The bankruptcy of Silicon Valley Bank (SVB) and Signature Bank (SB) was largely due to reasons such as the lack of diversification and a classic bank run. The downfall of these two notable banks in the United States, which were the country’s 16th and 29th largest at their prime, had caused many ripple effects to the financial world, one of which is the rise in price for heavy metals namely gold and silver, as investors now look for a safe haven for their investment alternatives.
What Really Happened?
In the case of SVB, the financial institution gained enormous volumes of startup companies as their depositors, which is also an aftermath of the strong demand for advanced technologies during the pandemic. The bank then went on to invest in long-term treasuries and agency mortgage-backed securities in the United States.
Things were going fine in the beginning, as Silicon Valley Bank was investing in arguably the safest product available. But engaging in this investment type has one particular risk. As institutions can only recover their capital plus interests when they hold their investment products until the maturity date, it poses interest rate risks, which was exactly what happened to SVB at the end. Federal Reserve’s continued interest hikes to combat inflation last year brought fears amongst investors, prompting them to withdraw their fund within Silicon Valley Bank, to the extent where SVB was unable to pay their investors with their lack of reserves.
Signature Bank suffered a similar fate like its counterpart SVB; People were concerned about their deposits and decided to cash out their funds upon liquidity risks. Together with SVB’s failure in this regard, both incidents are now ranked the second and third biggest bank collapses in the history of the United States, which are only bettered by the 2008 Washington Mutual case.
Precious Metals as Safe Haven
The collapses occurred last week and people soon turned their attention to other investment alternatives, with precious metals being one of the most popular options at the moment. Investing in this product certainly has the potential to suppress the volatility and perils others may bring upon, but what really drew investors to this choice can be related to a way of making the United States Federal Reserve to put a stop on its violent monetary policies, such as the constant rise of interest rates as seen in 2022.
When asked about the price surge of precious metals like gold and silver, Bart Melek, head of commodity markets strategy at TD Securities, had this to say: “Gold looks very much like it is fulfilling its mandate as a safe haven, with support from short covering of long exposures. A lot of investors are looking to the precious metal space as a safe haven against this volatility and this risk … amid a much lower interest rate environment, and the U.S. dollar that’s dropping.”
Head of metals strategy at MKS PAMP SA Nicky Shiels, on the other hand, thought that “There is nothing in the print to scare off gold bulls who’re searching for financial instability hedges at a time where the Fed may (indirectly) accept that inflation will stay higher for longer”.
Should You Invest in Gold Amidst Uncertainties Then?
Well, if you are someone who wants your investment products to combat inflation and unpredictabilities, or something that can diversify your portfolio and can be sold off quickly should it perform / does not perform, the answer is a certain yes. Precious metals investments do come with the said benefits above, which is why investors should be considering depositing some of their funds to this area soon. We welcome your opinion on choosing gold and other precious metals as an investment option down in the comment section as well.
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