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(Kitco News) - Bullish sentiment in the gold market has picked up significantly this past week, with prices pushing to a six-week high as investors looked for safe-haven assets following the failure of two U.S. commercial banks.
Some banks have started to increase their price forecasts for gold as worldwide financial markets face the growing threat of a new banking crisis. Market tensions spread globally when one of Europe's largest banks, Credit Suisse, saw its share price drop more than 30% Wednesday, a day after it said in its annual report that it lost roughly $8 billion last year.
Despite the growing risks in the marketplace, commodity analysts at Commerzbank said that they are standing firm with their forecast for prices to end the year around $1,950 an ounce, with growing upside potential.
The comments come as gold prices are holding their ground above $1,900 an ounce. April gold futures last traded at $1,924.90 an ounce, down 0.33% on the day.
In her latest gold report, Thu Lan Nguyen, head of commodity research at the German Bank, said that gold's path will be determined by the ongoing banking crisis and its impact on the Federal Reserve's monetary policy.
"If further bankruptcies follow or if the market increasingly prices in the risk of contagion effects, interest rate expectations could fall further and the gold price could, in turn, receive further tailwind as a result," she said.
However, Nguyen noted that gold would be vulnerable to a correction if fears of a more significant banking crisis faded.
"US President Biden assured all account holders of immediate and full access to their money at the affected institutions, which should have significantly reduced the likelihood of further stress in the financial system. The Swiss National Bank also came to the rescue by providing liquidity support," she said in the report. "If fears can be allayed, this could, according to our US experts, allow the Fed to raise interest rates further in order to curb inflation, which remains too high. In this case, the gold price would likely give up its recent gains."
Currently, the CME FedWatch Tool shows that markets see a more than 80% chance of the Federal Reserve raising interest rates by 25 basis points next week. Markets also see a 55% chance of one more rate hike in May. Markets see the Federal Reserve cutting interest rates by late summer.
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However, projections regarding the Federal Reserve's monetary policy have been extremely volatile. For most of this past week, there has been a 50/50 chance that the U.S. central bank would leave rates unchanged.
Looking past the recent volatility, Nguyen said that Commerzbank is still expecting the Federal Reserve to cut rates by the end of the year as the broader economy feels the effects of the aggressive tightening seen in 2022. She added that this turnaround will continue to support gold.
"The market's focus would subsequently turn to possible interest rate cuts, which should make gold look more attractive again in relative terms, as the price development of the last few days has impressively shown," she said.
