Gold Near $2,000 And Fast Approaching Its Life-Time High Amid US, Swiss Banking Crisis

By K Raveendran

Gold is within striking distance of $2,000 per ounce in the international market and seems set to revisit its historical high, which was $2067 in August 2020.  The latest price is around $1962 and is showing no signs of any immediate correction. In India, the precious metal has already touched a lifetime high of Rs 59,461 per 10 gm on MCX, further advancing from the previous high of Rs 58,847 recorded this week itself. Analysts are looking at a price of Rs 60,000 by next week.

The domestic gold price in India had increased by 3.8 percent in December, helping he year close with an impressive gain of 14 percent, mainly due to the weakening of the rupee against dollar. According to the council, sluggish retail demand drove the local price into discount, with the average discount staying at around $8 per ounce throughout 2022.

The immediate trigger for the new gold price run is the collapse of two US banks along with the crisis in Credit Suisse, which has forced the Swiss banking giant to seek help from the Swiss National Bank for survival, landmark events that have boosted gold’s safe haven value.

According to the World Gold Council, the recent developments are all gold-friendly. WGC points out how tightening standards weakens the corporate and consumer sector and by extension the economy, inching the US closer to an official recession. Recessions have historically been good for gold. A lower ceiling for interest rates is gold friendly too, limiting the opportunity cost of holding gold.

All this has brought about an about-turn in the performance of the precious metal, which had given back most of its gains early this year, particularly in February. Gold had shed 5.2 percent in February, as surprisingly strong US economic data propelled both yields and the US dollar higher. Global gold ETFs suffered more losses led by European funds while North American funds saw small outflows for the first time in two months.

However, the failure of Silicon Valley Bank and Signature Bank as well as trouble for Credit Suisse over the weekend sparked concerns over banking stress contagion, forcing governments to respond with monetary disinfectants. Experts see the banking crisis exerting pressure on the system, in the process increasing funding costs. With funding costs higher, and reports of deposits moving from smaller, regional banks to large too-big-to-fail institutions, banks are likely to curtail some lending too. This would lead to a further tightening of financial conditions. As a result, tech companies and their founders are expected to face greater hurdles to cash for fund their plans. The stronger regulatory scrutiny of cryptocurrency firms with their digital currencies pegged to the US dollar would also mean more difficulty to access the US banking system as easily as before, further adding to their woes.

The World Gold Council says that though not without risks, a good case for gold remains in place for 2023 driven by: elevated geopolitical risk; a developed market economic slowdown; a peak in interest rates, and risks to equity valuations. In addition, continued central bank buying can’t be ruled out.

Central bank gold demand in 2023 picked up from where it left off in 2022. According to the council, in January, central banks collectively added a net 31 tonnes to global gold reserves, which marked a 16 percent increase on a month to month basis. This was also comfortably within the 20-60t range of reported purchases which has been in place over the last 10 consecutive months of net buying.

Focus on central bank purchases has been intense in recent months, owing to the record level of buying in 2022. Two years on from dropping to its lowest level in a decade, central bank demand has rebounded strongly. Last year saw the second consecutive year on year increase in demand from this sector, with net purchases totalling 1,136 tonnes. In fact, 2022 marked a banner year for central bank buying: it was not only the thirteenth consecutive year of net purchases, but also the highest level of annual demand on record back to 1950, boosted by over 400 tonnes of demand in both third and fourth quarters of the year.

Central banks have been bullish on gold ever since they became net purchasers on an annual basis in 2010. This has been attributed to two key drivers: gold’s performance during times of crisis and its role as a long-term store of value. The council points out that it is hardly surprising then that in a year scarred by geopolitical uncertainty and rampant inflation, central banks opted to continue adding gold to their coffers and at an accelerated pace. (IPA Service)

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