Collapse of First Republic shows banking turmoil is not over, gold price flirts with $2,000 level

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(Kitco News) This year's third banking failure did not shock the markets, pushing gold above $2,000 an ounce only for a short period on Monday as traders focused on Wednesday's Federal Reserve interest rate announcement.

Three of the top 30 U.S. banks have failed in less than two months. Yet, the gold market barely moved in reaction to First Republic's collapse and news of JPMorgan buying most of the failed bank's assets.

This weekend First Republic was seized by the government, and the company’s assets were auctioned off. JPMorgan, PNC Financial Services and Citizens Financial were asked to submit offers.

This comes after a weekend auction for First Republic following the government's seizure of the troubled bank. During the auction, banks, including JPMorgan, PNC Financial Services and Citizens Financial were asked to submit offers.

"The collapse of First Republic Bank is no big surprise – it had been teetering on the edge since suffering $100bn in deposit withdrawals mostly in March – but it's a timely reminder that banking turmoil will continue to flare up periodically," said Capital Economics chief North America economist Paul Ashworth.

First Republic Bank was the fourteenth biggest bank in the country, with assets of close to $230bn, slightly bigger than Silicon Valley Bank.

In return for the buyout, JPMorgan will get a credit line worth $50 billion from the FDIC.

What does 2nd largest bank failure in US history cost these days?@jpmorgan will make a payment of $10.6B to @FDICgov for @firstrepublic

In turn, FDIC will provide new $50B five-year fixed-rate term financing.@business pic.twitter.com/45smR0Ohz8

— Danielle DiMartino Booth (@DiMartinoBooth) May 1, 2023

JPMorgan Chase CEO Jamie Dimon said Monday that he views the takeover as the end of panic for the banking system. "This part of the crisis is over," he said during a conference call Monday. "There are only so many banks that were offsides this way … There may be another smaller one, but this pretty much resolves them all."

But with the Fed about to raise rates by another 25 basis points on Wednesday, some analysts are watching what can break next.

"It is striking that even though the Fed's emergency lending hasn't expanded any further since the initial crisis in March, use of the Fed's discount window remains extremely elevated," Ashworth noted. "In addition, banks have apparently been tapping the Federal Home Loan Banks heavily."

The core of this crisis remains unresolved — there is an outflow of deposits as savers look for higher returns amid increased interest rates.

"With cash on hand already dwindling, the decline in deposits, particularly at small banks where the lack of blanket insurance is an additional problem, will add to the pressure to scale back loans. That squeeze on bank credit will add to the headwinds on GDP growth, at a time when the economy already appeared to be slowing," Ashworth warned.

The failure of First Republic points to a pattern and the consequences of the Fed raising rates too quickly, said Great Hill Capital chairman Thomas Hayes.

"When it was just SVB, it was easy to blame management. However, now that we see the pattern it is evident that the Fed has moved too far, too fast and is breaking things," Hayes said. "We would not be surprised to see a 'pause' after this final hike. Markets should take today's news in stride knowing that the repeated bank failures should now have the Fed back on its heels and defanged moving forward."

On the other hand, any concerning comment from Federal Reserve Chair Jerome Powell on what the Fed thinks about the banking sector could renew gold's momentum.

"Gold prices, in particular, have been on a gradual incline for much of 2023 so far, and such worrying indications of more stress in the Banking sector can be viewed as a potential catalyst to add the needed fuel to a rally that has run out of fumes in recent weeks," said CompareBroker.io chief analyst Jameel Ahmad.

Another risk to consider is that many global markets still need to digest First Republic news because they were closed on Monday, May 1, for public holidays, Ahmad wrote in a note Monday.

"Confidence in the banking sector has now weakened further, which means that investors should expect for financial markets to remain on the defensive," he said.

One possible downside for the gold market is the Fed sounding more hawkish than expected, said OANDA senior market analyst Edward Moya.

"Given the recent boost of inflationary pressures, [the Fed] might hold off signaling they are ready to hold rates steady after one more hike. The Fed might choose to remain vigilant and that is something this market is not ready to price in," Moya said Monday.