Banking Crisis Boosts Gold Prices as Bond Yields Plummet.

Gold keep rising this morning, with a very high level of transaction. On Wednesday, March 15th, 2023, gold prices surged for the third time in four days, reaching new historic highs for British investors at $1,930 per ounce in London. This comes as the panic surrounding bank values has caused the main state bonds to soar, bringing long-term borrowing costs to their lowest levels in six months, and leading to the biggest weekly drop in yields since the stock market crash of “Black Monday” in 1987.

The recent bankruptcy of Silicon Valley Bank, specialized in technology, has marked a turning point in interest rates, which are expected to remain high for a long time. This, coupled with the weakening dollar and the rush towards safe assets, could continue to drive up the prices of precious metals in the short term, particularly gold, according to Jonathan Butler, from the precious metals division of Japanese conglomerate Mitsubishi.

Meanwhile, white metals, which are more industry-oriented, may be less fortunate if economic growth weakens. The geopolitical climate is also uncertain, with tension between the US and Russia over the recent crash of an American military drone in the Black Sea, and with Taiwan reporting incursions in its defense air zone by Chinese military aircraft.

Gold has strongly appreciated in the context of the current banking and financial crisis, especially in light of the bankruptcy of Silicon Valley Bank – the 16th largest bank in the US in terms of assets – orchestrated by American authorities last weekend. This bankruptcy raises questions about the resilience of the banking system to the rise in interest rates.

Silicon Valley Bank suffered massive losses investing in US government bonds, almost at their peak, as a result of the aggressive policy of raising the Federal Reserve’s interest rate. In 2020 and 2021, during a period of low interest rates, and as its deposits increased significantly, SVB had taken significant positions in US government bonds.

Gold has reached new record highs in British pounds at £1,597 per ounce and €1,829 in euros, its highest level since the record set last spring during the Russian invasion of Ukraine. The price of gold in dollars reached $1,930 per ounce at noon in London, only 1.5% lower than the 9-month peak reached at the beginning of February for US investors who want to buy gold now.

Could this be the start of the bank collapse? 

Understanding the Silicon Valley Bank Crisis.

Recently, the Silicon Valley Bank (SVB) crisis has been a topic of discussion. During a conversation with a financial expert, it was revealed that the bank could have easily avoided this crisis. Although there have been several claims by some individuals who say that they predicted the crisis, the reality is that it was not that simple. The expert explained that the SVB crisis was not a systemic issue, but rather a one-time event. It was not possible to predict that the bank would be affected in this way due to a boom, as it does not work that way. Anyone that understands the Austrian Business Cycle theory could have predicted a collapse within the banking industry, sure, it takes a little bit more due diligence to know exactly which one would collapse first, but the big picture was VERY clear

The conversation with the financial expert delved into the different assets held by banks and how SVB could have avoided the crisis. There were two main reasons why SVB could have avoided the crisis. Firstly, the bank attempted to raise capital, which gave the impression that they were facing difficulties. Secondly, SVB did not hedge their interest rate risk, which is considered to be banking 101. Instead, they chose to purchase short-term assets to buy long-term yields. When you buy swaps, it guarantees your rate, and adjustments are made based on the current rates.

The financial expert explained that buying a bond without hedging your interest rate risk is risky. For example, if you buy a five-year bond at a rate of 3%, and the interest rate goes up to 6%, your bond will lose half its value. However, if you hold onto the bond until maturity, you will receive your full value, as well as the 3% interest payments. In a banking environment, where capital is important, if your bond falls in value, it looks like your capital is lower.

SVB’s crisis was compounded by people coming out and saying that people should avoid the bank. This created a run on the bank, and if nobody had pulled their money out, the bank would have been fine. The bank would have taken a tough hit, but it would have recovered, and it would have decreased their income for the foreseeable future.

The stock price played a role in causing the fall of the bank. When the stock price was plummeting, people were paying attention. Equity holders were wiped out, and bondholders were severely cut, if not wiped out. It is important to note that the stock price can dictate the fall of a bank. There has been a lot of speculation around the SVB crisis, and some individuals have claimed that they predicted it. However, it was not that simple.

By Alexandre Laurent

Alexandre Laurentl is working in the jewelry and investment gold since 2002. Alexandre graduated from The Normandy School of Business and from the University of Perpignan a Bachelor of economics in 1995.

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