Silver Linings

“It’s an ill wind that blows nobody any good”. The collapse of SVB – if it doesn’t bring about chaotic contagion – will have prompted many to think of that ancient proverb. For one of the more interesting responses came from Goldman Sachs, which said it no longer expects the US Federal Reserve’s Federal Open Market Committee (FOMC) to push interest rates higher, when it concludes its next two-day meeting on 22 March. That view seems to be shared by many, as this chart shows:

Traders in the US are now increasingly of the belief that the FOMC will halt entirely its interest rate increases. Elsewhere there was a growing belief that the European Central Bank (ECB) will see its deposit rate hit a peak of 3.3%, almost 1% lower than expectations just one week ago. The perceived fragility of the banking system has given central banks pause for thought, even though inflation remains a threat to currencies and stability. The Fed has had its eyes forcibly turned towards the protection of the US banking system.

That’s good news – and while it’s obviously good for those, for example, on variable rate mortgages, it’s also good for gold holders.

The main reference price for gold is, as for all commodities, the Dollar. As the Fed has pushed US interest rates higher, US government bonds and other Dollar-denominated fixed-income investments have become relatively more attractive, meaning investment money has moved into those vehicles; gold, which has no yield, has become relatively less inviting for investors.

This relationship between interest rates and gold does not always hold – interest rates generally declined in the 1980s and the gold price fell too. Other factors come into play; in the 1980s it seemed as though central banks had fallen out of love with gold and many of them sold gold from their reserves.

All this doubt about the immediate direction for interest rates had an impact on the Dollar gold price, which rose by more than 2% from the day prior to the SVB collapse to the following Monday. Given all the other uncertainties on the horizon, little wonder that investors shifted into gold which, of course, has no counter-party risk – such as a collapsing bank.

The US establishment rallied round the failed SVB. “We will do whatever is needed… Americans can have confidence that the banking system is safe…Your deposits will be there when you need them”, said President Joe Biden, who added that no losses would be paid for by the taxpayers.

Yet there remains an unhelpful ambiguity in this affair. Nikki Haley, who is hoping to be selected as the Republican Party’s candidate for the next US Presidential election tweeted that “Joe Biden is pretending this isn’t a bailout. It is”. Making political capital out of a banking crisis is an obvious tactic, but maybe Haley has a point?

Depositors in SVB are to be made whole even if their cash holdings with the failed lender are above the $250,000 cap that’s meant to apply to US bank deposit insurance. The authorities have stepped in to ensure that depositors don’t lose money, which is an uncomfortable reminder of what happened in 2008-09. The incentive to be prudent when making investments will have been weakened – big-money investors may be encouraged to take more risks than is sensible, safe in the knowledge that the cap on deposit insurance holds only so long as nothing bad happens. For Ken Griffin, founder of the mammoth hedge fund Citadel, the regulators rescue package for SVB shows American capitalism is “breaking down before our eyes”.