News

Gold prices poised for a rally as banking crisis reinvigorates precious metal’s value

Published by
WIlliam Dube

The old adage states that when the US Federal Reserve initiates interest rate hikes, it persists until something breaks. It appears that day has arrived, as evidenced by the collapse of two US regional banks.

Silicon Valley’s collapse in California represents the largest bank failure in the US since 2008, and coupled with the subsequent collapse of Signature Bank in New York and liquidity concerns surrounding Credit Suisse, financial regulators in the US and worldwide are scrambling to manage the fallout. This has sent shockwaves throughout the banking sector while simultaneously boosting the gold price, which experienced a 9% surge from $1,815 per ounce last Thursday, exceeding $1,980 per ounce over the weekend.

The stocks of gold-related companies such as Harmony Gold, Gold Fields, and AngloGold Ashanti have been buoyed disproportionately, with share prices soaring 21%, 23%, and 18%, respectively, in the past week. The yellow metal’s performance in rand terms is even more impressive, currently trading at an all-time high of R36,200 an ounce. Bruce Williamson of Integral Asset Management notes the dollar gold price and Rand weakening as factors contributing to this remarkable chart.

With recent developments, many are left wondering if these events signal the beginning of a gold price rally. The US Federal Reserve’s decision to consistently raise interest rates in the latter months of 2022 led to a drop in gold prices. Steph Erasmus, an investment analyst at Anchor Capital, believes the market will be closely watching the Federal Reserve’s next move on interest rates.

According to Erasmus, the Fed will need to balance its assessment of inflation in February against the collapse of two regional banks. Gold may experience pricing pressure if the Fed continues to raise interest rates since higher rates increase the opportunity cost of holding non-yielding assets. However, if the Fed pauses its rate increases, there may be room for further gold price gains as gold has historically been considered a hedge against inflation.

Williamson remains uncertain whether gold can lose, regardless of the Fed’s decision. Over the past three years, the 10-year US Treasury yield has risen from 0.5% to 4%, a seemingly small increase, but it represents a staggering 700% increase. This has had a significant impact on the banks that are now failing, as they were invested in bonds at 0.5% and 1%. As interest rates rise, the price of the bond falls, forcing banks to mark-to-market those investments and declare them as losses, which can be detrimental if depositors demand their deposits back.

Independent analyst Franco Lorenzani, on the other hand, believes that this “flash bank crash” marks the end of the Fed’s rate-hiking cycle and could potentially spark a rally in the gold price. Several factors contribute to this perfect storm for gold: the Fed’s reluctance to continue raising rates, Russia’s ongoing war in Ukraine, China’s Central Bank buying gold at near-record levels, and increasing difficulty in mining gold.

To take advantage of the possible gold rally, experts recommend investing not only in gold but also in companies heavily geared toward gold prices. Local miners who spend in rands but earn in dollars are expected to benefit significantly from this situation.

According to Lorenzani, these miners are “going to be spewing cash,” as evidenced by the overnight surge in the gold price by 9%, which resulted in a 21% increase for Harmony Gold. Williamson adds that solid gold operators should see their bottom lines increase commensurately with higher rand gold prices due to the gearing effect on gold prices.

Lorenzani, a self-proclaimed gold bull, views the current environment as fertile ground for bullion. He believes that, at worst, gold prices will remain stable at current levels, and at best, they will continue to rise materially. Peter Major, director of mining at Modern Capital Solutions, shares a similar sentiment. He argues that gold has already been discounting much of what’s been happening, but that doesn’t mean it can’t rise further.

Major highlights various factors driving gold and silver prices, such as a weaker dollar, rising interest rates, massive and growing debt, money printing, inflation, and impending bank collapses. He asserts, “So either inflation and debt growth gets controlled hard and quick, or this gold price is going to keep on rising.”

WIlliam Dube

William Dube is a finance and economic news expert with over 10 years of experience in economic anaylsis, financial product assessment and market analysis. With a numerous certificates from prestigious universities including but not limited to Yale University and the University of Pennyslivenia. William specializes in providing insightful news developments in South Africa and commentary on investment strategies, risk management, and global economic trends. You can contact him on william@rateweb.co.za

Share
Published by
WIlliam Dube

Recent Posts

Tesla Unveils Refreshed Model 3 in North America with Exciting Upgrades

Model 3 Refresh: Tesla introduces a restyled Model 3 in North America, featuring a rear…

January 11, 2024

SEC Twitter Account Compromised, False Bitcoin ETF Approval Post Triggers Market Volatility

Unidentified individual accessed SEC's Twitter through a third party. Lack of two-factor authentication heightened vulnerability.…

January 11, 2024

Global Currency Markets Navigate Economic Uncertainties: Yen Weakens, Dollar Awaits U.S. Inflation Data

Japanese yen falls against the dollar and euro due to persistently shrinking real wages for…

January 11, 2024

Oil Prices Unmoved as Unexpected U.S. Inventory Build Raises Concerns

Unexpected Inventory Build: U.S. crude inventories unexpectedly grew, sparking concerns about weakening fuel demand and…

January 11, 2024

YanGuFang International Group Appoints Interim Executives Amidst CEO and CFO Detainment

Leadership Shake-up: CEO and CFO of YanGuFang International Group detained by Shanghai Police, prompting interim…

January 11, 2024

Cryptocurrency Market Analysis: SHIB, SOL, and ETH Navigate Challenging Terrain

SHIB breaches 200-day EMA, signaling bearish sentiment. Historical data suggests strong buyer reactions and potential…

January 11, 2024