SVB Collapse Sends Gold Price Rocketing Higher Against Sinking Treasury Yields
Mar 13, 2023
Gold prices (/GC) surged on Monday, rising about 2.5% and extending its move higher from Friday when the collapse of Silicon Valley Bank sent investors fleeing for safety. A sharp pullback in Treasury yields and the US Dollar is helping to support the yellow metal as investors bet that the mayhem in financial markets around contagion fears stemming from last week’s events will force the Federal Reserve to slow its pace of rate hikes.
Rate traders now see a 70% chance that the Fed will deliver a 25-bps rate hike later this month before starting to cut later this summer, according to Fed funds futures. The policy-sensitive 2-year yield fell almost 50 basis points to 4% on Monday, its largest 1-day percentage drop since November 2021.
Investors believe that the Fed will have to slow down due to the stress that rate hikes are putting on the banking sector, which is now impossible to ignore; the SPDR S&P Regional Banking ETF KRE fell 12.31% to the lowest level traded since late 2020. Meanwhile, larger banks like JP Morgan ended the day with a relatively modest loss of 1.8%. The U.S. considers JPM to be a systemically important bank (SIB), which essentials means it’s too big to fail.
JP Morgan and other SIBs may benefit from the turmoil as depositors at regional banks move to protect their capital from regional banks that may be exposed to some of the same factors that helped to precipitate SIVB’s failure. Chair Jerome Powell and other Fed members made clear that they were willing to stomach some economic pain and the loss of jobs throughout the economy, but the systemic risk of more regional bank failures may prove too much for them to swallow.
So far, the government has not bailed out SVB, although there have been steps taken to protect depositors, especially those that are within current FDIC insurance limits (250K). A bank bailout, especially for a non-SIB, would likely be unpopular when higher prices are straining Americans' pocketbooks. In the coming weeks, gold traders may want to focus on comments from Fed members and the Treasury to get a grip on what may happen next. For now, gold prices may find more support in the post-SVB-collapse environment.
Monday’s move put gold firmly above the psychologically important 1,900 level, which may inspire some bullish confidence among technical traders. Prices also sliced above the 50-day Simple Moving Average (SMA). Considering the sharp move higher from last week, a pullback may be warranted. If so, prices may hold support around the 50-day SMA and 1,900 level before resuming the upward trend.
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