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Gold prices continue to improve as uncertainty grows over the US, and broader global banking system. Overnight, pointed comments by JP Morgan CEO Jamie Dimon with respect to the ongoing weakness of US banks further rattled stock investors and sent bonds and other risk-off assets soaring.
In his annual letter to shareholders, Dimon suggested the crisis which began with the collapse of Silicon Valley Bank (NYSE: SIVB) and Signature Bank (NYSE: SBNY) last month is "not over yet", and that the effects could be felt "for years to come".
Dimon is likely concerned about the ongoing impact of the flight of deposits from small-to-mid-sized US banking institutions, which according to US Federal Reserve data, reached record levels in mid-March. The outflows, which now total close to $US1 trillion across the broader US banking system, slowed last week but remain at levels not seen since last August.
Stock investors may be fretting the longer-term fallout from the banking crisis, but there are a number of clear beneficiaries of the fund flows it has created. Bond prices have rallied significantly in the wake of the SIVB/SBNY collapses, sending key benchmark yields plunging. The yield on the 2-year T-Note for example, has fallen from just over 5% to around 3.85%.
Winners from the banking crisis
Lower market yields are a boon for high growth and pre-earnings technology stocks which are more harshly discounted during periods of higher yields than companies with well-established earnings. This is why the NASDAQ Composite has rallied from just below 11,000 in early March to current 6-week highs around 12,100.
Gold/US Dollar spot rate XAUUSD - click to on chart enlarge
Clearly, however, there is one standout winner from the banking crisis, and that is gold. Gold doesn't have a yield, instead, you generally have to pay someone to keep it safe for you. For this reason, gold tends to suffer during periods of high and rising yields as the opportunity cost of holding gold increases. As market yields have fallen, it's been a shot in the arm for the gold price which has rallied from US$1,800/oz to touch 13-month highs yesterday at US$2,043/oz.
The spot gold price (XAUSD), which can be traded commission free on the ThinkMarkets trading platform ThinkTrader
, also has the extra benefit of being priced in US dollars. As US yields have fallen, so too has the attractiveness of the US dollar as a currency in which to hold investments. The US dollar index (USDX) has dropped over 5% since news of trouble at SIVB broke. The US dollar's loss has quite literally been spot gold's gain.
Silver/US Dollar spot rate XAGUSD - click to on chart enlarge
Also charging higher on recent market sentiment is spot silver (XAGUSD). It's perhaps shown the most spectacular response to the recent events, rocketing over 29% since the beginning of the banking turmoil. It tipped US$25.30/oz yesterday before settling back to $US25/oz. Spot silver can also be traded commission free on the ThinkTrader
Outlook for gold and silver
The outlook for spot gold and spot silver hinge on developments in both interest rates and the broader global banking system. The demise of SIVB and SBNY, and in Europe, the sale of ailing Credit Suisse to UBS, have turned traders' focus to rumours of trouble at Germany's Deutsche Bank and Canada's Toronto Dominion Bank. The latter, according to Bloomberg
, recently gained the dubious honor of most shorted bank in the world.
On the interest rate front, one beneficial side-effect of the banking crisis is it will likely force the hand of several central banks to halt their fight against inflation. Australia's reserve bank on Tuesday chose to keep its official cash rate on hold after 10 consecutive hikes, and futures market pricing has swung 59% in favour of the US Federal Reserve doing the same when it next meets in May.
It is clear that ongoing ructions in the banking sector, and lower official interest rates (along with accompanying weakness in the US dollar) are key swing factors determining the fortunes of spot gold and spot silver. Given present circumstances, these factors are delicately balanced and could go either way. Therefore, investors must remain on their toes and commit to assessing each piece of incoming data carefully.
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