Gold all aglow as it nears historic surge

GOLD was largely ho-hum last year amid a stellar rally across much of the commodities complex, but its narrative arc has shifted dramatically lately. With that, 2023 is shaping up to be a year when the precious metal could get its groove back.

The bullion has recaptured the US$2,000 an ounce glow at least twice in recent weeks (the last time it hit such levels was in March 2022), nudging close to record territory after sorely disappointing the bulls last year as rising interest rates and a stronger US dollar stole its shine. The metal’s steady ascent – it just capped its fourth straight week of gains – was led by safe haven flows in the wake of the banking duress following the collapse of America’s Silicon Valley Bank and Swiss giant Credit Suisse’s implosion.

Worries have since mounted over possible contagion risks and “credit crunch”, which could hurt global growth. These concerns, not without basis, have fuelled expectations that the US Federal Reserve is compelled to rethink its aggressive rate tightening trajectory aimed at tackling inflationary pressures. Indeed, the world’s largest central bank is walking an extremely tight rope between fighting inflation and averting a sharp economic slowdown and worsening the banking crisis.

At its recent meeting, the Fed raised rates by 25 basis points, as widely expected. While additional rate hikes are not ruled out given sticky inflation, there appeared to be less conviction by the Fed on that front this time. It also acknowledged that recent cracks in the US banking system could slow economic growth through a tightening of credit conditions. US Treasury Secretary Janet Yellen’s comments that a blanket guarantee of deposits had not been discussed, however, spurred risk aversion.

The Fed’s stance going forward is still not altogether clear. Milder hikes or a pause would bode well for the bullion while recent worries over a liquidity crisis and macro woes set the bulls charging towards the metal, which is also deemed a hedge against inflation, albeit an imperfect one.

It should be noted that gold is not too far away from its all-time high of US$2,075 an ounce reached in August 2020. It may not take much or long for it to break those levels given current volatile times that have resulted in safe-haven flows. Furthermore, demand from central banks will also be supportive for the metal.

For now, there appears to be some confidence that the efforts by central banks, regulators and governments may have averted (or rather, reduced the odds of) a full-blown banking crisis. That could see gold facing major resistance as it seeks to cross its record high.

But a worsening and prolonged banking turmoil, a sooner-than-expected pivot by the Fed on its rate cycle and the persistent element of fear could set the bullion on a historic surge. On the other hand, a dramatic shift of these possibilities could see the metal give up the great progress it has made – all in a month’s work.