Fear-induced demand driving sharp rise in gold prices, Goldman Sachs says

The sharp increase in gold prices – by $150 per troy ounce – over the past two weeks has been driven by an increase in fear-related demand, a report by Goldman Sachs has said.

The price of gold rose to levels not registered since March 2020, on the back of banking and funding stress and a sharp rise in the market-implied probability of a US recession next year, the investment bank said.

“The speed at which markets repriced a Fed pivot from 100-basis-point tightening to 50 bps in rate cuts by yearend has been unprecedented, leading to a spike in rates volatility to levels last seen in the depth of the 2008 financial crisis,” the report said. “During the sell-off, gold outperformed risk assets such as equities or credit, turning it into an effective hedge in the risk-off rotation. Cyclical commodities like oil and base metals fell sharply.”

The US Federal Reserve raised interest rates by a quarter of a percentage point on March 22 after policymakers were faced with a banking crisis and elevated inflation.

Banking sector turmoil raised risk while the flight to safety amid the doom and gloom resulted in gold surpassing $2,000 a troy ounce for the first time since March last year, when Russia invaded Ukraine.

The rally is being induced partly by fears of growing contagion risk in the banking industry, as well as fundamental driving forces, said Vijay Valecha, chief investment officer at Century Financial. Although a full-blown global banking crisis appears unlikely given the support from other lenders, regulators and central banks, cautious investors are flocking to bullion.

Stuart Cole, head macroeconomist at Equiti Capital, said the collapse of Silicon Valley Bank and Credit Suisse, “not to mention the smaller regional US bank failures, saw gold benefit from safe-haven demand as fears grew concerning the stability of the global financial system as a whole, with genuine concerns being expressed that we were potentially facing another Lehman Brothers moment”.

“The clear signal that the rise in the gold price was fear-driven was then confirmed by the retracement we saw following the rescue of Credit Suisse and the general easing in worries over the financial system, as central banks took rapid action to shore up sentiment,” Mr Cole said.