Gold Price Up Amid Banking Crisis
Five years ago, 24K gold cost only $1,336/oz. Since then it went up 50%. It reached $2,010 in August 2020 amid the Covid-19 pandemic that rattled the stock market. It went down to $1,626 when the U.S. Dollar went up 12% in September 2022 due to the federal increase in interest rate to fight inflation. As the Fed continues to increase the interest rate, market volatility contributed to increased gold price. The Federal Reserve increased the interest rate from 0 to 5% beginning last March 2022 and Fed officials said the interest will have to go higher and remain there longer as the inflation rate is still stubbornly high at 6%, which is still far from a goal of 2%.
As of March 17, Gold rose from $1,885 to $2,000, that is 6% in one week after the fall of Silicon Valley Bank in San Francisco resulting from the federal tightening of monetary policy. Fears of whether their deposits are safe caused people to withdraw billions of dollars at Signature Bank and First Republic Bank following the collapse of SVB.
The federal government stepped in and took control of Silicon Valley Bank, shut down Signature Bank on Monday March 13. The federal treasury announced the availability of funds for any bank to borrow if needed and assured that the deposits are backed by the Federal Deposit Insurance Corporation up to $250.000.
However, two-third of First Republic Bank deposits exceeds the $250.000 FDIC cap. According to the Wall Street Journal report, an estimate of 89 billion dollars left First Republic Bank in one week. The bank borrowed tens of billions of federal government loans to cover the withdrawal. A few major banks banded together and added $30 billion in deposits to First Republic Bank to help solve the crisis and fears of banking contagion.
Following the U.S. bank crisis, European Credit Suisse Group AG stock fell sharply. The bank secured $50 billion from Swiss National Bank to calm investors on Wednesday. However, deposits continue to flee, prompting the Swiss Central Bank and regulators to initiate talks with a larger rival, UBS, into purchasing Credit Suisse which was valued at $8 billion on the last trading day heading into the weekend. UBS agreed to buy Credit Suisse for $3.2 billion on Monday as the bank saw as much as $10 billion of deposit withdrawal last week causing fear that inaction would result in complete collapse in the coming days. The regulators are concerned that fear would spread to other banks.
Credit Suisse is a 167 years old bank in Switzerland known for serving wealthy clients from Asia and the Middle East. The ending of its life marks a significant moment since the world financial crisis in 2008. The uncertainty drove investors to buy government bonds and gold.
