'Wall Street's favorite trade': Gold price at $2k on banking turmoil fears, hopes of Fed pause

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(Kitco News) The gold market is attracting new buyers, pushing prices to $2,000 an ounce Thursday on fears of further banking turmoil and hopes of the Federal Reserve pausing.

Gold climbed to a high of $2,006.10 an ounce Thursday. At the time of writing, April Comex gold futures were trading at $2,000.10, up 2.59% on the day. Markets digested Wednesday's widely expected 25-basis-point hike from the Federal Reserve and the Fed Chair Jerome Powell's messaging about a potential pause in tightening.

The critical change in the Fed's language following the Silicon Valley Bank's collapse was a shift from expectations of "ongoing rate increases" to "some additional policy firming."

When reporters grilled Powell on what this new Fed speak means, the Fed chair replied: "We no longer state that ongoing rate increases will be needed to quell inflation … Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes."

In short, the impact of the banking crisis could mean that the Fed's monetary policy will have less work to do.

And gold has responded positively to the uncertainty surrounding the banking crisis and the Fed's catch-22 position.

"Gold is becoming a favorite trade on Wall Street as many traders remain nervous post-Fed and over how quickly will U.S. authorities be able to contain further banking turmoil," said OANDA senior market analyst Edward Moya. "Gold is going to shine here, and it seems positioned to find a home above the $2,000 level. A run to record territory is not that far away."

And if financial stability concerns continue, gold's upside potential is even higher, according to analysts.

U.S. Treasury Secretary Janet Yellen failed to alleviate market fears during her latest congressional hearing.

The key question on everyone's mind is whether Washington is willing to back all U.S. bank deposits after sudden outflows contributed to the collapse of several U.S. regional banks. The current Federal Deposit Insurance Corp insurance limit is $250,000.

And Yellen pushed back on this idea Wednesday. She said that each situation would be reviewed on a case-by-case basis. "I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits," she said during a hearing before a Senate subcommittee.

Powell seemed to be sending a contradictory statement Wednesday: "What I'm saying is you've seen that we have the tools to protect depositors when there is a threat of serious harm to the economy or to the financial system, and we're prepared to use those tools. I think depositors should assume that their deposits are safe."

Despite the uncertainty of what will happen with the banking sector turmoil, gold's risks are to the upside, especially with growing expectations of rate cuts by the end of the year, said TD Securities senior commodity strategist Daniel Ghali.

"The balance of risks in gold remains to the upside, with a CTA buying activity potentially supporting prices north of $2,000/oz," Ghali said. "A subsequent break north of the $2,030/oz range would catalyze a substantial CTA buying program, beyond which discretionary interest for gold would likely need to rise before prices rally any further."

The ETF buyer is also supporting gold, with the Bloomberg data showing that gold-backed ETFs added more than 300,000 ounces in the last trading session, marking the biggest daily gain since last June.

"There's been a notable flight to quality bid across classic safe havens like gold and U.S. Treasuries," said MKS PAMP's head of metals strategy Nicky Shiels. "Gold has surged through $2000/oz, from only $1800/oz. We continue to think the SVB failure is a new catalyst and a game-changer for gold as it officially confirms that the Fed has broken something more important and closer to home."