Insight

Monthly Gold Update - March 2023

Monthly Gold Update

Gold: Spotlight on March’s performance

Gold increased 7.8% In March as contagion fears in the financial system (first in the US and shortly followed by Europe) saw investors turn to the traditionally perceived safe havens. Behind this the fundamental drivers, namely lower real yields and a weaker USD, were supports to the rise in gold.

Gold price during the month

Source: Bloomberg, to 31 March 2023. Past performance does not predict future returns.

The gold price settled at $1,969 at the end of March, having broken the $2,000 barrier several times during the month when looking at intra-day prices. There was a spike in the demand for the metal following the collapse of Silicon Valley Bank (SVB) compounded by the Federal Deposit Insurance Corporation’s (FDIC) closure of Signature Bank. US authorities looked to preclude further bank runs by guaranteeing US bank deposits and the Fed opening an emergency lending facility to banks to conserve confidence in the banking sector. The takeover of Credit Swiss by UBS that occurred shortly thereafter was for unrelated reasons but still raised questions over confidence in the banking system, causing investors to seek out the conventional security of gold.

The nature of the failure of SVB gave rise to speculation that the Fed could pause its rate hike schedule and, given that the stress was centred in the banking sector, increased risk of a US recession – both positives for gold.

This means gold delivered another strong quarter of performance, adding 8.0%, remembering that February’s price fall effectively negated January’s price appreciation.

Keep an eye on … additional regulation for US mid- and small-sized banks as well as provisions for the shadow-banking sector.

Gold price and real bond yields

Source: Bloomberg, to 31 March 2023. Past performance does not predict future returns.

Real yields hit their highest level (1.7%) since November last year before falling to end the month at 1.1%. Investors grew increasingly pessimistic on the outlook for the US economy in part fuelled by the situation with the banking sector, reflected by the overnight index swap (OIS) curve. On 8 March, markets were pricing a further 75 basis points of rate hikes post the March meeting, but by the end of the month projections were balanced if there would even be one more hike. Of greater significance, two rate cuts were anticipated by the end of 2023.

That PCE inflation, often referred to as the Fed’s preferred measure of inflation, came in lower than expected for February was also supportive for gold. This added to the mounting evidence that US inflation is falling and gives the Fed greater scope to pause, if not cut, the Fed funds rate. Consumer expectations of inflation also fell at the last reading, though the USD 5y5y inflation swap has been sticky between 2.5-2.6%.

Keep an eye on … non-farm payrolls for softening in the labour market.

Gold price and the US Dollar

Source: Bloomberg, to 31 March 2023. Past performance does not predict future returns.

The USD index fell 2.3% in March, not quite giving up its gains achieved in February. Although there was an increase in demand for perceived safe-haven assets, that the centre of concerns was in the US and real yields were lower there meant the USD did not fully benefit. Gold was a direct beneficiary of the softer USD through the month.

March saw dramatic repricing of policy rates across the globe but with the US seeing the biggest shift with peak rate, if not already hit, expected to be reached in May. The Eurozone had forecasts of its peak rate reduced by 75 basis points. The UK was least impacted with its peak rate forecast at 4.6% from 4.7%. Consequently, Sterling was the strongest major currency against the USD in Q1 although gold also outperformed the British pound.

Keep an eye on … lingering inflation concerns see rate hikes priced back in.

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

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