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Gold digests Yellen's take on banking turmoil, gears up for Powell's comments

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(Kitco News) The gold market retreated to the mid-$1,950s as banking fears eased and investors focused on Wednesday's Federal Reserve monetary policy meeting.

The latest development in the banking crisis was Treasury Secretary Janet Yellen stating that more actions may be needed to protect bank depositors.

"Our intervention was necessary to protect the broader U.S. banking system, and similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion," Yellen said Tuesday at an American Bankers Association conference in Washington.

Yellen spoke a week after the Federal Deposit Insurance Corp (FDIC) moved to close the failing Silicon Valley Bank and Signature Bank. In response, U.S. regulators guaranteed insured and uninsured deposits at both institutions. The Fed also launched its new lending program — Bank Term Funding — and changed its rules around the emergency discount window to help banks meet deposit withdrawals.

The U.S. Treasury Secretary added that the "decisive and forceful" actions helped to strengthen public confidence in the U.S. banking system. "Our intervention was necessary to protect the broader U.S. banking system," she said.

Yellen did not elaborate on what the additional actions could look like but noted that regulators will be looking into the collapse of Silicon Valley Bank and Signature Bank closely and reexamining the "current regulatory and supervisory regimes."

U.S. officials have also been looking into temporarily expanding FDIC coverage to all deposits to avoid bank runs. The current cap for insured deposits is $250,000. This comes after a group of banks pushed the idea to prevent a potential financial crisis, according to Bloomberg.

Last week, JPMorgan and ten other banks deposited $30 billion into First Republic — the latest bank hit with large cash outflows after the Silicon Valley Bank collapse.

On top of that, markets watched a historic takeover as Switzerland's largest bank UBS agreed to purchase Credit Suisse for $3.2 billion.

"It is aimed at containing the panic and jitters currently around the financial system," said FXTM senior research analyst Lukman Otunuga. "The overall mood remains fragile with investors likely to remain guarded ahead of the Fed meeting tomorrow."

Gold's take

After briefly breaching $2,000 an ounce on Monday, gold retreated to $1,950 an ounce Tuesday, with markets focusing on how the Fed's monetary policy could change in reaction to the ongoing banking turmoil.

April gold futures were last down $32 on the day, trading at $1,950.60 an ounce. A slight uptick in risk appetite weighed on gold's short-term price action. But longer term, analysts see more upside potential.

"Profit-taking ahead of this week's FOMC has pressured gold prices below the $2,000/oz mark. Looking forward, we still could see substantial CTA buying activity above the $2,045/oz mark, but the journey towards this key trigger level will require additional discretionary interest," said TD Securities senior commodity strategist Daniel Ghali.

The banking crisis triggered the best weekly gains in gold since March 2020. "Back then, at the start of the coronavirus pandemic, there had been serious market turmoil, with emergency measures being implemented by central banks," said Commerzbank analyst Carsten Fritsch.

Powell's message in focus

Shifting Fed rate hike expectations have pushed gold higher as investors see the Fed slowing down sooner than previously thought.

"The sharp fall in interest rate expectations, and thus also in bond yields, is likely to have played an important role as it means that gold, being a non-interest-bearing asset, has become more attractive," Fritsch said. "What statements the Fed makes in its communiqué tomorrow about its future monetary policy, and what Fed Chair Powell says in the subsequent press conference about the interest rate outlook, are thus likely to play a key role."

If Powell squashes rate cut expectations, gold could see a selloff. But if there is more of a dovish tone, gold could once again move above the $2,000 mark, Fritsch added.

Market consensus calls are projecting for the Fed to raise the rate by 25 basis points Wednesday.

"Key for markets will be what the central bank has to say about the recent developments concerning the SVB collapse and Credit Suisse drama, especially after the UBS takeover," Otunuga said. "If the Federal Reserve surprises markets by leaving rates unchanged, this could signal the end of the rate hike cycle with the next move being a cut in rates."

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