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(Kitco News) - The gold market continues to see solid support within striking distance of $2,000 an ounce. While gold prices can continue to perform well through the rest of the year, a new all-time high depends on how the current global banking crisis continues to unfold, according to one market strategist.
In an interview with Kitco News, Kristina Hooper, chief global market strategist at Invesco, said that while she is bullish on gold for the year, its current price action will depend on whether or not policymakers will be able to contain the situation and instill confidence in financial markets and the global banking system.
She noted that the government's plan to guarantee consumer bank deposits has gone a long way to calm initial fears. Last week at the start of the crisis, the Federal Reserve launched its Bank Term Funding Program, where banks can use their bonds for collateral to borrow capital from the central bank.
At the same time, the Federal Reserve has unleashed a record amount of liquidity through its discount window. Last week, banks borrowed nearly $153 billion to shore up their capital requirements. The previous record of $111 billion was set during the Great Financial Crisis.
Hooper said it will take some time to determine whether the current measures are enough to instill confidence.
"There are lots of tools at the disposal of policymakers, so this crisis can be averted. A situation like this is going to set us up for a scenario where we could see a more risk-on environment. In this environment, gold may not perform that well. But, if policymakers don't act quickly, this is likely to get worse," she said.
Although gold may not see a sustained break above $2,000 just yet, Hooper said that aside from the banking crisis, there are other factors that will keep prices well supported through the rest of the year.
She noted that the Federal Reserve will likely end its aggressive tightening cycle on Wednesday following its monetary policy meeting. Although inflation remains elevated, Hooper said she expects the Federal Reserve to prioritize financial stability over consumer prices.
"I think the most we can hope for right now is for them to hit the pause button. And I would argue that could be enough. That would be the appropriate response," she said. "We've done 475 basis points in 10 months; just hitting the pause button will give markets a kind of reprieve, some breathing room."
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Hooper added that this shift in monetary policy should weaken the U.S. dollar, providing a tailwind for gold.
According to the CME FedWatch Tool, the market currently sees about a 28% chance that the Federal Reserve will leave interest rates unchanged later this week.
At the same time, even if the banking crisis is resolved, she noted that markets could start focusing on a potential U.S. government default as Congress has yet to raise the debt ceiling.
"It's not just the current issues, but we have the debt ceiling debate in the offing, that could also drive investors to a safe-haven asset class like gold. The conditions are right for gold to perform well, in this stressed environment," she said.
Along with gold, in a world filled with uncertainty, Hooper said that they continue to look at building defensive positions in a portfolio, being underweight equities and overweight bonds.
