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(Kitco News) - The biggest banking crisis since the Great Financial Crisis of 2008 prompted investors to flee into gold last month, ending ten consecutive months of outflows, according to the latest report from the World Gold Council.
In its monthly ETF report, the WGC said 32 tonnes of precious metal, worth $1.9 billion, flowed in global gold-backed exchange-traded products in March.
"Lower yields, a weaker dollar and safe-haven buying lifted the gold price in March by 9%, fuelled by the recent banking industry crisis," the analysts said in the report published Thursday. "This was a key contributor to net inflows into physically-backed gold ETFs during March as investors flocked to gold in bulk after 12 March, following the collapse of the Silicon Valley Bank."
Looking at regional data, the report said that North American-based funds saw inflows of 12 tonnes last month, worth $806 million. At the same time, European funds saw inflows of 18 tonnes, valued at $927 million. Finally, the Asian ETF market saw inflows of 3 tonnes, worth $203 million.
Although March saw the gold ETF market sharply turn, demand last month wasn't enough to undo a relatively disappointing start to the year. The WGC said that gold-backed ETFs saw net outflows of 28.7 tonnes worth $1.5 billion in the first quarter of 2023.
The WGC said this is the fourth consecutive quarter of net outflows.
However, the analysts expect that gold demand will remain robust as uncertainty continues to dominate financial markets.
"Cracks from unprecedented monetary policy are beginning to show, most notably in small US banks and their intertwined commercial real estate sector, although these look controllable for now," the analysts said. "The case for an economic slowdown remains. Gold is handy in a recession as dry powder given that a weakened economy is more exposed to these financial cracks becoming systemic."
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Easing tensions in financial markets has created some technical selling pressure in gold, as prices fall below $2,000 an ounce at the start of the week.
Also weighing on gold are shifting expectations that the Federal Reserve may raise interest rates one last time in May, pushing the Fed Funds rate to between 5.00% and 5.25%. Although near-term expectations have been extremely volatile, markets still expect the U.S. central bank to cut rates before the end of the year.
Many analysts have said that growing recession fears and expectations that the Federal Reserve will be forced to loosen interest rates before it gets inflation under control will continue to support gold prices through 2023.
At the same time, analysts have also said that despite easing tensions, the banking crisis has not gone away. Some economists note that it's unclear how banks will handle higher consumer credit default rates as the recession starts to bite. The WGC pointed to commercial real estate as a potential risk for the financial sector.
"A bit of complacency, faith in central bankers and equity market resilience makes for an uneasy cocktail in the event of a full-blown crisis. But since such crises are almost impossible to time, a strategic holding to gold makes sense," the analysts said.
