The longer the uncertainty, the higher the gold price: Macquarie 

The failure of Silicon Valley Bank and Credit Suisse crisis has left ‘economic and market outcomes wide open with uncertainty’ and propped up gold prices to levels not seen since April 2022. 

The compounding effect of weakening equity markets, tumbling bond yields, a softening US dollar and the downshift in peak interest rates has created a “near enough perfect crisis”, says Macquarie.

“The longer uncertainty rolls on, with neither market fears being wholly calmed nor a full-blown systematic crisis unfolding, the higher gold prices should be able to trade.”

The perfect storm

The market is in a near goldilocks state for gold bugs – There’s enough uncertainty to drive demand for safe havens but not enough to exacerbate things into a full blown crisis. The most notable upside drivers include:

• Fed fund futures repricing: Market expectations for peak US rates have swung from 5.5% - 5.75% in September and one 25 bp rate cut in January 2024 to 4.75% - 5.0% in March and 100 bps of cuts by next January

• Markets weak but not crashing: Most major equity benchmarks are down 5-8% from February peaks but far from capitulation territory

• US dollar easing: The US dollar competes with gold for safe haven flows. The US Dollar Index is down 2.4% from its March high

• Weaker economic outlook: The banking crisis to deliver ‘rapid disinflation via negative spillovers to the real economy and consequent demand destruction,’ which should also drive a more dovish Fed

Macquarie says the longer the market remains in this goldilocks state, the more bullish it is for gold prices. The analysts are focused on price points including “Friday’s $1,989/oz high, the technical focus would naturally turn to $2,000/oz and the all-time nominal high of $2,075.47/oz.”

Gold chart (Source: TradingView)

When the storm turns into panic

“While gold has a track record of rallying into crises, once things tip over into panic it tends to fall in absolute USD terms, even if outperforming on a relative cross-asset basis,” said Macquarie.

Some notable examples of this include:

• Between August 2007 and March 2008, gold rallied almost 50%. But when markets entered full crisis mode just a few months later, gold also corrected around 27%

• The same happened during the 2020 Covid crash – where gold was trending higher but when markets nosedived between early February and March, it also experienced a sharp 10.5% pullback

The Fed’s higher for longer rhetoric is another potential issue for gold. If the Fed holds “rates high enough for long enough to sustainably bring inflation back to target, gold still has headwinds to come,” noted the analysts.

ASX gold stocks

A quick glance at larger cap gold miner performance. See a full list of ASX-listed gold stocks here.