GOLD prices reached this year’s highs of over $2,020 per ounce in an effort to beat the all-time record of $2,074.5 per ounce that was recorded in Aug
GOLD prices reached this year’s highs of over $2,020 per ounce in an effort to beat the all-time record of $2,074.5 per ounce that was recorded in August 2020. And this time it might be successful as uncertainty in the markets is growing rapidly.
There are numerous major drivers that may push gold up to new record prices, and they are piling up rapidly. Firstly, stubborn inflation is slowly reacting to the efforts of central bankers to bring it under control by raising interest rates. Even though inflation in the United States has slowed down to 6% year-on-year in February, Core inflation was reported to be up by 0.5% on a monthly basis, accelerating from 0.4% in January. This is worrying as core inflation indicated a trend of internal inflationary factors without volatile food and energy prices.
Headline inflation in Europe fell dramatically to 6.9% year-on-year in March compared to 8.5% in February. This huge drop was prompted by falling energy prices. Again, core inflation is accelerating to an all-time record of 5.7% in March from 5.6% in February. Food, alcohol, and tobacco are seen to have the largest contribution to inflation and the highest annual rate at 15.4% compared to 15% in February.
Esperio analyst note that tightening borrowing conditions after a recent banking crisis both in the U.S. and Europe has somewhat slowed inflation, but this tightening will only have a delayed effect on prices to bring them down.
However, most important is the banking crisis itself. Jamie Dimon, the longtime JPMorgan Chase CEO, shocked shareholders in his annual letter to them as he believes that “the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come.” JP Morgan has been heavily involved in the rescue of the banking sector after it and some other large U.S. banks made a $30 billion deposit at First Republic that was expected to collapse after the Silicon Valley Bank crash.
Although he said that recent events are nothing like what occurred during the 2008 global financial crisis, investors were heavily disappointed with such pessimism and the new wave of a possible credit crisis has suddenly reappeared.
The volatility in stocks has been trimmed down below 20 points for the VIX CBOE Volatility index. Any reading above 20 points is considered high volatility and stress for investors. Overall, the VIX was pushed down from the recent high altitude of 30 points a few weeks earlier. So, this is a very unstable situation that may resolve with erupted volatility at any moment. If we look closer at the components of the recent rally, we may find that it is driven mostly by large tech stocks like FAANG group, which includes Meta, Apple, Amazon, Netflix, and Google-parent Alphabet, that was supported by some other techs like Microsoft, Tesla, and Nvidia. These mega caps collectively contributed around 90% to the latest rally, overheating the market. Banking stocks, or industrial corporations, are looking quite pale on this background as they continue to suffer.
The other factor behind the rally of risky assets was the rise of liquidity which was poured into the market by the Federal Reserve (Fed) in March in an effort to secure deposits in the U.S. banking system. The monetary watchdog and the U.S. Finance Ministry added around $500 billion to the system in just two weeks. The Fed increased its balance sheet to $8,733 billion. Although it has unloaded some of the assets, deducing the balance to $8,706 billion by the end of March. This huge money injection could drive assets’ prices up.
The monetary policymakers both in the U.S. and in Europe are pretty serious about their intentions to increase monetary tightening. The European Central Bank (ECB) is expected to lift its interest rates by another 0.75 percentage points to 3.75%, while the Fed has clearly indicated it will make at least one more interest rate hike by 0.25 percentage points, likely in May. Both monetary policymakers are set to hold their tight monetary stance.
There are some more side factors that contribute to uncertainty in the market. So, gold has a strong chance to continue up if uncertainty continues to mount. This may bring gold prices to a new all-time high at $2400-2500 per ounce.
Alex Boltyan, senior analyst of Esperio company
GOLD
www.fxleaders.com