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Gold's $3k rally? The missing catalyst is here: banking crisis signals economy's 'ebbing tide' - Bloomberg Intelligence

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(Kitco News) The missing driver to take gold to $2,000 an ounce is here, and it's the banking crisis. The financial fallout ensures that the Federal Reserve stops its tightening cycle, said Bloomberg Intelligence.

After rallying to five-week highs and trading near $1,920 an ounce Monday, gold comfortably settles in above $1,900 an ounce. Markets are busy digesting the impact of U.S. regulators rushing in to contain Silicon Valley Bank's and Signature Bank's sudden failures.

There are now reports that the U.S. Justice Department and the Securities and Exchange Commission have launched separate investigations into the collapse of Silicon Valley Bank.

Also, Moody downgraded its outlook on the U.S. banking system from "stable" to "negative."

The gold market has been on the receiving end of the renewed safe-haven demand. But even more so, the price has been driven by the re-pricing of the U.S. central bank's rate hike expectations. The bond market is currently signaling a potential pause in the tightening cycle.

"The banking crisis is part of the economic ebbing tide, and the Federal Reserve is done tightening," said Bloomberg Intelligence senior macro strategist Mike McGlone. "Federal funds futures in one year (FF13) show rates dropping below 4% on March 13 after the high close of 5.26% about a week earlier, which was the highest since 2007."

Given this change in the macro environment, gold is bound to see its new record highs, McGlone said Tuesday.

Gold's trading pattern could resemble that of 2018, when the precious metal breached $1,350 an ounce after the Federal funds' futures signaled a shift from tightening to easing. And the result this time around could be gold rising to the $3,000 level.

"That rally brought the metal to a new high of around $2,060. Conditions seem ample for gold to head to $3,000," McGlone said.

Lower commodity prices also indicate a slower economic growth outlook in which the Fed cannot tighten further.

"The Bloomberg Commodity Spot index is down about 20% on a 12-month basis to March 13, and the Fed has never sustained a tightening cycle with such deflating conditions (database since 1960) may be playing out in 1Q. Fed pivots to easing have been a top factor to buy gold," McGlone explained.

This is why gold looks to be a top commodity performer this year, especially if the U.S. is in recession.

"The highest probability for economic contraction from the yield curve since 1982 might be ample reason for the ratio of the metal to the Bloomberg Commodity Spot Index (BCOM) to rise in a similar pattern as from the bottom in 2008," McGlone added.

At the time of writing, April Comex gold futures were trading at $1,910.60 an ounce, down 0.31% on the day. Year-to-date, spot gold is up 4.4%.

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