Gold’s on everyone’s minds lately after jumping by over $150 in under a week following the collapse of SVB and unsettling unemployment reports. On March 16, prices reached a six-week high before jumping beyond the $2,000 line for the first time since early 2022 when Russia invaded Ukraine. With this excellent momentum, more investors are turning toward the shiny precious metal to protect their assets amid the failing economy, allowing prices to surge even higher.
At the beginning of the year, many analysts and banks alike set their price forecasts for gold’s 2023 performance rates at a modest level, though given March’s events, modesty may not be necessary anymore. A few banks are already increasing their predictions as worldwide markets continue stockpiling gold to prepare for the nearing banking crisis that’s already on the horizon in the United States.
SVB Financial, the 16th largest commercial banking institution in the U.S. was not a silo failure when it collapsed on March 10. A few days later, Credit Suisse, one of the largest banking institutions in Europe, suffered a price drop of over 30% after losing approximately $8 billion last year. The banking crisis and market tensions are spreading globally at astronomical rates, and the sooner the economy fails, the faster gold will rise.
With all of these factors in mind, commodity analysts from Commerzbank believe gold prices should end the year around $1,950 per ounce. To put this into perspective, gold prices entered 2023 at $1823.91. At the time, the average forecast among major analysts on gold performance for the year was around $1,859 per ounce, meaning Commersbank’s forecast shows more promising improvements based on recent market developments.
After February’s price dips following shaky Federal Reserve actions, gold has been steadily holding its prices above the $1,900 line, proving its stability amid market volatility. Thu Lan Nguyen, the German bank’s head of commodity research, explains how their predictions revolve around how the Federal Reserve shapes its monetary policy to respond to the economy and how these actions affect the banking crisis.
As of right now, we can semi-predict how certain economic scenarios may play out, though no one actually knows for sure. For example, in February, gold prices dragged because the Federal Reserve hiked interest rates to control inflation. Come early March, this action turned into an overcorrection that contributed to the SVB meltdown, ultimately skyrocketing gold prices.
“If further bankruptcies follow or if the market increases 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,” Nguyen explains. Conversely, if the economy settles and fears of a banking crisis calm down, then gold prices will likely follow suit.
Understanding exactly which scenario will play out can feel like a guessing game, though it’s important to remember that investment demand is only one small sector impacting gold’s prices. Demand from other sectors, including central banks, will likely remain steady or continue rising as we persist through 2023. If investor demand from individuals continues to rise at its current rate, we could breach Commerzbank’s $1,950 prediction.
“U.S. 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,” Nguyen continues. “The Swiss National Bank also came to the rescue by providing liquidity support. If fears can be allayed, this could, according to our U.S. 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.”
According to CME FedWatch Tool, analysis shows an 80% likelihood of another Fed interest rate increase by 25 basis points in the next week. The same predictions show a 55% chance of another hike in May with rate cuts coming by late summer.
Keep in mind that projections surrounding Federal Reserve policies have shown excessive volatility. Some predictions show a 50% chance of no rate cuts at all.
Regardless of how predictions play out, Commerzbank still firmly believes the Federal Reserve will reduce interest rates by the end of the year, ultimately supporting increased gold prices. “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,” Nguyen concludes.
As always, investors should consult their financial advisors before making any portfolio decisions.