When it comes down to it, the primary appeal of precious metals for savers is their perceived capacity to act as safe-haven assets. That is, as assets with the tendency to strengthen during conditions that are unfavorable to economies, markets and/or the dollar.
The safe-haven appeal of metals isn’t triggered exclusively by outright crises or sudden surges in geopolitical or economic tension and fears. For example, some retirement savers own gold and silver as a way to hedge against the impact of ongoing dollar debasement. In a case like that, they are relying on metals’ potential to shelter accounts from the negative effects of debasement.
Long-term dollar debasement can really be a problem for retirement savers. Chronic inflation of as little as 4% can reduce the purchasing power of a $500,000 savings account down to just $228,000 in 20 years.
That said, the most dramatic increases in the price of gold and silver typically are attributable to concerns that something very bad is about to happen – war, economic collapse…a banking crisis.
Did someone say “banking crisis”?
Unless you’ve been asleep for the last week, you know bank collapses and fears of a larger banking crisis have dominated the headlines. Last Friday, Silicon Valley Bank was the subject of the largest U.S. bank failure since the financial crisis and the second-largest bank failure in American history. Just two days later, Signature Bank of New York was consumed by the third-largest bank failure in U.S. history.
And then just three days after the collapse of Signature Bank, shares of Credit Suisse (CS) – one of the world’s “too big to fail” banks – plunged when news outlets reported irregularities in the institution’s financial reporting processes.
It is premature at this point to suggest we’re on the cusp of an actual systemic banking crisis. But it’s not premature to say there are widespread concerns about the stability of the banking system. As those concerns have grown, so have the prices of gold and silver.
And that’s what I really want to talk about.
The recent price action of precious metals serves as a textbook example of the bottom-line benefit so many savers expect from gold and silver. They hope the assets will help offset the volatility in retirement accounts that arises during crises – or even during periods when merely the fear that such a crisis might occur is increasing.
What we are seeing play out right now in the context of precious metals’ reaction to worries about the banking system is a real-time reminder of why some savers decide to seek out perceived safe-haven assets in the first place.
In this article, I’m going to further detail precious metals’ “classic” safe-haven-type movement against the backdrop of current concerns about the banking system. We’re also going to look at a couple of other relatively recent examples of gold and silver surging rapidly when anxiety about global stability was particularly high.
There are a number of reasons why retirement savers choose to own precious metals. The most prominent may be the belief that metals can thrive during periods of sudden and quickly unfolding crisis. As it turns out, those who have that kind of faith in metals may be on to something.
Let’s see why.
As you surely know by now, 2022 proved to be an especially volatile year – the sixth-most volatile year since the Great Depression, according to Goldman Sachs. Yet as the average 401(k) balance fell by nearly 25% last year, gold and silver remained especially resilient even as the Fed’s stringent rate-tightening cycle created significant headwinds for metals.
Hopes that an even better 2023 was in store for precious metals dimmed somewhat when recent signs of continued price pressures strongly suggested the Fed would have to keep hiking rates.
Shortly thereafter, however, gold and silver received an unexpected boost from one of its very favorite energy sources: concerns that a major crisis might be developing.
Toward the end of last week, news began to emerge suggesting Silicon Valley Bank might be in trouble. By Tuesday of this week, both Silicon Valley and Signature Banks were gone, and concerns were growing we might be facing a larger banking crisis.
Over the course of that handful of days, gold and silver provided clear evidence as to why metals have come to enjoy a reputation as safe havens. From Thursday a week ago through this past Tuesday, the price of gold jumped 5% and silver leapt by 7.5%.
This sudden surge in metals prices seemed to serve as yet another example of gold and silver’s apparent status as safe havens – something readily acknowledged by analysts.
“Gold looks very much like it is fulfilling its mandate as a safe haven,” said Bart Melek, the head of commodity markets strategy at TD Securities, who added that “a lot of investors are looking to the precious metal space as a safe haven against this volatility and this risk.”
You may know the government and Federal Reserve deployed unprecedented rescue efforts to backstop all depositors at Silicon Valley and Signature, as well as to inject liquidity into regional, mid-tier banks that are seen to be at greater risk. No sooner did those measures begin to at least slightly calm fears of contagion, however, than Credit Suisse (CS) fell into a sea of troubles.
On Wednesday, the Saudi National Bank – CS’s largest backer – announced it would not be injecting any additional money into the Swiss multinational. The previous day, CS announced the previous day that it had found “material weakness” in its financial reporting process from years past.
The announcement saw shares of CS plunge by as much as 25% in trading on Wednesday. The news also dragged down share prices across the financial services sector.
It doesn’t matter that the problems plaguing CS appear unrelated to those concerning American regional banks such as Silicon Valley and Signature; news that one of the world’s systemically important banks now was having problems understandably has exacerbated existing concerns about the viability of America’s mid-tier banks. Gold increased another 1% on the news and silver rose an additional 1.5%.
That means in the span of roughly a week and on the basis of anxiety over a feared banking crisis, gold increased 6% and silver 9%. But it’s hardly the only example of metals “fulfilling their mandate as safe havens,” to quote TD Securities’ Bart Melek.
Other Safe-Haven-Type Surges Demonstrate Metals’ Potential to Lessen the Impact of Uncertainty
The manner in which gold and silver reacted to Russia’s invasion of Ukraine last year illustrates the same dynamic. Tensions began building in earnest toward the beginning of February 2022, with the actual invasion beginning on the 24th of that month. Throughout that period until the first couple of weeks of March, there was heightened concern over how the invasion would play out – including whether it would spill over into a broader conflict. During that period, gold jumped 12% while silver rose nearly 15%.
Metals demonstrated yet another “safe-haven surge” roughly a year before that, when an exchange of missiles between the U.S. and Iran raised the threat of open warfare between the two countries. During a particularly tense week and a half from the end of 2019 into the first few days of 2020, the price of gold increased 7% and silver jumped roughly 8.5%.
In the case of both the Russia-Ukraine invasion and the U.S.-Iran standoff, the principal metals surge arising from these tensions ultimately was not sustained. As the tensions moderated, so, too, did the price of gold and silver. But the more important point is that, until tensions were resolved, precious metals continued to respond because so many see them as safe havens.
What about the current surge in gold and silver prices triggered by apprehension over the banking system? That, too, may moderate if depositors and investors begin to feel more at ease. Until that happens, however, there’s no reason to believe the strengthening in metals prices we’re seeing right now will subside.
That said, will gold and silver prices always decline eventually in these moments? Or are there times when safe-haven-generated price surges can continue beyond the point at which the immediate tensions subside?
A sustainment in prices after an especially critical period of uncertainty may continue if the relevant tensions prompt changes in fiscal and/or monetary policy that prove favorable for metals.
In the case of geopolitical tensions such as those springing from the referenced U.S.-Iran showdown, there typically isn’t a basis for making significant changes in fiscal or monetary policy. But other sorts of crises may lead to such changes. And depending on the specific nature of those changes, there can be a more lasting response from metals.
The 2008 financial crisis is one example. The crisis began unfolding in earnest in 2007, when more than 25 subprime lenders went out of business between February and March of that year. By the beginning of August, two Bear Stearns hedge funds had collapsed and a third stopped honoring client redemption requests. The spiral downward was underway.
Gold’s response was to climb 30% that year. But the scope of the crisis prompted the Federal Reserve in November 2008 to announce its first-ever round of quantitative easing (QE), which was followed by the announcement of a second round of QE in November 2010. From the beginning of 2007 through the end of 2011, largely upon the strength of the Federal Reserve’s shift to an unprecedented form of monetary policy, gold rose nearly 150%.
There’s talk that a similar scenario could play out today. There’s no shortage of concerns that the banking system is simply unable to handle additional rate hikes, with a growing number of analysts saying the Fed could pause rate increases altogether as early as next week. Economists at Nomura Securities have gone as far as to suggest quantitative tightening is over and the Fed will cut rates 25 basis points next week.
According to Bloomberg Intelligence senior macro strategist Mike McGlone, a shift back to accommodative monetary policy in this environment would pave the way “for gold to head to $3,000.”
There are circumstances, then, in which safe-haven metals surges can become something more lasting. But even when that doesn’t happen, retirement savers may be grateful enough for the peace of mind that comes from knowing that when crisis-driven turmoil is at its worst, precious metals have the potential to make those days considerably less unpleasant.
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