Rising Gold Price Amidst Falling US Dollar and SVB Bailout Yield Drops

Author: Christian Roberts - Photographer / Content Editor

Published: 13 Mar 2023

Last Updated: 14 Mar 2023


The recent collapse of banks serving the crypto and technology industries, including Silvergate Capital Corp., Silicon Valley Bank, and Signature Bank, has sent shockwaves through the market. While the US Treasury Department and Federal Reserve have taken measures to reassure depositors and stabilize markets, bond and equity investors will not be bailed out...

Gold Price Finds Support Following Bank Failures: Potential Implications for Investors

Gold investors may have reason to pay attention to recent market developments, as the fallout from the collapse of Silvergate Capital Corp., Silicon Valley Bank (SVB), and Signature Bank may have significant implications for monetary policy and asset prices.

Reassuring news from the US Treasury Department and the Federal Reserve has helped stabilize markets, but investors are closely watching upcoming events such as the Federal Open Market Committee (FOMC) meeting on March 22nd and the release of US CPI data on Tuesday. Here's what investors need to know about recent developments and how they could impact the gold market.

Banks' Collapse Affects Market Sentiment

The recent failures of banks that largely served the crypto and technology industries have sent shockwaves through the market, and investors are uncertain about what the fallout will be. The US Treasury Department has assured depositors that their funds will be safe, while the Federal Reserve has created a liquidity facility for eligible financial deposit-taking institutions. However, bond and equity investors will not be bailed out.

This uncertainty has led to a change in rate expectations, with the overnight index swap (OIS) market now leaning toward a 25 basis point hike rather than a 50 basis point lift as previously anticipated. US CPI data due out on Tuesday may have implications for monetary policy that would have been different prior to the collapse of these banks.

Yield Changes Impact Gold Price

The change in rate expectations has impacted Treasury yields, with the 2-year note moving more than 70 basis points lower from last week's peak of 5.08%, the highest yield since July 2007. The 2s 10s Treasury curve inversion has also contracted more than 40 basis points from last week's nadir of -1.08%. Similarly, the US 10-year real yield has dipped by more than 30 basis points from last week's peak of 1.72%.

These changes have had implications for gold prices, as the yellow metal is a non-interest bearing asset and can be subject to changes in nominal yields and real yields. Gold has also been boosted by a weakening US dollar, which has led to an uptick in gold volatility (GVZ). As a result, gold has found support again and may continue to do so if the market remains uncertain.

Dollar = Blue line, Gold=Orange line

Other Asset Classes React

The collapse of these banks has also impacted other asset classes, with palladium seeing almost 3% gains while silver and platinum also reached higher. In currency markets, the US dollar has been hammered across the board, with the Australian dollar a notable beneficiary. Emerging market currencies are also higher.

In equities, Wall Street futures have recovered through early Monday trade after a sell-off on Friday, and APAC equities are mixed. Australian and Japanese equity indices are lower while China and Hong Kong have seen their bourses move higher.

Looking Ahead

Investors should keep an eye on upcoming events that could impact the market, such as the FOMC meeting on March 22nd and the release of US CPI data on Tuesday. The European Central Bank (ECB) rate decision on Thursday is also worth watching.

It's unclear what the long-term implications of the bank failures will be, but investors should pay close attention to monetary policy changes and any impact on asset prices. As always, diversification and a long-term perspective are key for gold investors.

While recent events may have caused some turbulence in the market, it's important to remember that gold has historically been a safe haven asset in times of economic uncertainty. As the US dollar weakens and yields decline, gold's appeal as a hedge against inflation may continue to grow. However, it's worth noting that gold prices can be subject to volatility, and investors should carefully consider their risk tolerance and investment goals before making any decisions.

As always, it's important to maintain a diversified portfolio that includes a variety of asset classes, including stocks, bonds, and precious metals. While gold can be a valuable addition to a portfolio, it's not a one-size-fits-all solution, and investors should work with a financial advisor to determine the best approach for their individual circumstances.

Overall, the recent bank failures and changing rate expectations have created a climate of uncertainty in the market, and investors should remain vigilant in the coming weeks as events continue to unfold. By staying informed and maintaining a long-term perspective, investors can make informed decisions that align with their investment goals and risk tolerance.

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