Gold Forecast—Spreading Bank Failures Could Send Gold Soaring

The comments below are an edited and abridged synopsis of an article by AG Thorson

Silicon Valley Bank (SVB) collapsed after experiencing an old-fashioned bank run. It started last week when the bank tried to raise $2.25 billion in equity to shore up its balance sheet. Customers panicked and withdrew a staggering $42 billion, making SVB insolvent.

Gold Forecast—Spreading Bank Failures Could Send Gold Soaring - BullionBuzz - Nick's Top Six
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The FDIC took over operations, and SVB became the second-largest bank failure in US history.

Apparently SVB didn’t do anything wrong. They were flush with cash in 2020 and 2021 from Covid stimulus, and they used some of their customer deposits to buy Ginnie Mae mortgage-backed securities. Regulators consider such debt risk-free and didn’t require the bank to maintain reserves. It turns out that SVB was over-concentrated in low-yielding MBS and didn’t hedge for interest rate risk.

Who could have predicted the Fed would hike rates from 0.25% to 4.75% in just 12 months? The odds of that happening were below 1%. From the dot plot dated December 16, 2020, the Fed forecasted rates to stay at 0.25% through 2021 and 2022. They didn’t see rates rising to 0.50% until 2023 and only 2.50% years after. Nobody expected rates to end 2022 at 4.50%!

The sudden increase in rates over the past year pushed the market value of SVB low-yielding paper lower by 20% or 30%; it was sitting on massive losses and needed to raise $2.25 billion to shore up the balance sheet. Instead of getting more capital, depositors panicked and withdrew their money at a record pace. The bank run made them hopelessly insolvent, and the FDIC took over.

Up for discussion: The takeaway; SVB crypto fallout; curve pool 3; gold; S&P 500; and Bitcoin/US dollar.

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