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(Kitco News) Investors are embracing the gold market amid the quickly escalating banking contagion fears. Strong demand for the precious metal is keeping prices at 5-week highs Wednesday.
The banking sector roiled Wednesday as shares of Credit Suisse — a Swiss bank with extensive U.S. and global operations — tumbled 31% before paring back declines to 20%. This was the biggest one-day selloff on record and managed to drag European and U.S. stocks down.
With the global market rout stoking fears of a more significant fallout, gold is trading above $1,900 an ounce and is up 5.5% since the start of the year. April Comex gold futures were last at $1,941.60 an ounce, up 1.6% on the day.
"We expect this banking turmoil to reinvigorate investor demand over the longer term," said ANZ senior commodity strategist Daniel Hynes.
Demand for the precious metal is growing, with more than 300,000 ounces added to physically-backed gold ETFs in the last trading session, according to Bloomberg data. This marked the largest increase since June.
And analysts are saying that this could just be the start of the institutional investor coming back into the gold space, with a lot more upside potential for the price.
The key trigger analysts are watching is whether the Federal Reserve will pause its rate hike cycle as soon as next week — a topic that markets are currently debating. According to the CME FedWatch Tool, there is a 58% chance that the Fed will hold rates steady on March 22.
"Risks that the tightening cycle is coming to an end should realign discretionary flows with strong physical flows, which could translate into substantial upside [for gold]," said TD Securities senior commodity strategist Daniel Ghali. "The yellow metal still appears to offer the most competitive risk/reward on our screen."
In the meantime, regulators have stepped in to reassure markets after the sudden collapse of the Silicon Valley Bank and Signature Bank. But they are yet to contain the situation.
After the dramatic drop in the stock price, Credit Suisse appealed to the Swiss National Bank and federal regulators for public support, FT reported. Meanwhile, the European Central Bank contacted EU lenders and asked them to disclose their exposures to the Swiss lender, according to the same report.
The Credit Suisse situation is much more dangerous than a failure of a couple of U.S. regional banks, warned Capital Economics Wednesday.
"Credit Suisse has a much larger balance sheet than SVB and is much more globally inter-connected, with multiple subsidiaries outside Switzerland, including in the US. It is also a U.S. primary broker. Credit Suisse is not just a Swiss problem but a global one," said Capital Economics chief Europe economist Andrew Kenningham.
Also, the Credit Suisse predicament could impact the European Central Bank's policy decision scheduled for Thursday.
"Clearly there is a strong case for the ECB to wait and see how things develop. But our best guess at this stage is that the Bank will press on with its pre-announced plan to raise the deposit rate from 2.5% to 3.0% while stressing that policy is not on a predetermined path," Kenningham said.
The big problem facing markets is figuring out whether Credit Suisse is another "one-off" or the beginning of a global crisis. "This is the third 'one-off' problem in a few months, following the UK's gilt market crisis in September and the U.S. regional bank failures last week, so it would be foolish to assume there will be no other problems coming down the road," Kenningham added.
On the SVB front, the Fed will be launching its own internal review, which will be headed by Vice Chair for Supervision Michael Barr and released to the public by May 1. "The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve," Fed Chair Jerome Powell said in a statement.
Also, the Fed is looking into increasing its oversight of midsized banks, Bloomberg reported citing sources. The change would increase capital and liquidity thresholds closer to those of larger Wall Street firms.
This comes after the U.S. Department of Justice (DoJ) and Securities and Exchange Commission (SEC) launched their own investigations into the SVB case.
