Got gold? You might just need it
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(Kitco News) - The biggest banking crisis since the 2008 Great Financial Crisis once again proves that gold is the ultimate safe-haven asset. It is seeing its best weekly performance in three years as the price moves to within striking distance of $2,000 an ounce.
According to analysts, gold prices are ending Friday up more than 3% on the session as investors don't want to go home ahead of the weekend without some protection and you can't blame them.
The U.S. banking system is a complete mess and nobody knows how bad it will get. Laurence Fink, CEO of BlackRock, the world's biggest asset management firm, admitted that even he doesn't know how bad it will get as financial institutions face "a classic asset-liability mismatch."
"We don't know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector with more seizures and shutdowns coming," Fink said in his annual letter to investors.
Customers are moving their money out of regional banks at an incredible rate, creating a liquidity crunch. To raise the capital needed to meet their customers' demand, these regional banks have to sell bonds; however, because of the aggressive rise in interest rates in the last 12 months, these banks are selling their bonds at a loss.
Silicon Valley Bank, the first domino to fall, lost $2 billion as it sold $21 billion in assets.
In another sign of how weak the financial system is, according to data from the Federal Reserve, banks borrowed a record $164.8 billion from the Federal Reserve in the week ending March 15; this is up from $4.58 billion borrowed the previous week. Just for comparison, the previous record was $111 billion, reached in 2008.
Economists and market analysts have been warning investors that the Federal Reserve was going to raise interest rates until it breaks something; well, something broke.
Of course, it's more than just a U.S. banking crisis; it has turned global as one of Europe's biggest banks, Credit Suisse, had to borrow $54 billion from the Swiss National Bank to shore up its liquidity and restore investor confidence. Wednesday, the Swiss bank saw its shares fall more than 30%, a day after it said in its annual report that it lost $8 billion last year. At the same time, its wealthy clients withdrew about $100 billion from the bank in the fourth quarter.
In an interview with Kitco News, Axel Merk, president and chief investment officer of Merk Investments, said it's only logical for gold to go up as markets are gripped with uncertainty. He added that there is no way the Federal Reserve can raise interest rates in this environment.
|Afraid of a Sunday bank failure, investors don't want to start the weekend without some gold, driving prices up more than 3%|
To save some face, the Federal Reserve may raise interest rates by 25 basis points next week, but Merk said they are done.
As to where this leaves gold, analysts note that gold's solid push above $1,960 puts it on pace to test resistance at $2,000 an ounce.
However, even that now feels like an outdated number, this week both Bloomberg Intelligence and Wells Fargo said that they ultimately see gold eventually going to $3,000 an ounce, according to reports from Kitco's Anna Golubova.
Of course, while we are all focused on the banking sector, let's not forget that the world economy also faces the threat of persistently high inflation. The latest survey from the University of Michigan shows that consumers expect inflation to rise 3.8% by next year. While this is down from February's estimate of 4.1%, it is still above the Federal Reserve's target of 2%.
Matthew Piepenburg, Commercial Director at Matterhorn Asset Management and Author of Gold Matters: Real Solutions to Surreal Risks, told Kitco's editor-in-chief Michelle Makori that he remains focused 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.
That is it for this week; I hope everyone stays safe in this new banking crisis.