Banking crisis in sight: gold price rises

Is a new financial crisis looming?

Last week saw the biggest bank failure in the U.S. since 2008. The case brought home to many investors just how shaky the balance sheets of many banks are and that the financial system may once again be just one step away from the abyss.

While stock markets around the world are deep red, the price of gold skyrocketed.

Silicon Valley Bank Crash: What Actually Happened?

On Friday, the U.S. Financial Markets Authority announced that California-based Silicon Valley Bank (SVB) will be taken over and wound up by the authorities. The day before, it had become known that the bank had speculated, whereupon customers withdrew their funds and the parent company's stock crashed and was eventually suspended from trading.

SVB is considered the house bank of the Californian tech startups. The latter parked their cash, which they had previously collected from investors, with SVB. The bank then invested these funds in supposedly safe bonds, which at the time carried an interest rate of around 1.8%.

However, because thanks to interest rate hikes, U.S. government bonds now yield 3.9% interest per year, the value of the bonds the bank held fell significantly. This led to a (realized) loss of 1.8 billion at SVB. The attempt to recoup the loss through an emergency capital increase, i.e. the issue of new shares, led to panic and triggered a vicious circle.

The fear of banking domino

The decisive intervention of the U.S. authorities and the assurance that all deposits at Silicon Valley Bank are protected seem to have calmed the markets somewhat on Monday. However, uncertainty remains high. On the one hand, there is panic in the start-up scene; after all, the bank played an important role in the tech industry, and on the other hand, people fear the risk of a domino effect in the banking sector.

After all, not only is the collapse of SVB the largest bank failure since the 2008 global financial crisis: the problem of unrealized losses from bonds affects virtually all U.S. banks. According to the FDIC, U.S. banks were sitting on $620 billion in unrealized losses at the end of 2022. Signature Bank was the second U.S. bank to be placed under government control over the weekend.

And European banks could also be facing similar problems, with previously unrealized losses hidden on their balance sheets. In any case, the European bank index and the share values of major European banks were recently deep red.

All those involved are trying to reassure the public that the banking system is much more stable than in 2008 and that there will by no means be a new global banking crisis. However, if further banks were to stumble in the next few days, this could very well lead to a new downward spiral and a collapse of the financial system.

Gold as crisis insurance

The news of the Silicon Valley bankruptcy not only caused the stock markets to plummet. It also caused the price of gold to shoot up on Friday. Gold, whose price in the weeks before, due to the increased interest rates rather declined, thus approached a new 4-week high. The precious metal thus once again lives up to its reputation as a crisis metal.

Gold is considered to be THE safe haven of all. Due to the general stability of value of precious metals, gold, silver & co. are ideal crisis reserves. As a hedge against systemic and political risks, gold is also part of the portfolio of many professional investors.

Even though the price of gold tends to rise in times of crisis due to increased demand, the focus with gold is not on short-term gains, but on long-term asset protection. Depending on the opportunity, we recommend investing 10 to 20 percent of total assets in precious metals.

My tip: Always buy precious metals as genuine physical investments. In other words, in the form of bullion coins and bars of gold and silver that you hold in your own hands.
Paper gold, i.e. financial products such as gold certificates & ETCs, gold ETFs or vault gold, is also based on the gold price, but in case of an emergency (bank run, etc.) you will not get your assets.

Hedge assets with precious metals now

If you would like to protect your acquired assets against crises and are interested in investing in precious metals, please come by for a free and completely non-binding consultation with our gold experts.

In a personal meeting we get an idea of your reasons for investing in gold and, based on this, we work out a denomination tailored to your needs and show you the gold products that are ideal for you.