Gold Prices Surge Amid Concerns Over Financial Stability and Inflation, Analysts Closely Monitoring Fed’s Response

After shaky performance levels in February, the gold market has started March off on a strong foot with impressive price climbs responding to the collapse of the Silicon Valley Bank and unwelcomed Federal Reserve actions. The unexpected price climb shows gold reaching the highest price it’s been since early 2022. If the trend continues, we could see record-breaking gold prices on the horizon.

Gold regained its safe-haven status as investors rushed to purchase the shiny metal and protect their wealth after the Silicon Valley Bank meltdown on March 10. Banking regulators in California quickly closed SVB Financial Group following this event, marking the largest bank failure since the 2008 financial crisis; a warning sign that the nearing recession creeping into everyone’s minds might be closer than we expect.

SVB Financial Group is the holding company for Silicon Valley Bank and the 16th largest U.S. commercial banking institution. On March 10th, SVB Financial lost 60% of its stock value after taking out $2.25 billion in emergency funds to account for $1.8 billion losses from the hefty $21 billion bond portfolio strategy that clearly isn’t panning out.

SVB was a leading financer in the technology sphere, though this collapse has created unexpected rippling effects throughout the market as investors correlate this meltdown with Federal Reserve interest rate hiking actions. Analysts predict that the fear of more large banks collapsing as a result of Fed actions and high-interest rates will only continue rising. This fear means one thing: risk-aversion investing.

“Gold is seeing safe-haven flows on these financial instability concerns,” Edward Moya, the senior market analyst at OANDA, explains to Kitco News. “Startups and debt refinancing are some of the biggest financial risks that traders are analyzing.”

The collapse of SVB isn’t siloed. When an institution as large as SVB falls, it creates tsunami-sized waves throughout the market, causing numerous asset classes to bear on the negative side.

“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%,” S.P. Angel explains.

This catastrophic financial event has created a dramatic turnaround in gold prices compared to February’s performance rate. In early March, gold steadily declined after the Federal Reserve announced a 50-basis-point interest rate increase plan, though this decrease was short-lived.

Gold’s prices are surging for numerous reasons: the collapse of SVB, February’s high unemployment rates announced in the U.S. non-farm payrolls report, and the 50-point interest rate hike expectations. Together, these factors have created the perfect landscape for safe-haven assets to rise.

“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%,” Moya explains. “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.”

As the U.S. dollar index continues falling, with two-year yields showing the highest two-day fall since the 2008 recession,

“Gold is becoming everyone’s favorite trade again,” Moya continues.

A few analysts questioned how sustainable these gold price rises are. “This is broadly a short-term reaction. You do see safe-haven demand come in fits and starts. There is fear over the stability of banking systems, and the dollar is sharply lower today. That is driving gold higher in the short term,” Everett Millman, a precious metals expert for Gainesville Coins, explained to Kitco News shortly after the March 10 events.

As of March 23, gold has proven Millman’s hesitant predictions wrong. In the last week, gold prices have surged the $2,000-per-ounce line, the highest they’ve been since early 2022. While numerous complex factors do surge gold prices in the short-term, many predict that the global economy will continue dwindling throughout 2023 and beyond, creating long-term gold success.

As always, investors should consult their financial advisors before making any portfolio decisions.

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