Gold price retreats after hitting $2,000, banking issues continue

• Gold price has rallied over 10% in the past two weeks.
• Trust issues in banking sector continue despite the UBS takeover of Credit Suisse.
• Federal Reserve decision looms over current safe-haven dominance.

Gold price bulls have been the biggest beneficiaries of the international banking crisis that has taken over the financial markets in the past week. The bright metal has rallied more than 10% since March 8 and reached the round $2,000 level on Monday during the European trading session before retracing somewhat to trading $1,977 at the time of writing. Gold is nearing its double-top all-time highs from summer 2020 and March 2022 as traders try to find refuge in the most traditional safe-haven asset, ditching cash in the process. 

International banking crisis lifting Gold price

The spark that started this extreme risk-off mood scenario was the collapse of Sillicon Valley Bank (SVB), and it didn’t take long before a big international bank, Credit Suisse, got in trouble. With news over the weekend of Swiss giant bank UBS taking over its rival in shambles in a deal orchestrated by authorities in Switzerland, the markets have not calmed down.

Adding substance to these fears, a Senior Swiss lawmaker reportedly warned that “the UBS-Credit Suisse merger is an enormous risk.” The lawmaker noted that “the newly merged bank is too big for Switzerland to handle.”

Phil Carr, from the The Gold & Silver Club, explains how the banking crisis is helping Gold, Silver and other precious metals stage this rally:

Over the weekend, UBS Bank agreed to buy Credit Suisse in a historic $3.3 Billion deal. But this still may not be enough to prevent risk of contagion spreading across the broader banking sector – and the global economy.

Depositors aren't waiting around to find out, which bank fails next.

On Friday, US customers withdrew a total of $42 billion from their accounts. That's $4.2 billion an hour, or more than $1 million per second for ten hours straight.

Meanwhile, the precious metal markets recorded a net inflow totalling $5.9 billion. That's the second largest inflow into safe-haven metals ever recorded in a single week since the 2008 Global Financial Crisis.

Gold price rally at mercy of Federal Reserve conundrum

With the Federal Reserve meeting within the market sight this week, market players are asking themselves whether this flight to safe haven will keep benefiting Gold, or if the US Dollar can make a comeback. Eren Sengezer, Senior Analyst at FXStreet, depicts this conundrum in his weekly Gold price article:

“At this point, it looks very unlikely the Fed will opt for a 50 bps rate hike. If that were to be the case, the initial reaction could provide a boost to the USD and weigh on XAU/USD. However, such a decision could also revive fears over a deepening financial crisis and trigger a fresh bout of flight to safe-haven bonds, causing US T-bond yields to fall sharply and opening the door for a leg higher in Gold price.

At the other extreme, markets are likely to go back into panic mode even if the Fed were to leave its policy rate unchanged to address the tightening of financial conditions. Investors could assess such a decision as the situation in the banking sector being much worse than what they were led to believe.”

Forecast poll experts not buying into Gold price hype

Despite the huge bullish momentum in Gold price, FXStreet Forecast Poll respondents are way more cautious, with the consensus not buying the current hype of XAU/USD bulls. The average end-of-the-week target for the bright metal in the poll $1,947.62, with 50% of the experts in bearish territory. 

This might reflect a cautious market positioning ahead of a super busy week, with the FOMC Meeting looming, but can also be read in a counter-intuitive way, with US Dollar bulls (or US Treasury bond bears) vulnerable to more losses if the nervousness of the market persists throughout the week.

FXStreet Forecast Poll on Gold price (published on March 17)

Has Gold price peaked?

Przemyslaw Radomski, the Editor in Chief at Sunshine Profits, deep dives into the current Gold price rally during this international banking crisis, comparing it to previous rallies during the Global Financial Crisis in 2008 and the covid outbreak in March 2020. Radomski's analysis goes well with this counter-intuitive trend markets usually operate under, hinting that Gold might have a more bearish outlook than the current looks of it.

Radomski writes:

It’s simply normal for people to first “run for the hills” and buy gold, and then switch to the USD while selling stocks (and – most of all – silver and mining stocks).

With this context in mind, let’s see where we are now.

People are very concerned about the health of the banking sector – it looks like a severe banking crisis. Is the world ending? It might seem so, but is the fear really as big as it was when the entire globe was in lockdown back in 2008? Not really – the current situation is not as severe as the previous one.

He acknowledges that while Gold price might still have some unpredictable rallies on it, the general outlook from here is bearish:

All this means that while it might be difficult to believe (as it’s natural for everyone to focus on what happened recently), what’s happening on the markets right now is a typical reaction to the early stages of crisis-based declines.

The implications are extremely bearish for junior mining stocks.

They are also bearish for the rest of the precious metals sector. However, it’s least unclear how high gold might move in the immediate term.

Still, do you know the saying that time is more important than price – when the time is up, the price will reverse?