March may just be the month of gold. While the first few weeks of the month proved that the economy was nowhere near recovery, one asset stood strong amid the chaos. Gold has become the shiny life ring in a sea of volatile uncertainty, and while this concept is nothing new, it became more solidified following the events of March 10 and the Federal Reserve’s reactions to it.
On March 10, SVB Financial, the holding company for Silicon Valley Bank, collapsed after losing 60% of its stock value from suffering $1.8 billion in losses. As the 16th largest commercial banking institution in the United States, this meltdown sent a wave of aftershocks rippling through the economy. A bank failure of this size hasn’t happened since the 2008 Great Recession, so it left many wondering if it would spark another bank run.
While many factors contributed to SVB’s failure, one major player was the recent rise in interest rates from the Federal Reserve as an attempt to combat climbing inflation rates. Unfortunately, the aggressive interest rate hikes turned into an overcorrection that sent the economy crumbling for the time being. When a bank the size of SVB fails, many institutions suffer the consequences.
Because of these enormous repercussions, the question on everyone’s minds became, “Will the Fed continue hiking interest rates, or did the policymakers learn their lesson?”
On March 22, the Federal Reserve increased interest rates by 25 basis points, a much more modest strategy than the previous 50-basis-point hikes, easing many market nerves. This hike did not come out of the blue, as many knew the temporary pause would come to an end soon.
What’s important to note is how the Federal Reserve’s language surrounding this action has shifted since the SVB meltdown. Prior to SVB’s collapse, the Federal Reserve spoke of interest rate hikes as aggressive “ongoing rate increases” in the 50-point sphere to “some additional policy firming,” that hints at the idea of a nearing end.
“We no longer state that ongoing rate increases will be needed to quell inflation … Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes,” Jerome Powell, a Federal Chairman of the Federal Reserve explains.
The banking crisis has left the Federal Reserve with less work on its hands. Too aggressive of monetary policies could lead to a domino effect of institution collapses or a bank run, which would send the economy spiraling. For now, the Fed must tread lightly.
Meanwhile, gold is thriving. Gold and similar assets typically lull during high-interest rate periods, so with the idea of reduced hikes in the future, more investors are jumping on the asset. This concept coupled with the recent scare in the banking sector has allowed gold to reaffirm its position as the primary safe-haven asset, protecting investor funds against bank collapses, inflation rates, and everything else.
“Gold is becoming a favorite trade on Wall Street as many traders remain nervous post-Fed and over how quickly will U.S. authorities be able to contain further banking turmoil,” Edward Moya, a senior market analyst at OANDA, explains.
“Gold is going to shine here, and it seems positioned to find a home above the $2,000 level. A run-to-record territory is not that far away.”
The primary concept that will determine if gold can maintain these prices is whether or not the market fears persist. People want to know if they can trust their banking institutions, considering sudden outflows led to the failure of numerous regional banks. Currently, the Federal Deposit Insurance Corp insurance limit is set at $250,000.
“I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits,” U.S. Treasury Secretary Janet Yellen explained during a congressional meeting, failing to alleviate any fears.
With this continued rise in uncertainty, gold has breached its highest price point since early 2022 of over $2,000 per ounce, rising by $195 per ounce in just two weeks.
“There’s been a notable flight to quality bid across classic safe havens like gold and U.S. Treasuries,” Nicky Shiels, the head of metals strategy at MKS PAMP, explains. “Gold has surged through $2000/oz, from only $1800/oz. We continue to think the SVB failure is a new catalyst and a game-changer for gold as it officially confirms that the Fed has broken something more important and closer to home.”
