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In Which Direction Will Gold Go From Now?

By:
Carolane De Palmas
Published: Mar 30, 2023, 09:24 GMT+00:00

During market uncertainty and economic instability, investors often seek safe and stable assets to protect their investments. This typically involves them turning to assets such as US government bonds and commodities like Gold.

Gold, FX Empire

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Recently, the fallout of several banks including Silicon Valley Bank, Silvergate, Signature, and Credit Suisse has caused significant downturns in equity markets and sparked fears of potential contagion to other global banks.

Weekly Gold chart – Source: Online trading platform from ActivTrades

As a result, many investors have turned to Gold over the past two weeks, driving the price of the precious metal above $2,000 for the first time since March 9, 2022. However, since then, Gold has lost momentum, hovering around $1,970, leading investors to question what may lie ahead for this asset.

Gold Could Continue to Go Up as Worries About the Stability of the Financial, Monetary, and Economic Systems Grow

It’s important to bear in mind that Gold has traditionally served as a safe haven asset during periods of economic uncertainty, financial market volatility, and instability in the global financial and monetary system. During these times, investors often rush to Gold as a “flight to quality” solution to avoid assets that are seen as riskier, like stocks.

This trend has been clear in the last few weeks, as events like the bankruptcies of US banks and the problems at Credit Suisse and Deutsche Bank have caused investors to seek safety in Gold as they raised questions about the strength of the world’s banking system.

Moreover, earlier this week, French authorities searched the office of five international banks in Paris on suspicion of fiscal fraud, which might lead to a significant fine and late interest payment of more than $1 billion, as reported by Reuters.

As many investors are still unsure about the chance of global contagion and the overall level of systemic financial risk, Gold could take advantage of this uncertainty and play its key role as a safe haven asset in the coming weeks and months, depending on what happens in the industry.

Additionally, recession risk, especially in the US, is higher than ever for many analysts because of the aggressive monetary policy from the Fed, which is showing no real signs of slowing down any time soon.

Following the collapse of SVB, which suffered significant losses due to the impact of US rate hikes on its bond portfolio, the bond market had to deal with significant movements, forcing investors to turn to Gold amidst the panic, rather than bonds.

Even though this change in the bond market was mostly due to flight-to-safety and expectations of a possible slowdown in the Fed’s monetary policy and even the possibility of future rate cuts, the FOMC decided to raise its interest rate by a quarter of a percentage point last week, despite the ongoing market turmoil and the banking crisis, bringing the target rate range to 4.75%-5.00%.

Even though Fed officials have emphasized that the banking system remains strong and resilient, with enough capital and liquidity, they also stated that their efforts to combat inflation are not over yet. And some experts are warning that the Fed’s actions could increase the likelihood of a recession in the United States, which could lead to further bank failures.

Investors will be paying close attention to all new economic data and statistics, as well as any news about the health of the banking sector, which could cause the Fed to change its plan about its interest rate hike trajectory.

On Friday, 7th of April, the March NFP report will be released and might show a slow-down in job gains. The recent turmoil in the banking industry is believed by many analysts and investors to have had a detrimental effect on the job market in the United States. As less loans are likely to be made available as a result of stricter lending criteria and higher borrowing costs, unemployment rates might go up and restrict job growth.

As Investors Could Lose Some of Their Money Because of the Latest Bankruptcies, Many Have Decided to Turn to Gold and Many Could Still Do

One of the reasons why the price of Gold exploded earlier this month was because people were worried about the possibility that some customers of bankrupt banks might have lost money. This is because the government only protects deposits up to a certain amount, usually $250,000 in the US and €100,000 in Europe.

Also, some shareholders and bondholders lose all or part of their investments when a bank goes bankrupt or if a struggling company has to be sold quickly, like when Credit Suisse was taken over by UBS.

For example, AT1 bondholders of Credit Suisse have seen the value of their investments disappear because the value of the bond was close to 0. Shareholders of the former Swiss bank have also lost money because the ratio of 22.48 Credit Suisse shares to 1 UBS share, which was agreed upon when UBS bought Credit Suisse, is equal to a price of CHF 0.76 per share, which is more than 50% lower than the closing price of the share at the time of the takeover.

Given these risks, many investors may be rebalancing their portfolios and could decide to include more Gold.

Should You Invest in Gold?

Gold is often added to financial portfolios for better diversification and to include a relatively stable safe-haven asset, as its price cannot be controlled by central banks. It is also a commodity that doesn’t deteriorate with time.

If you’re not keen to buy and store physical Gold, there are financial products you can use to get exposure to Gold, such as ETFs, futures, options, Gold-related stocks, and CFDs or Contracts For Difference. You just need to consider your trading personality, as well as your strategy and your objectives, to pick the best product for you.

Disclaimer

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About the Author

Carolane graduated with a Masters in Corporate Finance & Financial Markets and got the AMF Certification (Financial Markets Regulator in France). Afterward, she became an independent trader, investing mostly in European and American stocks/indices.

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