Can Strong Gold Prices Maintain Their Momentum?

April 13, 2023 02:00 PM PST

The recent collapse of Silicon Valley Bank (SVB) has caused turmoil in the markets, leading to fears of a recession and a rush to gold as a real asset and a hedge against volatility. From the beginning of March 10—when SVB crumpled—to the time of writing in late March, spot gold prices have risen more than 7% to over US$1,960 per ounce.[1]

It's the old, familiar pattern. Chaos ensues in the markets for one reason or another, in this case, the biggest bank failure in U.S. history.[2] The resulting instability causes U.S. Treasury yields to decline beyond the apparent control of market regulators, and the dollar grows shaky. Pundits begin to speculate whether the government will step in with quantitative easing or similar interventions in order to attempt to avert disaster. If so, the argument goes that the U.S. will devalue its currency; as investors anticipate this shift, gold becomes an ever more attractive store of real value, an actual asset to hedge against the wobbly economic ground.

But the question becomes, with gold up over 8% year-to-date, can the yellow metal maintain its current momentum?

While no one can predict the future, there are a few key factors that lead us to believe that yes, the outlook for gold could remain sunny for the long term. However, there are headwinds to contend with.

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The first is the general instability of the current market. Many experts were already anticipating a recession before the SVB meltdown. Following the collapse, a recession looms even larger: Goldman Sachs puts the odds of a recession within the next year at 35%.[1] Geopolitical shock, compounding energy crises, and basic economics have combined to create a perfect backdrop for a potentially oncoming recession.

Obviously, that's bad news, but big market contractions tend to be good for gold: The first time gold cracked $1,800 was in 2011, in the wake of the Great Recession. Gold reached its all-time high of over $2,036.58 in 2020, as the economy reeled from COVID-19.

The second good indicator for gold is inflation. The latest 12-month data for the U.S., released back in February, showed inflation at 6%.[2] In the latest round of quarterly economic projections, the Fed forecasts inflation to remain at a higher level than it previously expected. The Fed recently raised rates, but in the wake of the SVB collapse, it needs to ensure that it doesn't push too hard and spur further instability in the banking industry.

High inflation tends to send some investors flocking toward so-called "safe haven" assets like gold, seen, again, as real assets in a turbulent market.

The third positive factor for gold lies in the speedy response of the U.S. Treasury and Federal Reserve following the SVB crisis. As mid-sized banks reeled and consumers feared for their uninsured funds, the Fed and Treasury swooped in to protect depositors' investments.[1] This shows a willingness to take active action in an attempt to stabilize the economy—which can devalue the U.S. dollar and may likely improve the environment for gold.

Of course, each of these factors depends upon big "ifs": if the U.S. fails to reel in inflation; if the banking system fails to stabilize after the SVB collapse; if the U.S. either decides not to intervene in the next banking crisis or that crisis simply doesn't materialize. All of this is uncertain. However, the sharper uncertainty becomes, the higher the price of gold usually climbs. We'll be keeping a close eye on it as all of the above unfolds.

[1] Link [2] Link [3] Link [4] Link


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Past performance is no guarantee of future results. Investments, commentary, and statements are that of the author. They may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this commentary are those of the author and may vary widely from the opinions of other Sprott affiliated Portfolio Managers or investment professionals.

The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, or professional advice. Readers should consult their own accountants and/or lawyers for advice on their specific circumstances before taking any action.

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Inflation could continue above the U.S.'s two-percent target for a long time, making holding real assets like gold and silver ever more attractive as a hedge against lower purchasing power.

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