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The banking crisis flares up again and that causes a flight to safe havens. For example, the gold price in dollars rose to $2,067 per troy ounce this week, surpassing the record set in March last year. was almost equalled. Then the price of gold skyrocketed in response to Russia's invasion of Ukraine. Now, investors are mainly concerned about the stability of the banking sector. Due to the increased interest rates, the market value of many assets has fallen to such an extent that they are no longer sufficient to cover all liabilities. How does this continue and what does it mean for the prices of precious metals?
After the collapse of Signature Bank and Silicon Valley Bank at the beginning of March, things seemed calm again around the banking sector, but we could already deduce from the share prices that the problems were not over yet. While the stock market as a whole recovered, the main indices of bank stocks did not recover. Investors' eyes were soon on First Republic Bank, a bank that also proved highly vulnerable due to outflows of savings. Moreover, the bank had provided many mortgages at very low interest rates, assets that yielded little income and that were guaranteed to result in a loss if sold.
Bank stocks failed to rebound after the collapse of Silicon Valley Bank (Born: Bloomberg)
First Republic Bank was eventually taken over by JP Morgan with guarantees from the US Deposit Insurance Scheme (FDIC), but that is not the end of the banking crisis. Many more banks are facing the same problem as Silicon Valley Bank and First Republic, namely assets that have become less valuable due to increased interest rates. This is problematic if many customers withdraw their money, because then banks have to sell these assets at a loss. The banks that have already collapsed turned out to be the most vulnerable, but that does not mean that they were isolated cases. Other banks are also at risk to a greater or lesser extent, especially in the US, where supervision of smaller banks up to $250 billion has been much less strict in recent years.
According to a Recent research more than 2,300 U.S. banks are currently technically bankrupt. The market value of the loan portfolios of all U.S. banks combined is currently said to be $2 trillion lower than book value. This includes not only small and regional banks, but also large players and systemic banks with more than $1 trillion in assets. As long as account holders continue to withdraw money and move it to larger banks or money market funds, more banks could be in the danger zone.
According to a New Poll According to the American research agency Gallup, almost half of all Americans are currently (reasonably) concerned about the safety of the money in the bank account. The last time this percentage was this high was during the 2008 financial crisis, when Lehman Brothers collapsed. The poll was conducted between April 3 and 25, which was after the collapse of Silicon Valley Bank and Signature Bank and just before the collapse of First Republic and the problems at several small banks.
Indicative of the lack of confidence in the banking sector is that many bank stocks are still under pressure. Jerome Powell, the chairman of the U.S. central bank, mentioned the banking system just this week Robust and resilient, but he failed to convince the market. On Thursday, the share prices of small banks plummeted as Western Alliance, First Horizon, PacWest by tens of percents. It is indicative of a lack of confidence in the stability of these banks.
Many Americans are concerned about the safety of money in the bank (Source: Gallup)
That something is going on is also evident from the fact that the deposit guarantee scheme in the US issued its advice at the beginning of this week released to further increase the maximum guaranteed amount for business accounts. Currently, consumers and businesses get up to $250,000 back if the bank where they have an account goes bankrupt, but that amount is not enough for many companies. Companies that have large financial obligations will move their bank balances to one of the major banks as a precaution if in doubt. By increasing the insured amount for companies, it is possible to prevent companies from moving their money in advance.
Of course, increasing this deposit guarantee is not without risk. If a bank does fail, it means that the guarantee system will have to pay out much more money and that the pot will be emptied much sooner. The banking crisis is already causing a major blow to the US deposit guarantee fund. It is estimated that the fund has already lost more than $35 billion to the three recently collapsed banks. By comparison, that's more than a quarter of the fund's total $128 billion pot. If more banks fail, the guarantee fund itself will also have a Bailout necessary. And that while the government itself will be able to Debt Ceiling and can no longer borrow. The timing couldn't have been much worse.
Three major U.S. banks have already collapsed (Source: Telegraph)
In previous banking crises, such as that of the 1930s and more recently that of 2008, we saw that precious metals ended up benefiting. During the deflationary crisis of the 1930s, the ownership of gold was banned, after which the price was upgraded from $20.67 to $35 per troy ounce. At the time, the dollar was still pegged to gold and only a higher gold price could end the deflationary depression. During the 2008 credit crisis, the Gold price initially through a flight to liquidity, only to rise from just over $700 in October 2008 to a record of over $1,900 in 2011.
Even now, we see investors seeking refuge in safe havens. Since the start of the banking crisis in March, the price of gold in dollars has risen by 12%, while Bitcoin has even increased in value by almost 25% since then. A further escalation of the banking crisis means that more savers will move their money and look for safe havens. The distinguishing feature of precious metals such as gold and silver is that they are forms of tangible wealth that do not rely on a third party, such as a bank or a company, for their value. Precious metals also offer protection against currency risk. In other words, it retains value even if the currency becomes worthless. Unlike, for example, bonds, which are listed in a certain currency.
Investors who need money to hedge losses on other positions may have to sell some gold in an economic crisis, but on balance the upside potential of precious metals is much greater. For example, institutional investors still have hardly any positions in precious metals, even though there is a lot of capital there. Also, central banks (especially in non-Western countries) More and more gold to their reserves. This lays a solid foundation for the gold market, because central banks do not seek profit but wealth preservation and diversification. If the financial system falters, they are more likely to buy gold than sell it.
Gold price nears record level again
Disclaimer: Holland Gold does not provide investment advice and this article should not be considered as such. Past performance is no guarantee of future results.
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