Gold Set for Best Week Since Mid-March on Fears Over US Banks

Two hundred and fifty gram gold bars arranged at Gold Investments Ltd. bullion dealers in London, U.K., on Thursday, March 17, 2022. Gold rose for a second day as investors weigh the trajectory of the Federal Reserve’s rates tightening cycle against risks to growth from the war in Ukraine. Photographer: Chris Ratcliffe/Bloomberg

(Bloomberg) -- Gold headed for its biggest weekly advance since the middle of March as renewed worries about the US banking sector fueled bets that the Federal Reserve may have to cut rates sooner than anticipated.

Bullion was steady on Friday, and is up around 3% this week. It has surged since early March on falling Treasury yields, and nervousness over banks and the US debt ceiling standoff. Gold climbed to a one-year peak on Thursday and is within reach of the record high set in 2020.

The main focus at the moment is the deepening rout in US regional lenders and what that means for interest rates. There are expectations the Fed may have to start cutting borrowing costs by July in response to the tightening credit conditions. Lower rates are supportive for the precious metal, which doesn't offer any interest.

The debt-ceiling standoff, which could have disastrous consequences if it isn't resolved, drove up rates on short-term Treasury bills, pushing them over 10-year yields by the most in at least three decades. The steep inversion of the curve is worsening recession concerns and boosting the appeal of haven assets.

The risk of a technical US default is “currently under-appreciated,” RBC Capital Markets strategist Christopher Louney said in a note. “We'd look out for investors making significant allocations for signs gold has legs from here.”

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Meanwhile, central bank purchases saw a significant pullback in the first quarter, according to a report from the World Gold Council. Though demand remains strong, the decline may weigh on bullion after record central bank buying in 2022 supported prices even as investors sold the precious metal amid a surging dollar and bond yields.

Spot gold declined 0.2% to $2,046.31 an ounce as of 7:41 a.m. in London after rising 3.4% in the prior three sessions. The Bloomberg Dollar Spot Index fell 0.2% and is down 0.6% this week. Silver was steady, while platinum and palladium edged higher.

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