Gold briefly crosses $2,000 mark on First Republic Bank deal

The precious metal has slipped below the key level but could breach it again after clarity on Fed's interest rate cut direction

Gold is considered as a hedge against inflation and economic uncertainties, but rising interest rates tend to lower demand. Reuters
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Gold prices briefly rose above the $2,000 mark on Monday after JP Morgan’s acquisition of First Republic Bank’s assets, but were flat on Tuesday as investors waited for direction from major central banks on their monetary policy plans.

The uncertainty surrounding First Republic Bank pushed gold prices briefly above $2,000, Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said.

However, now that stress has eased, the US yields pop higher and the market is back to pricing a hawkish Fed to continue fighting inflation, she added.

“Resilience and continued demand for the US dollar as recession fears circulate, banks continue to collapse and anticipation of the Fed pulling the trigger on a final increase to the interest rate this week all likely led to gold pulling back,” Jameel Ahmad, chief analyst at forex broker comparison website, said.

“The near-term decline in gold momentum after finally breaking above $2,000, albeit briefly, could be swiftly reversed should the Fed deliver a downbeat assessment on its future monetary policy path over the next few days.”

Spot gold was trading at $1,981.52 at 11.50am on Tuesday. Today's trading range is $1,986.90-$1,994.40 and the 52-week trading range is $1,662.50-$2,063.40.

The US Federal Reserve, which meets on May 2 and 3, is widely expected to raise interest rates by 25 basis points.

The US central bank raised interest rates by a quarter of a percentage point on March 22.

The European Central Bank is also widely expected to raise rates for the seventh straight meeting on Thursday.

While gold is considered as a hedge against inflation and economic uncertainties, rising rates tend to lower demand for the zero-yielding asset.

The price of gold has risen to levels not registered since March 2020, on the back of banking and funding stress and a sharp rise in the market-implied probability of a US recession next year, investment bank Goldman Sachs said last month.

Regulators seized First Republic Bank and sold its assets to JP Morgan Chase on Monday, in a deal to resolve one of the largest US bank failures since the 2008 financial crisis.

Bullion prices slipped on Monday as the dollar rose after better-than-expected US manufacturing data, Reuters reported.

The Institute for Supply Management said on Monday that its manufacturing PMI rose to 47.1 last month from 46.3 in March, which was the lowest reading since May 2020.

The Fed is expected to make its final increase to interest rates tomorrow, according to Mr Ahmad.

“Focus will then quickly turn towards when Fed officials will begin preparing the market for potential decreases to the US interest rate,” he said.

“This is the signal that gold investors will most likely want to hear for the precious metal to maintain a more prolonged stay above $2,000.”

Given the latest surprise rise from the Reserve Bank of Australia, which raised its cash rate by 25 basis points to 3.85 per cent on Tuesday, and resilient US consumer and inflation figures, there is a growing chance that the Fed will keep its monetary policy tight enough to reinforce the US yields higher, according to Ms Ozkardeskaya.

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If this is the case, higher yields — which increase the opportunity cost of holding the non-interest-bearing gold — should weigh on gold’s valuation and it could retreat to the $1,900 to $1,950 range, she said.

In the near term, gold prices will depend on whether forthcoming economic data signals a slowdown in the economy and the Fed’s subsequent trajectory, said Vijay Valecha, chief investment officer at Century Financial.

“While a Fed rate increase typically exerts pressure on bullion, its bearish impact seems less pronounced in the current environment rife with fears of recession,” he said.

“Furthermore, the possibility of a US debt default is also lending safe-haven support to gold.”

In the long term, the global monetary system is gradually transitioning away from the US dollar and towards a new reserve currency. This bodes well for the prices of precious metals like gold and silver, Mr Valecha said.

Meanwhile, Lukman Otunuga, senior research analyst at FXTM, said gold prices are tracking sideways between $1,970 and $2,015, with the major psychological level of $2,000 at the centre.

“A strong breakout above $2,015 may encourage a move toward the April high at $2,047,” he said.

“Alternatively, a breakdown below $1,970 could open the doors toward $1,950 and $1,935.”

Updated: May 02, 2023, 9:38 AM