Gold enters May having enjoyed two consecutive months of gains trading just shy of $2,000 an ounce, after a surge in safe-haven demand and gold’s lack of counterparty risk amid the continued fallout from the US banking crisis.
Gold investors now face two key questions. First, rather aptly, is how stable is First Republic and will the ongoing concerns about this US bank trigger a fresh wave of demand from haven-seeking investors? And second, how close is the Federal Reserve to the end of its cycle of interest rate hikes?
The Impact of US Banking Crisis on Gold
For the latter question, the first week of May is likely to bring another 25-basis point increase to the Fed’s benchmark interest rate followed by a similar move by the European Central Bank.
Yet even though interest rates continue to rise, attention has already started to switch to the end of this cycle with investors working out when the first interest rate cut may come. Gold is likely to be a beneficiary of this change of outlook with the physical metal’s appeal diminishing at times of rising interest rates.
Kinesis gold KAU offers holders a solution to this with the gold-backed currency providing all the security of a physical asset with the added incentive of a monthly yield paid from transactions using the currency or for holding it in a platform account.
While the market has some confidence in the next moves of the Fed, the same cannot be said for the outcome for First Republic with the US bank stuck in a state of limbo as April draws to a close. At the time of writing, no buyer had been found for the ailing institute and the US regulators were unwilling to step in to bail it out.
Market Confidence & Potential for Gold Rally
Market confidence has failed to meaningfully recover from the shock delivered to it by the failure of Silicon Valley Bank, Signature and Silvergate in March with gold demand remaining buyout despite a positive round of earnings from the biggest corporates. Therefore a fresh knock to this fragile confidence would send the demand for gold higher still, potentially seeing the precious metal challenge its all-time high.
Gold Trading History & Current Price Levels
It is worth remembering that even though the gold price has dropped below $2,000 an ounce, it is still trading at one of its highest levels on record, having only breached this significant threshold a handful of times in its long trading history.
Even with interest rates set for another increase, it is hard to see gold falling far from its current lofty position in the short to medium term with investors showing themselves unwilling to fully trust the positive health report of the global economy so far being illustrated by corporate earnings.
The Future Outlook for Gold
The fact that gold has managed to continue trading so close to $2,000 despite the headwind of another Fed hike around the corner also highlights how investors have moved on from the near-term view of where the US central bank is going with its next move and have instead returned to a more zoomed out view of how soon it will be until we’re talking about a cut to interest rates, a prospect that now looks possible before the end of the year.
Taking all these factors into consideration, May is likely to prove a pivotal month for gold and the broader market as in 30 days from now, we’re likely to have answers to these big questions and know how robust the US banking sector really is and how close an end to rate hikes truly is. But while questions are being answered, gold looks like a safe bet.
After spending the first quarter of the year largely frustrating investors, silver has well and truly woken up in March and April with the price surging above $25 an ounce. Having suffered some false dawns, could this finally be the start of the continued rally that silver’s strong fundamental case has pointed to?
Silver’s Reaction to Fed Rate Hikes
The major issue holding back silver’s attempts to climb higher has been the Federal Reserve’s adoption and implementation of an aggressive rate hike policy. The start of May is set to bring another 25 basis point increase to the US central bank’s benchmark rate. Yet while this move has been well trailed and therefore priced in, it will be interesting to note silver’s reaction to Wednesday’s announcement.
Previously, silver has often suffered outsized moves to any hawkish action by the Fed so if it can largely shrug off this upcoming increase, it would point to an investor attitude that is indeed moving on from the short-term of more interest rate increases and starting to look to the end of the hawkish cycle and even a possible rate cut before the end of the year.
Silver’s Industrial Demand & Bullish Outlook
The fact that silver draws significant physical demand from the major industrial trend of current times, the energy transition, should be enormously bullish for prices. However, the Fed cloud has weighed heavily on silver and thus far stopped it from pushing higher, with the price still below the $26 an ounce it was trading at in March last year, before the first of the Fed’s hikes.
Silver’s Potential Price Increase
With the fundamental outlook remaining as promising as ever, and with the end of the Fed hikes seemingly drawing closer, silver’s current price of $25 an ounce could represent a bargain price with the factors lining up to potentially push the price up towards $30 an ounce territory.
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