With Gold Futures consolidating recent gains, renewed banking fears are keeping the safe-haven metal in a tight range around the key $2000 level as month-end book squaring takes place into Fed week. We learned this week that the recent collapse of several prominent banks in the U.S. and Europe has seen depositors withdraw a total of $508 billion dollars from banks around the world.
Different problems, but fears of more bank runs are a potential risk on both sides of the Atlantic, as the health of the banking system has once again come into question. After several banking giants including First Republic, Bank of America, Barclays, Credit Suisse, Lloyds and Santander raised fresh alarm bells signaling deposit outflows have been significantly worse, herd psychology is now the big concern.
Although the market expects the Fed will raise rates one more time, by another 25 basis points to a target range of 5%-5.25%, a pause is expected later this year. And markets see a stronger than 80% chance that the central bank will lower its policy rate back to the range of 4.75%-5% by September, even if it opts for a rate hike at the upcoming meeting.
Over the past 70 years, a Fed pause or pivot has been followed by an economic recession 85% of the time. And immediately thereafter, gold prices began a strong up-leg to new all-time highs. Rate cuts are on the horizon, and the gold price has been sniffing out the Federal Reserve starting to loosen policy before the end of the year.
The pre-mature rate cut cycle announcement pushed the gold price through 6-year resistance at $1400 in mid-2019, rising to an all-time high of $2089 by mid-2020. Good for a $700 move over the next 12 months after a Fed pivot.