On March 10, the 16th largest commercial bank in the United States collapsed, marking the most significant bank failure since the 2008 great financial crisis. SVB Financial Group, the holding company for Silicon Valley Bank, tanked 60% of its stock values after quickly trying to cover $1.8 billion losses from a failing bond portfolio strategy with $2.25 billion in emergency funding. Immediately after this meltdown, spot gold prices began rising from $1,869 per ounce to just over the $2,000 line last week on March 17.
Bullion gaining strength during poor economic times is nothing out of the ordinary, but a jump of this size doesn’t happen for no reason. When people hear about a bank collapse, they think one thing: a recession is coming. The 2008 recession involved numerous large banks failing, as many investors and ordinary people pulled their funds out of banks and into new asset classes (or just stuffed under mattresses).
While the SVB Financial collapse does not necessarily mean more banks will fall in a cascading line, it does mean that some fear bank security now. With this fear comes a rush toward placing funds in more secure places, like gold.
SVB Financial may have been the first large collapse since 2008, but it wasn’t the first collapse entirely. Silvergate Capital Corp voluntarily shut down its operations on March 8, just two days before the SVB failure. On March 10, state regulators took over SVB, appointing the receiver as the Federal Deposit Insurance Corp.
The SVB collapse affects the market in many unpredictable ways. First, as mentioned above, investors may pull funds out of their banking institutions as a fear tactic.
S.P. Angel explains that “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%.”
Next, the bank’s failure may put an end to the Federal Reserve interest rate hiking cycle. Such efforts to control inflation have caused gold prices to dip, particularly in February, though analysts believe the Fed will cool off on the hikes soon after this event given its catastrophic outcome.
“We’ve always said that the central bank is going to hike until they break something; this could be that something,” Adam Button, the chief currency strategist for Forexlive.com explains. “You want to buy gold when you can at least see the top in the Fed Funds rate and its close.”
Saxo Bank’s head of commodity strategy, Ole Hansen, expects market stressors to continue tightening as we experience the remaining effects of the Fed’s aggressive interest rate policies. He explains that given the current state of affairs, he doesn’t believe the Federal Reserve can increase rates above 6% considering both two-year and 10-year yields have peaked expectations. Two-year yields plummeted by 40 basis points following the SVB collapse, creating the perfect environment for positive gold performance.
Given all of this unpredictableness, Kitco News hosted a Gold Survey with 21 Wall Street analysts to re-evaluate gold price and performance expectations for the coming year. 76% of survey respondents expect gold price rises in the near future. This survey was conducted shortly after March 10, before the major price jump to over $2,000 per ounce, showing how these predictions are already playing out.
The question ringing in the back of everyone’s mind is, “will it spread?” Will the SVB collapse spark another domino effect of failing banks that push our economy into a recession?
While no one can confirm the answer to this question, we can compare SVB’s conditions to the banks in 2008. SVB lent funds to many startups and organizations in a singular vertical, which is riskier and fairly uncommon compared to other banking institutions of its size. While this isn’t the only factor that caused its failure, it did contribute.
Just because SVB Financial collapsed doesn’t mean it will spread because the conditions causing its failure were unique to its portfolio. With that in mind, the fall of SVB combined with an already bad economy creates a level of fear that could spark a bank run. Regardless of which scenario occurs, analysts expect gold to remain up while all else plummets.