for gold tomorrow," Boutros said.

Market consensus calls expect U.S. inflation to slow down to 6% in February.

"The market turmoil is definitely something that affects the Fed's judgment, but at the end of the day, if inflation is running hot, that has to be the thing it is targeting," Boutros said.

The market is currently in a heated debate about whether or not the Fed chooses to hike by another 25 basis points on March 22 or halt its tightening cycle. And the Fed's decision will be heavily determined by the CPI report, Boutros added.

"The market basically resets its expectation for the interest rate policy. We were coming into the month with 80% saying 50 basis points. But today, at one point, it swung towards 60% for nothing. So these radical swings are going to continue to fuel volatility," he said.

Lessons from the 2008 financial crisis: risk of 'vicious' washout in gold

As the expectations around the Fed drive the market, gold's upside potential is clear. But if the narrative shifts, a selloff could be "vicious," Boutros pointed out.

"People are just looking to readjust their Fed expectations. The big question is not the speed but the terminal rate — where the Fed is going to level off," he said.

During the 2008 financial crisis, gold rallied into the mid-year, and then the market was hit by a massive correction. After the Fed cut rates, the gold market went on another bull run and posted then-record highs in 2009.

"The storyline can drift really abruptly to the upside for gold. But the washout can be vicious. It can swing really bullish, and then all of a sudden, interest rate expectations change," Boutros said. "At the end of the day, the technicals have been super clear. We've made a massive defense of uptrend support. For me, the line in the sand is still $1,807."

Is the U.S. response to the banking rout inflationary?

There is also this idea that the banking fallout is bullish for gold in the short-term but could be a negative driver in the long-term, warned Lusk.

"All this money being printed to help out makes the dollar worth less. That's why the dollar is selling off today. It only enhances gold as a safe haven," he said. "But once we get past this new story, is this going to bring about more inflation? The answer is yes. The Fed will have to continue to raise rates. So how does that affect gold? Probably to the negative."

It will also depend on how big the contagion risk is, which is still a big unknown. And it is unclear how long this crisis will last either, Lusk added. "We don't know who also has their tentacles into this bank or its subsidiaries and what is the real fallout," he said.

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