March 20

Silicon Valley Bank Collapse: SVB’s Impact on Gold Prices

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The collapse of Silicon Valley Bank (SVB) has renewed doubts about the stability of the U.S. banking and global financial system. At one point, SVB was the 16th largest bank in the U.S. and counted almost 50% of VC-backed startups as clients.

Within 24 hours, it lost $42 billion in deposits, making it the second-largest bank failure in U.S. history. This alarming event echoes the great collapses from 2007-2008 and emphasizes the genuine risks we face day in and day out in the financial system.

Amid this modern-day banking crisis, gold has emerged as a flourishing asset. Just two weeks after the collapse of SVB, gold futures broke past the $2,000 mark for the first time since 2020, reaching 11-month highs. With doubts about the banking system's stability, investors are turning to gold as a safe-haven investment, a trend expected to continue until investors regain confidence.

In this article, we will explore the events surrounding the collapse of SVB, the factors that led to it, the possibility of contagion risks, and how these developments could potentially result in further gains for gold.

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The SVB Collapse- What Happened?  

SVB was a well-known lender in the technology industry, offering loans and financial services to startup companies, venture capitalists, and private equity firms. It had a reputation as the go-to bank in the sector and was popular among the international startup community.

From 2019 to 2022, the assets of SVB surged by 215% due to a significant influx of venture capital. In addition, the low-interest-rate environment aided this growth and attracted a surge in short-term deposits. 

However, with this influx of capital, the bank made significant investments in securities, exposing it to interest rate risk. If interest rates rose, the bank would have to pay higher interest on these short-term deposits, leading to potential losses. Banks often increase loans at a floating rate to mitigate this risk, but SVB did no such thing.

Related: Banking System Collapse - Is History Repeating Itself?

Instead, SVB chose to lock in a low yield on a significant portion of its assets, believing that interest rates would remain low. Unfortunately, this decision made its deposits more expensive, and by 2022, rising interest rates started causing liquidity issues and squeezing margins.

SVB's downfall was mainly due to this gross miscalculation. The bank had borrowed almost $14 billion against its bond portfolio and had inadequate interest rate risk controls. Eventually, this led to a bank run where depositors simultaneously withdrew their funds, fearing insolvency or an outright collapse. 

By March 8, 2023, these depositors’ worst fears came true. SVB announced that it sold $21 billion worth of securities at a loss of about $1.8 billion and needed to raise $2.25 billion to meet customer demands. The SVB's stock price then dropped 60%, resulting in a loss of over $80 billion in bank shares. In hours, regulators seized control and raised concerns about the possibility of another widespread catastrophe.

Related: How to Protect Your Savings from Bank Failure (Free Guide)

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Does the Risk of SVB Collapse Go Beyond the US Banking System?

The recent collapse of SVB highlights the potential dangers within the financial system, prompting concerns of a contagion effect that could spread through the financial markets and the broader economy. This concern has become even more pronounced with the subsequent collapse of Silvergate and Signature Bank.

First Republic, a troubled regional bank, was saved from becoming the fourth U.S. bank to fail in two weeks, thanks to 11 big U.S. banks injecting $30 billion. However, the U.S. banking system's stability has been further undermined, as evidenced by Moody's recent downgrade to a "negative" rating, with fears mounting of more regional banks succumbing to the crisis.

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In Europe, the situation is even more precarious due to companies' heavy reliance on bank loans for growth, rendering the real economy more susceptible to the banking system's vulnerabilities. UBS's recent acquisition of Credit Suisse for $3.3 billion is an effort to shore up the industry, which essentially amounts to a bailout.

Despite post-2008 regulations and safeguards, concerns remain that the banking system could collapse. Billionaire hedge fund manager Bill Ackman compared the fall of SVB to "Bear Stearns," which was the first bank to collapse at the start of the financial crisis.

Sheila Zavaro Weiss, the head of Dun & Bradstreet Israel’s tech department, called the fall of SVB the “beginning of an economic tsunami” and stated that “no one is safe when banks collapse due to sheer panic.” Even Elon Musk sees similarities between the collapse of SVB and the 1929 Wall Street crash that led to the Great Depression.

While it is difficult to predict the exact impact that this event will have, it is clear that there are more risks to the global financial system today than there were 3 weeks ago.

Related: Gold's Price Floor 2023 - Has it Already Arrived?

Silicon Valley Bank collapse

Silicon Valley Bank image credit - Wall Street Journal

The Key Takeaway- What It Means for the Price of Gold

The collapse of Silicon Valley Bank (SVB) and the risks facing the U.S. banking system could significantly impact gold prices. Investors concerned about banking system stability may turn to gold as a safe haven asset, increasing demand and price. 

We’ve seen gold surge many times throughout history during times of financial crisis. 

During the 1929 Wall Street crash, the price of gold rallied from $20.67 to $35 per ounce. In the 1970s stagflation era, gold rallied 2300% from $35 an ounce in August 1971 to a record high of $850 an ounce in 1981. During the 2008 financial crisis, gold more than doubled from $850 to $1,900 per ounce in 2011. 

In the two weeks since the SVB collapse? Gold’s price increased from $1,811.50 to as high as $2,014.90 per ounce.

The banking industry's exposure to risky loans and debt and the potential for contagion poses a significant threat to the stability of the U.S. economy and financial system. Accordingly, investors should take necessary precautions to protect their portfolios, including diversifying into safe-haven assets like gold. 

Despite government assurances, the actual cost and consequences of the SVB collapse remain uncertain. To learn how you can protect your retirement savings from bank failure, request your free gold IRA kit from Goldco here.

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About the author 

Robert Samuels

Robert Samuels is a financial copywriter and business advisor. After teaching himself stock market basics and financial fundamentals, he leveraged this newfound passion into a Master’s Degree from Harvard University’s ALM Finance extension program, where he received a 3.87 GPA and Dean’s List distinction.

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