Agencies
London
The sharp increase in gold prices — by $150 per troy ounce — over the past two weeks has been driven by an increase in fear-related demand, according to a report by Goldman Sachs.
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, the investment bank said.
“The speed at which markets repriced a Fed pivot from 100-basis-point tightening to 50 bps in rate cuts by year-end has been unprecedented, leading to a spike in rates volatility to levels last seen in the depth of the 2008 financial crisis,” the report said.
“During the sell-off, gold outperformed risk assets such as equities or credit, turning it into an effective hedge in the risk-off rotation. Cyclical commodities like oil and base metals fell sharply.”
On Wednesday, the US Federal Reserve raised interest rates by a quarter of a percentage point after policymakers were faced with a banking crisis and elevated inflation.
Earlier this month, Fed chairman Jerome Powell suggested that policymakers would probably return to aggressive rate rises, but the collapse of Silicon Valley Bank and contagion fears ended that plan.
Financial markets are also facing escalating volatility despite the news that Swiss bank UBS would acquire Credit Suisse, resulting in risk appetite being sucked from markets.
The continuing turmoil in the banking sector has raised risk while the flight to safety amid the doom and gloom resulted in gold — a traditional safe haven — surpassing $2,000 a troy ounce for the first time since March 2022, when Russia invaded Ukraine.
The rally in gold prices is being fuelled partly by fears of growing contagion risk in the banking industry, as well as fundamental driving forces, according to Vijay Valecha, chief investment officer at Century Financial.
“The recent turmoil inflicting US and European banks roiled global markets. A risk-off sentiment has permeated the markets in its aftermath as investors wait for further clues about the extent of the crisis,” he said.
