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SVB collapse will force Fed to pause rate hikes on March 22nd, ‘gold will start to rip' as U.S. dollar declines - Matthew Piepenburg

Kitco News

The second-largest bank failure in U.S. history, that of Silicon Valley Bank (SVB), transpired on March 10th, causing ripple effects through both U.S. and international markets, as well as the failure of another bank, Signature, which had $118 billion in assets under management. SVB’s collapse was triggered by significant depositor withdrawals, which forced the bank to sell assets at a loss to meet client demands.

In an effort to control high inflation, Federal Reserve Chairman Jerome Powell had previously signaled a hike of 25 to 50 basis points in March. However, concern about the contagion effects of SVB’s collapse will compel the Fed to pause its rate hikes, according to Matthew Piepenburg, Commercial Director at Matterhorn Asset Management and Author of Gold Matters: Real Solutions to Surreal Risks.

“I don’t expect a rate hike on March 22nd,” he told Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News. “Powell is going to have no choice now. He has broken something.”

Piepenburg said that SVB’s collapse was largely due to its poor management of interest rate risk as the Federal Reserve hiked rates by 450 basis points over the past year. This increased the opportunity cost of holding bank deposits when depositors could earn a better and safer yield by holding U.S. Treasuries.

It also harmed SVB’s balance sheet, since the bonds the bank held diminished in value as interest rates rose.

“As these depositors started to take their money out, banks like SVB or Silvergate were forced to sell assets to meet depositor demands,” Piepenburg explained. “The Fed, by raising rates all these months… [caused] the bond prices [to go] down, and so these banks which were faced with liquidity needs by their depositors had to sell those short-term notes… at a discount.”

For these reasons, Piepenburg said it would take a “miracle” for the Fed to continue hiking rates in March and beyond.

To find out whether Piepenburg thinks the SVB contagion can spread and how, watch the video above

Gold to ‘rip’

As the U.S. dollar loses value, gold is set to “rip,” forecast Piepenburg, who noted that the strong U.S. dollar had dampened the gold price in 2022, but that as recessionary pressures build, the dollar is set to weaken.

“That strong dollar narrative is about to shift,” he predicted. “You can’t have a strong dollar in a recession.”

The U.S. dollar index is down 1.8 percent over the past 5 days.

Piepenburg said that the precise timing is “irrelevant,” since his focus is on gold as a long-term inflation hedge.

“I have no doubt that the dollar in my pocket, if I put it there and come back in two years, it’ll be worth a lot less than the gram of gold I have in my pocket,” he said.

To find out Piepenburg’s 2023 gold price outlook, watch the video above

Government Response

Following SVB’s failure, the Federal Deposit Insurance Corporation, Federal Reserve, and U.S. Treasury issued a joint statement, stating that all of SVB and Signature Bank’s depositors would not suffer consequences due to the banks’ failures.

This systemic risk exemption runs counter to the FDIC’s usual practice of only insuring depositor funds up to $250,000. Almost 90 percent of SVB’s depositors held more than $250,000 in their accounts.

In addition to the FDIC’s intervention, the Bank Term Lending Program (BTLP) will provide up to $25 billion from the U.S. Treasury to shore up liquidity in the U.S. banking system. The Federal Reserve also promised to make loans available.

Piepenburg said that these measures are “probably not going to be enough.”

“That really is a Band-Aid on an open knife wound,” he stated. “Other things are happening too that are scaring rather than comforting depositors and investors.”

In particular, he pointed to Federal Home Loan Banks, which are raising almost $90 billion through sales of their assets. The banks claim that there is “heightened demand” from depositors.

U.S. President Joe Biden on Monday reassured the public, claiming that “deposits are safe,” and that the U.S. banking system is stable.

“When the math gets bad, you need to have really comforting words,” said Piepenburg, responding to Biden’s public remarks.

To find out how Piepenburg sees the SVB collapse affecting gold and other assets, watch the video above

Follow Michelle Makori on Twitter: @MichelleMakori

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