Precious moments: Silicon Valley Bank rattles the markets and highlights gold’s role as a risk-hedge

Rhona O’Connell took a look at the collapse of Silicon Valley Bank (SVB), a bank that concentrated on start-up companies in the technology sector and went into receivership last Friday. She argued that Gold benefited from a surge in buying, rising to $1,909 per ounce emphasizing its long-term role as  a hedge against risk.

Gold benefited in the short term from the SVB receivership, and its perceived market role is likely now to revert to risk-hedging. Any escalating financial sector distress would almost certainly see an initial gold sell-off to raise liquidity, followed by fresh safe haven buying, the usual pattern. 

SVB’s failure could impact the banking systems a whole, and it is clear that government leaders have acted swiftly to contagion and a run on the smaller banks last Friday. SVB’s position shines a spotlight on potential systemic risks for parts of the banking system as cheap money disappears – although SVB over-concentrated on lending to the tech sector, which has faced volatility.

Gold and the S&P Banking sector

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.

Source: Bloomberg, StoneX

Gold and the VIX, Wall Street’s Fear index

Rhona also notes a sharp increase the correlation with gold moving back into positive territory. Ordinarily, we might expect gold and the VIX to move in tandem – reflecting risk –but in 2022 they did not. Now gold and the VIX are moving up together to reflect economic and equity market risk.

Source: Bloomberg, StoneX.

Taken from analysis by Rhona O’Connell, Head of Commodity Market Analysis for EMEA & Asia, StoneX Financial Ltd.