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Gold Price Rallies from Powell's Fed 'Bombshell' as CRE Debt Iceberg Hits Banking

The GOLD PRICE rallied $10 from another drop to $2030 per Troy ounce on Thursday in London, again erasing the drop made overnight when US central bank chairman Jerome Powell said the Federal Reserve won't cut Dollar interest rates in March as financial markets had expected, even as fears over bad debts in US commercial real estate hit banking stocks.
Asked whether falling inflation could permit a rate cut after the Fed held at a 2-decade high of 5.50% on Wednesday, "I don't think it's likely that we'll reach [that] level of confidence by the time of the March meeting," Powell replied.
"I don't think that's the base case."
"That's the bombshell and all that matters," said Swiss bullion refining and finance group MKS Pamp's Nicky Shiels in a note Thursday morning.
"With one out-of-character quip, Powell put any hopes/bets of rate cuts in March to bed."
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Further ahead, says Jonathan Butler – head of business development at Japanese conglomerate Mitsubishi's precious metals division – "Geopolitical tensions as well as speculation over the outcome of the US election should keep gold well supported as a risk hedge.
"[But] if the actual pace and magnitude of Fed rate cuts ends up undershooting expectations, then gold may be in for a downwards correction as the year progresses."
Powell's comment came amid a 37.6% plunge in the stock of New York Community Bancorp (NYSE: NYCB), the $4.7 billion lender which last spring bought some "strategically and financially attractive assets and liabilities" from Signature Bank, the crypto-focused bank whose 'concentration risk' saw it fail during the spring 2023 turmoil in regional US banking shares that started with the collapse of Silicon Valley Bank, then spurring fears of a US recession and expectations of steep Fed rate cuts which never materialized.
NYCB's drop on Wednesday saw the wider KBW index of US regional banking stocks sink 6.0% on Wednesday, its worst 1-day drop since that 'mini crisis' of 10 months ago.
Chart of KBW regional US banking stock index vs. gold front-month futures, past 5 years. Source: Google Finance
"The official Federal Open Market Committee statement erased language it had used previously that it held a bias toward more hikes," notes Bloomberg columnist John Authers.
Comparison with the Fed's previous policy statement also shows it put a red line through December's assertion that "the US banking system is sound and resilient".
Shares in Tokyo's Aozora Bank (TYO: 8304) today dropped by 1/5th after it warned of losses on US commercial property investments, and Deutsche Bank (FRA: DBK) has "more than quadrupled its US real estate loss provisions to €123 million ($133m)," says Bloomberg. But shares in Germany's biggest bank today jumped 5.5% in Frankfurt after its 4th quarter results "smashed expectations" with a net profit of €1.3bn for October-to-December, plus news of an "efficiency program" set to cut 3,500 jobs.
"No reaction in gold as yet," says a note from bullion analyst Rhona O'Connell at brokerage StoneX, looking at how Aozora's shares fell after NYCB. "But I still fear that this news could be the tip of the iceberg, especially with regard to commercial real estate in the United States.
"Buried in the Minutes of the December FOMC meeting," O'Connell says, was a note on how "delinquency rates on non-farm non-residential CRE bank loans rose further in the third quarter...The large volume of loans scheduled to mature over the next few quarters suggested that delinquencies would likely surge again."
Betting on March's Fed rate decision today put the odds of a cut down at 35.5%, slumping from yesterday's 54.5% to the weakest since end-November and sharply in contrast with the peak of 90.2% hit at the end of December, when the Dollar gold price ended the week, month, quarter and year with a new all-time closing high of $2062 per Troy ounce.
Betting on the Fed's December 2024 decision, however, has barely moved, with the market still expecting steep rate cuts by year-end and the consensus forecast edging only 3 basis points higher from yesterday's near-3-week low of 3.88% according to derivatives exchange the CME's FedWatch tool.
Silver also rallied on Thursday, but unlike gold it failed to regain yesterday's level, trading 20 cents lower for the week so far at $22.75 per Troy ounce.
Creditors of failed Chinese property development giant Evergrande are likely to lose most of their investments, Bloomberg reports today, as its liquidators struggle to sell real-estate assets in a "slumping market".

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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