SVB-induced chaos nudges investors to pile into gold

Last week’s NFP results were overshadowed by the abrupt collapse of the Silicon Valley Bank and distorted the market’s projections for the Fed’s tightening cycle. The collapse led investors to flee en-masse towards the precious aiding to its ascent above the $1900 key psychological level. In this report, we aim to shed light on the catalysts driving the precious metal’s price, assess its future outlook and conclude with a technical analysis.

SVB’s fallout scatters money markets projections

Market consensus about the Fed’s hiking path forward radically changed since last week. Following Fed Chair Powell’s comments, the market shifted their outlooks reflecting the hawkish prospects of the Fed, once the door for a larger magnitude hike sprung open. As a result, we saw the market shifting their projections, bracing for 50 basis points hike in the March meeting. As soon as the SVB’s collapse headlines hit however, the market quickly downgraded their projections for the 50 basis points hike and opted for a 25 basis points hike scenario, reverting to pre-Powell speech expectations. After the weekend and the Federal Reserve, FDIC and the Treasury Department’s joint decision to step in and ensure that depositors would get back their money back, we saw a complete 180 degree turn from the market, dismissing the 25-basis points scenario all together and ended up pricing in that the Fed would stay on hold in the March meeting. Earlier today the market was split equally between no hike and 25 basis points scenarios in anticipation of the inflation report. The underlying message from these observations is that the market has no clue on what’s to follow as we inch closer to the Fed meeting and further developments from the SVB case alongside the results from crucial US related data may be needed for more accurate assessments.

Fed deploys BTFP protection mechanism to stifle contagion

Over the weekend the FED, FIDC and Treasury Department traversed extraordinary lengths to maintain stability and contain undue panic within the market and decided to go forth with the decision to protect uninsured SVB depositors’ money. Furthermore, the Fed announced the creation of its new lending program for banks, dubbed the Bank Term Funding Program or BTFP in short. The facility will allow banks to “take advances from the Fed for up to a year by pledging Treasurys, mortgage-backed bonds and other debt as collateral. By allowing banks to pledge their bonds, they can meet customer withdrawals without having to sell their bonds at a loss, which is what Silicon Valley Bank did last week, sparking a run on the bank” WSJ reported.

Monster moves in bond yields boost inflows towards the precious

Bond yields were on a free fall mode for the past four days, with the US 2-year yield nose diving in extraordinary fashion by more than 100 basis points, from 5.07% peak formed last Tuesday and finding support around the 4% level. Similarly, the benchmark US 10-year treasury yield eased towards the 3.5% mark, down by more than 50 basis points for the same period. These erratic moves reflect the market worries for a possible spillover from the SVB’s collapse into the entire banking industry and as a result investors fled to safety, diverting significant inflows towards the precious. Hence, we observed gold’s price pivoting from the low $1800’s and soaring past the key psychological level of $1900 within three sessions, recording an incredulous 5.5% gain. Should fears for contagion persist and bond yields keep moving south, we may see gold’s price being propelled higher, closer to early February’s peak.

CPI print underscores the stickiness of inflationary pressures

Earlier today the latest US CPI print showcased that inflationary pressures have eased but remain well above the central bank’s 2% target. Both the month-on-month and the year-on-year headline CPI rates matched expectations, reported at 0.4% and 6.0% respectively, confirming the slowdown, however the Core CPI rate beat forecasts and rose to 0.5%, above market expectations of 0.4% and broadcasted once again the stickier nature of inflationary pressures. These results prior to SVB’s collapse would have most likely pushed markets to expect the 50 basis points hike from the Fed, however, taking into account the fallout of the Silicon Valley Bank, the FFF currently assigns a 85% probability in the scenario where the Fed hikes by 25 basis points. The results had minimal effect on the greenback, however the gold gained traction despite the jump of bond yields intraday and left analysts puzzled. Nevertheless, market participants will turn their attention towards Fed Governor Bowman’s comments later today who is conveniently the first Fed official to speak post the SVB mayhem and may drop some hints in regards to the Fed’s intentions.

Technical Analysis

XAUUSD H4 Chart

• Support: 1900 (S1), 1885 (S2), 1870 (S3)
• Resistance: 1915 (R1), 1930 (R2), 1945 (R3)

Looking at XAUUSD 4-hour chart we observe gold’s monster move demolishing all of our prior resistance levels, as investors’ confidence was shaken by SVB’s fallout and led them to flee towards the precious to safeguard themselves from another contagion. We hold a bullish outlook bias for the bullion given the ascending channel and since worries for a spillover continue to circulate the market. Supporting our case is the RSI indicator below our 4-hour chart that currently registers a value of 77, highlighting the extreme bullish sentiment that surrounds the precious metal. Yet we would like to point out that the move has been excessive as clearly seen by the multiple breaks above the upper bound of the Bollinger band, hence we would like to highlight the scenario of a possible correction lower in the short term or at the very least a period of consolidation. Moreover, worth pointing out is that the 100 period Moving Average appears to be on track to break above the 200 period Moving Average, and should that be the case the formation of a golden cross could signal to the bulls that more upside is expected. Should the bulls continue to dominate, we may see the break above the 1915 (R1) closest resistance level and the move closer to the 1930 (R2) resistance barrier. Also should extreme volatile conditions continue to plague the market we may see the price action rising higher, closer to the 1945 (R3) crucial resistance level. Should on the other hand, the bears take the initiative, we may see the break below the ascending channel, the definitive break of the 1900 (S1) support level and the move lower close to the 1885 (S2) support base. In extreme volatile conditions we may also see the price fall to lower ground and close in the 1870 (S3) support base.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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