Gold prices spent most of February in a lull, leaving many to question when and how the next rise would come. On March 10, two major events occurred that sent investors scrambling to reconsider their portfolios with a safer asset, allowing gold to rise once again. First, the U.S. Labor Department released the February job data showing unemployment rates above expectations, and on the same day, one of the largest banking institutions in the United States, SVB Financial, collapsed.
Between these two events, gold prices increased from $1,832.24 per ounce on March 10 to $2,001 per ounce on March 17, just a week later. The price on March 17 marked the first time gold has edged over the $2,000 line since early 2022 when Russia invaded Ukraine. A price jump of this kind doesn’t occur for no reason, so let’s explore why.
To start, the unemployment rate in February increased despite the number of created jobs rising above the expectation level. Unemployment rose by 3.6% in February, even with the 311,000 new positions available. The expected number of new roles was 255,000, though January’s report showed 517,000 new positions, making February’s performance appear sub-par considering the unemployment rate.
Financial instability leads to increased gold investing. When job outlooks look poor, people want to protect their funds with a safe investment that can hedge against inflation. As unemployment rises, so do gold prices.
“The NFP report had a strong headline beat, but the rest of the report supported the idea that the labor market is ready to cool. Wage pressures came in much softer than forecasts, and the unemployment rate rose from 3.4% to 3.6%,” Edward Moya, a senior analyst for OANDA, explains to Kitco News in an interview. “Gold is surging as Fed rate hike bets get scaled down and as SVB contagion risks trigger some safe-haven buying. The bond market is now starting to price in rate cuts by the end of the year, and that is triggering a major collapse with yields.”
The next primary factor pushing up gold prices in early March was the fall of SVB Financial. SVB, the holding company for Silicon Valley Bank, is the 16th largest commercial bank in the United States. On March 10, the company lost 60% of its shares after pulling out $2.25 billion of emergency funds to cover a massive $1.8 billion loss from its risky $21 billion bond portfolio.
The organization’s portfolio has been struggling lately from the excessive rate hikes from the Federal Reserve in an attempt to control interest rates. Unfortunately, this Fed action has now led to an overcorrection of sorts—an economic meltdown.
The collapse of SVB Financial is the first one of its size since the 2008 Great Recession, which of course is leading many to fear another recession or massive bank failure on the horizon. SVB’s meltdown combined with the climbing inflation levels and interest rate hikes all appear as warning signs of an economy ready to burst.
While many argue that the events leading to SVB’s failure were unique and siloed, the simple fear that it’s created could spark a bank run. SVB invested in primarily startup businesses, which is a riskier strategy compared to other banks of its size. When compared to how banks failed in 2008, many believe SVB’s collapse will not directly cause other institutions to fall in line.
While its impacts may not be direct, SVB Financial’s failure will have enormous effects throughout the market. People have developed a general fear of the entire economy, including employment sectors, banks, and other asset classes. Many investors have already begun pulling out funds and investing them in safe-haven assets, like gold, hence the sudden spike in prices.
“Markets look vulnerable to further shocks as the Silicon Valley Bank collapse in California lends weight to a risk-off strategy. To quote Warren Buffett: ‘Only when the tide goes out do you discover who’s been swimming naked.’ Every institution holding treasuries is now sitting on paper losses and will be forced to crystalize real losses if required to sell. Shares in JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, the largest U.S. lenders by assets, all fell by between 4.1% and 6.2%,” representatives from S.P. Angel explain.
The rise of fear and fall of major markets allows gold to become the shiny beacon of hope for many investors seeking security in a sea of uncertainty. As always, investors should consult their financial advisors before making portfolio decisions.
