The dominos are starting to fall...
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(Kitco News) - Once again, the gold market is showing its true colors as we end the week with the biggest bank failure since the start of the 2008 Great Financial Crisis.
Friday, California state regulators seized Silicon Valley Bank and appointed the Federal Deposit Insurance Corp. as the receiver. The bank, known for providing venture capital to tech startups and supporting cryptocurrencies, saw a run on its deposits after it announced plans to sell shares to raise capital. It needed to raise money to cover a $1.8 billion deficit after selling loss-making assets, mostly U.S. government bonds.
In a surprise to none, the bank's bond and mortgage-backed securities holding have taken a major hit as the Federal Reserve has aggressively raised interest rates to cool down inflation. According to analysts, even if the fallout from SVB's failure is limited, it does show the growing financial stress in the marketplace as the Federal Reserve has raised interest rates by 475 basis points during this tightening cycle.
According to many analysts, this is just an early taste of what's to come, as the economy is yet to feel the full effects of the Federal Reserve's rate hikes. To add fuel to the fire, the central bank isn't done yet. In his two days of testimony before Congress, Fed Chair Jerome Powell warned lawmakers that interest rates must go higher to cool down inflation.
Of course, the question now is, with a potential banking crisis looming, does the Federal Reserve have room to raise interest rates higher?
Since the start of this tightening cycle, economists and analysts have warned investors that the Federal Reserve will raise interest rates until something breaks. That was a clear theme at the 2023 Prospectors & Developers Association of Canada. Nicky Shiels, head of metals strategy at MKS PAMP, gave a keynote address on gold and silver prices and said that whether the Fed raises rates to 5% or 6%, they are in the "eighth inning" of this tightening cycle, which will be positive for gold.
She added that the Federal Reserve must also choose between fighting inflation or ensuring the economy doesn't fall into a recession. A the same time, she noted that it's unlikely the central bank will be able to bring inflation down.
"They need to pick one because they can't do both," she said. "Something will break before they get inflation down."
On the sidelines of PDAC 2023, Chantelle Schieven, head of research at Capitalight Research, said that the Fed continues to put the economy at risk as it underestimates the lag in U.S. monetary policy.
"The faster you raise interest rates, the faster something is going to give, that something is going to break," she said. "Gold doesn't need a crisis to move higher, but it definitely loves a crisis."
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Schieven said she sees a potential Fed-induced banking crisis will push gold prices to $2,000 an ounce by the end of the year. She added that with that target in mind, she sees gold prices at an attractive value.
And she is not the only one. Tuesday, DoubleLine Capital CEO Jeffrey Gundlach said in a webinar that he continues to like gold. "Gold probably deserves a role in portfolios at $1,800 type dollar price, even though the Fed is raising interest rates," he said.
Finally, in other PDAC news, the team at Kitco would like to congratulate Filo Mining CEO Jamie Beck for earning Kitco's Mining CEO of the Year 2022 in the non-operating category. Lundin Gold CEO Ron Hochstein was awarded Kitco's Mining CEO Of The Year 2022 in the operating category.
According to analysts, mining executives and other participants, there was definitely a bullish vibe at the world's largest mining conference in Toronto this past week. There is a lot of new energy in the mining sector as demand for critical metals drives investor interest.
That is it for this week; have a great weekend.