For two days in a row, the XAU/USD gold price was exposed to profit-taking sales, which brought it to the level of 1944 dollars an ounce. This is temporarily abandoning the psychological resistance level 2000 dollars an ounce. The performance returned, as a sense of calm returned to the global financial markets after a double dose of good news about the US economy and the sector financial.
Renewed concerns about the sustainability of the banking system plagued trading on Friday, with banking stocks in Europe taking a hit as fears of contagion spread. However, the mood improved once the latest US business surveys were published. These surveys painted a brighter picture of economic conditions, praising the resilience of demand in the services sector and highlighting the acceleration of inflationary pressures.
Likewise, business leaders don’t seem particularly concerned about the impact of the banking ring on their operations.
This was the catalyst for a miraculous comeback in stock markets, with the S&P 500 erasing some heavy losses to end up 0.5%. Futures point to further gains at the Wall Street open on Monday, likely reflecting some relief that no more banks collapsed this weekend. After the absence of escalation, the news flow around the banks started to improve as well. Investors were greeted Monday with headlines that First Citizens Bank would absorb deposits and loans from the failed Silicon Valley bank, suggesting regulators are working around the clock to prevent any further fallout.
Knowing the events of this turbulent month in advance, it would be hard to guess that the Nasdaq 100 will be trading 6% higher, showing Teflon-like qualities. After all, bleak economic news is negative for corporate earnings, and by extension for stock markets themselves. Instead, it was a classic case of “bad news is good news for stocks” because the Fed is going to bail out. The turmoil in the banking sector convinced investors that interest rates likely had already peaked, and rate cuts would be back on the menu by summer. This is a powerful elixir for riskier assets, which is why technology stocks have been flying so high. The problem is that valuations, especially in tech, are starting to reach exorbitant levels again.
At the same time, speculation of interest rate cuts and increased liquidity in the financial system is great news for stocks, but at some point, it’s just hard to justify these valuations heading into what is likely to be stagnant earnings starting this quarter. The risk/reward appears to be weak.
Overall, the XAU/USD gold price has turned into a gauge of financial stress this month, reflecting the degree of concern about banking disaster, mostly due to its sensitivity to interest rate expectations. As fears spread that the banking sector had reached a breaking point, there was a significant drop in US yields which led to the shipment of the precious metal which yields no returns.
However, whether this rally is sustainable will ultimately depend on how the financial system works and whether the Fed rate cuts that have been priced in for this year really pay off. As things stand, it seems that the “peak of tension” has passed, so there is a risk of a rebound after such a violent rally in gold.
- Despite the recent selling, the gold price, XAU/USD, is still in an upward trajectory.
- A first reversal of the trend will not occur without moving towards the support level of $1885 an ounce.
- The price of gold may remain in a limited range until a strong reaction on the sentiment of investors and markets on developments in the global banking system and any signals about the policy of global central banks.
Over the same time period, a move towards the $1985 resistance level will be important for the bulls to complete the current path. One should be careful, as technical indicators are around overbought areas. In the event that the US dollar recovers, the price of gold may be exposed to profit-taking sales again.
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