Silicon Valley Bank's Collapse: The Week Ahead & Why Gold Is Still Considered By Some To Be A Hedge

On March 10, 2023, Silicon Valley Bank (SVB) collapsed. 

The bank was the sixteenth-largest in the U.S. in terms of assets held and the largest bank in California by deposits. According to SVB, it banked 44% of VC-backed tech and healthcare companies' initial public offerings in 2022, making it an invaluable banking destination for the tech and healthcare industries. 

SVB’s capitulation triggered hysteria in the stock market. The S&P500 index declined 5% in the three days leading to SVB’s collapse on March 10th, a 20-point drop. Given SVB’s list of high-profile clients – including Binance, Circle and Roku – operators were concerned about a bankruptcy contagion spreading throughout the tech sector. Other operators, noting the interconnectedness of the U.S. banking system, feared a broader collapse in banks across the U.S. 

On March 13th, the hysteria abated slightly as the Federal Reserve and Federal Deposit Insurance Corporation announced a $25 billion backstop for customer deposits, and HSBC Holdings PLC HSBA acquired SVB’s U.K. asset for 1 pound. Despite these interventions, the rising price of gold suggests market participants are still wary of the future. 

In a market report, FOREX.com’s Rhona O’Connell argued that, in the midst of the SVB collapse, gold’s rising price exemplified its role as a long-term hedge against risk. As of March 13th, 3:00 PM (EST), the price of gold has risen to $1918 an ounce. Three days ago, the price of gold opened at $1818 an ounce, roughly 5% lower (an almost perfect inverse reflection of the S&P500). 

Chart of Gold Futures. Source: TradingView.

Speaking of Rhona’s analysis, FOREX.com’s Paul Walton says: “Rhona notes that the correlation between gold and the banking sector is normally inverse, but has recently been positive as markets have looked at the Fed’s hiking cycle and the potential impact on both assets.” 

The Week Ahead For The Markets

Another FOREX.com report by Joshua Warner outlines the future for SVB and its financial counterparts. Warner writes: 

“The FDIC has placed SVB’s assets into a new bank named the Deposit Insurance National Bank of Santa Clara and guaranteed that clients will be able to access their money, which provided some certainty before markets opened on Monday… The hope now will be to find a buyer that can take on SVB’s assets. An auction over the weekend was fruitless. However, Apollo Global Management, one of the world's largest alternative asset managers, is reported to be among the suitors circling SVB's loan book, according to unnamed sources cited by Bloomberg.” 

As mentioned earlier, the Federal Reserve has pledged up to $25 billion as insurance for SVB’s depositors, but this is a mere fraction of the $175 billion total that depositors had in SVB at the end of 2022. “For now,” Warner writes “all client funds, insured or not, are being made accessible in full.” On a larger scale, banks considered more reliable are experiencing an influx of requests to move funds over to them since the weekend. 

For now, depositors appear to be in the clear, but the future is still murky for the FDIC as SVB continues its search for a purchaser of its assets. The SVB debacle has put pressure on the Fed to decrease its aggressive rate hike, and this pressure has been reflected in market expectations. 

“Markets were anticipating another 50bps rate hike when the Fed meets later in March, but odds have now swiftly turned to a 25bps increase following the collapse of SVB on Friday,” concludes Warner. 

For more information on SVB and how you could’ve traded the news, click here

Featured photo by Dan Dennis on Unsplash

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