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Gold will outshine the other precious metals as fears of a global banking crisis grow - Mitsubishi's Jonathan Butler
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(Kitco News) - According to one market analyst, the gold market should continue to outperform within the precious metals sector as investors continue to react to the growing U.S. banking crisis, which has now spread in global financial markets.
The gold market has held solid support above $1,900 an ounce as markets continue to react to the fallout after U.S. regulators took control of California-based Silicon Valley Bank and New York's Signature Bank. Although the U.S. government has tried to calm fears by saying that all depositors' money at the two banks will be guaranteed, the failure has revealed significant cracks in financial markets that are starting to impact global institutions.
One of Europe's top banks, Credit Suisse, saw its share price plummet Wednesday. The selloff came a day after the Swiss bank said in its annual report that it lost roughly $8 billion last year. Late last year, Credit Suisse said it saw "significantly higher cash withdrawals and net asset outflows in the third quarter of 2022.
Adding to its financial worries, Saudi National Bank said it would not provide further financial help, maintaining its 9.9% stake in the bank.
Turning back to the U.S., Johnathan Butler, Precious Metals Strategist at Mitsubishi Corporation, said that the U.S. bank failures have been a "watershed moment in the 'higher for longer' interest rate narrative."
He noted that gold is benefiting as broad-based demand for safe-haven assets has pushed bond yields significantly lower.
"The 2-year US Treasury yield, which is sensitive to interest rate expectations, has fallen by more than 1% since Thursday, just before the news of SVB broke, marking the biggest 3-day decline since Black Monday of 1987, and leaving the yield at a 1-month low of just over 4%," he said in a note published Monday.
April gold futures last traded at $1,928.40 an ounce, up nearly 1% on the day. Gold is outperforming silver; May silver futures last traded at $22.035 an ounce, relatively unchanged on the day.
Both platinum and palladium are seeing significant losses Wednesday. April platinum futures last traded at $970.30 an ounce, down 2.7% on the session. At the same time, palladium last traded at $1,446.50 an ounce, down 4.69% on the day.
"The combination of falling yields, a weaker dollar and a rush into haven assets could continue to give some strength to precious metals in the near term, though this may be confined to gold and the more industrial-facing white metals could fare less well if economic growth stutters," Butler said. "Provided the banking contagion is contained, then equities and bond yields may eventually undergo something of a relief rally, and put the dollar back in the ascendant to gold's detriment, possibly helping the PGMs and silver, ultimately."
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Gold is the only true measure of value in our growing multipolar world - Byron King |
The precipitous drop in bond yields reflects a significant shift in interest rate expectations. The CME FedWatch Tool shows that markets are roughly split 50/50 on whether the U.S. central bank raises interest rates by 25 basis points or leaves them unchanged next week.
In comparison, last week, markets were pricing in an 80% chance that the Federal Reserve would raise interest rates by 50 basis points in March and saw another aggressive move in May.
Butler said that the new banking crisis shows just how precarious the health of financial markets is after a year of aggressive rate hikes from the Federal Reserve.
"This episode highlights that the ever-higher march of interest rates has consequences and cannot be taken for granted, even if economic conditions have until now remained generally benign," he said."What appears clear for now is that rates are not going to rise as quickly in the short term as had been thought, and precious metals in general and gold, in particular, continue to be attractive safe havens in times of turmoil – though the longer that turmoil continues, the more it could damage the industrial prospects for the white metals."
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