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(Kitco News) The gold market rallied as banking sector turbulence intensified despite Federal Reserve Chair Jerome Powell's attempt to calm the markets.
Comex gold hit new record highs of $2,085.40 overnight, with June Comex gold futures last trading at $2,062.70, up 1.26% on the day.
Banking fears escalated Thursday on contagion risk within the U.S. regional bank space.
PacWest Bancorp, a regional bank, was reportedly looking at various strategic options, including a sale. Following the news, the bank's shares tumbled more than 41% Thursday.
The stock of Western Alliance also plunged 39% after FT reported that it was considering a potential sale of all or part of its business. The Arizona-based bank denied the report, describing it as "categorically false in all respects" and noting that "Western Alliance is not exploring a sale, nor has it hired an advisor to explore strategic options."
Other regional bank shares saw a steep selloff as well, with the SPDR S&P Regional Bank ETF down nearly 9% on the day.
The renewed urgency within the banking sector is the opposite reaction Powell envisioned when he spoke to reporters on Wednesday.
After raising rates by another 25 basis points and signaling a potential pause in June, Powell reassured the market that the banking sector is "sound and resilient."
Powell also pointed out that the resolution of the First Republic collapse was an important step in "drawing a line under that period of severe stress." He added that three large banks were "at the heart of the stress." And "those have been resolved," Powell noted, stating that the Fed is "very focused on what's happening with credit availability."
The big change in the Fed's May statement was a decision to omit the reference to "some additional policy firming may be appropriate." From now on, Powell said the Fed would be making its decisions meeting by meeting and basing its assessment on incoming data and credit conditions.
Powell was also grilled by reporters on how credit tightening from the banking sector stress impacts monetary policy decisions. According to the Fed chair, the focus of the U.S. central bank will be monitoring small and medium-sized banks.
"We are very focused on, uh, what's happening with credit availability. Particularly, [we are watching] small and medium-sized banks, who are feeling that they need to tighten credit standards and build liquidity. What's going to be the macroeconomic effect of that? More broadly, we will continue to very carefully monitor what's going on in the banking system, and we'll factor that assessment into our decisions," he explained.
Many market experts disagree with the Fed's outlook, stressing that the decision to keep rates elevated only exacerbates the banking issues.
"Leaving rates this high is going to continue this stress," DoubleLine CEO Jeffrey Gundlach told CNBC Wednesday. "I believe with a very high degree of probability there's going to be further regional bank failures."
More stress in the banking sector has pushed investors to safe havens like gold.
"The melt-up in prices overnight associated with ongoing stress in the banking sector revealed that traders are willing to deploy their hoard of dry-powder," said TD Securities senior commodity strategist Daniel Ghali. "Our gauge of discretionary trader positioning still suggests this cohort has yet to participate in the rally in gold."
TD Securities expects the market to keep pricing in rate cuts into next year, which will keep gold supported and moving to $2,100 an ounce later this year.
"This feeds the view that gold markets may have just entered into a new bull market with prices near all-time highs," Ghali said.
