At the beginning of March, the market looked surprisingly straightforward. The United States Federal Reserve was following its stated strategy of hiking interest rates – “higher for longer.”
But then the $212 billion Silicon Valley Bank (SVB) collapsed. Some argue that Trump rollbacks of credit requirements, poor management by SVB, and rising interest rates depreciating the value of its bonds dove-tailed into a social media-fuelled bank run to foment the biggest bank failure in US history.
Now, fears of a recession loom even larger than before. Goldman Sachs bumped its prediction of a recession within the next year to 35 percent, while markets are betting on cuts as early as June, peaking below 5 percent—as opposed to previous expectations of a 5.75 percent cut in early 2024. The downfall of SVB has cascaded to cause serious damage to other mid-sized banks, some of which have teetered on the brink of going under in the past couple of weeks.
This chaos splits the goals of the Fed. It needs to continue to combat inflation by raising rates, but it also must ensure those same rising rates don't damage the country's already-shaky financial stability.
Clearly this is all, generally, bad news. But, as is often the case, what's bad for the market may likely be good for precious metals investors.https://clients.blendermedia.com/privateplacements
A terrified market has resulted in a flood to so-called "safe haven" assets like silver and gold. From March 10, when SVB collapsed, to the time of writing in late March, spot gold prices have jumped almost eight percent to over $1,950 per ounce. Silver prices have leapt over 12 percent to over $22 per ounce. Right now, both metals are reaching heights not seen since early February.
In the wider markets, reeling from the collapse of SVB, volatility has become the order of the day. In response, many investors have followed a well-known pattern: When markets become especially shaky and the U.S. dollar and Treasury yields decline beyond the apparent control of regulators, they opt into precious metals as a hedge against risk and volatility. This pushes up spot prices of the metal, which may provide a better market environment for mining companies to push their projects forward.
In recent years, gold hasn't always followed this pattern. In the aftermath of COVID collapses, we saw gold stay relatively still as other crises battered the economy. However, this time there's an important difference: the U.S. Treasury and the Federal Reserve have swooped in right away to come to the rescue. These organizations aren't exactly handing out money, but they have stated goals to prevent risk from getting out of hand.
This policy could mean further quantitative easing, further devaluations of the U.S. dollar, and generally implies lower interest rates and lower liquidity, all of which boosted gold prices during the 2008 financial crisis. Past performance does not indicate future returns, but we are already seeing similar trends accelerate in the wake of the SVB fireworks.
Longer-term, we believe the forecast for gold is even stronger than before. It's likely the Fed will still increase rates, but as previously stated, they will likely increase at a much slower pace than previously expected. This could create a good environment for gold.
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.
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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.