Gold presents a pleasant performance for investors amid banking uncertainty
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
The implosion of California-based, Silicon Valley Bank (SVB) this month sent shockwaves across the market, as lawmakers and the federal government deployed emergency measures to shore up the banking system against a backdrop of broader macroeconomic problems.
The bank's belated efforts to fix its balance sheet and mismanagement of interest rates and liquidity, quickly saw the intervention of the Federal Deposit Insurance Corporation (FDIC) on March 10, after more than $42 billion was pulled from the bank by the depositors the day before as fear spread across the market.
The failure of SVB and Signature Bank New York was considered to be the second-largest since the financial crisis of 2008.
Several weeks after the collapse, the banking sector is still not completely out of the woods, as a congressional hearing is set to kick off in the coming days, putting the spotlight on lawmakers to shore up interventions that ensure the U.S. banking system remains sound and secure.
Bank shares and stocks have slowly rebounded in recent days, as North-Carolina-based First Citizens Group announced on March 26 that it will be purchasing a sizable portion of SVB's deposits, assets, and loans.
The banking turmoil comes at a crucial time when the economy is struggling to shake off stubbornly high inflation and aggressive interest rates by the Federal Reserve.
Fear among investors in the finance and banking sector has been widespread since the collapse of SVB, with the iShares US Regional Banks ETF seeing a decline of 14% days several days after the fall of the bank.
A rolling risk environment
Overall, the pain of the bank's collapse wasn't felt in the wider market, but it has given many investors the initial shock they needed to look for more diversified opportunities.
With the hope of resolutions for the banking crisis still in progress, some have once again squared up to gold, as the precious metal once again proved to be a resolute haven during times of turmoil.
Yet, despite this, gold prices have been steadily fluctuating, as investors once again shrug off safe havens for riskier bets after the news of First Citizens Group buying up a majority stake in SVB.
The risk factor is a contagion that is spread across the market, and investors remain persistent on its heels.
Caught between the banking crisis, volatile market conditions, and a pull-back from the dollar, gold remains close within the $ 2,000 level, and some experts suggest in the coming days this threshold could peak again.
Even with this resolute outlook for gold, prices depreciated 1.06% on Monday, March 27, with the price of spot gold falling to $1,957.31 for the day.
Although there are fluctuations, and prices are strongly correlated to external economic activity, experts suggest that it remains a sound “insurance policy” for investors and portfolios.
CEO Whitney George of Sprott Inc., a global investment management firm, told BNN Bloomberg that he's not concerned about the recent dip in prices, as gold remains a particularly popular investment for some in the wake of broader economic turmoil.
What's more, gold is an easy and quick sell-off during times of liquidity crisis, something which has been prevalent within U.S. banks recently.
Amid the uncertainty, investors are taking a more diversified stance, and while everyone's financial position may differ, there are growing advantages for gold investors in the current economic climate.
Perhaps one of the more notable traits carried by gold and other precious metals, is that it acts as a hedge against inflation, something which both consumers and investors have had a hard time dealing with in recent months.
In an open letter released by the Federal Reserve Bank of Chicago, experts predict that during inflationary conditions, such as what we're currently experiencing, investors tend to pivot their interest toward purchasing gold, helping to drive up prices.
On the other end of the spectrum, a drop in inflation could pull investors back to shares and stocks, causing a decrease in gold prices.
Historically, gold prices tend to outpace inflation, keeping up with the cost of living. What's more, many see gold as a potentially safer bet in times when fiat currencies lose their value due to inflationary pressures and higher costs.
Another potential that gold carries, as of late, is that it helps to diversify investor portfolios. This comes at a time when multiple industries, including some of the biggest on the global market such as tech and financials, are struggling to stabilize themselves against broader macroeconomic problems.
Although investors can stockpile their portfolios with precious metals during times of uncertainty, hoping to see substantial gains in the near-term, most advisors recommend that gold makes up 5% to 10% of an investor's portfolio.
Basic asset allocation will determine how much of the portfolio should be dedicated to gold and other precious metals. Investors must consider a more balanced approach to ensure their portfolios are cushioned to withstand economic downturns.
Having several different investment vehicles can help spread risk evenly across your portfolio, lowering the risk potential and increasing the opportunity for growth among industries that can thrive amid the current economic climate.
Another reason perhaps why many investors can be looking towards gold in the coming days is that it can be sold off quickly. Even under current circumstances, gold is fairly easy to sell and exchange within the market, whether it's in the form of coins or bullion.
There are varying reasons why investors might lower their stakes in gold, but for those that see new opportunities and require monetary leverage to undertake them, gold often presents itself as a valuable asset and investment vehicle when investors want to sell and retain its cash value.
The bottom line
Investors remain focused on how markets will act against the backdrop of ongoing economic uncertainty. Perhaps recent events in the banking system have only further shaken an already grumbling economy, pushing many investors to seek new avenues in which they can park their cash.
Navigating the market has come with major headwinds, and investors require to be more agile than ever before if they want to continue growing their portfolios. Although there are several limited opportunities now presenting themselves, investors will need to consider how much risk they're able to take on, and how gold is a diversified investment vehicle in tumultuous economic conditions. The future is always uncertain and it's impossible to predict accurately what an asset (including precious metals) will do, but gold is a reliable hedge in unclear times.