Gold Price Spikes Following Silicon Valley Bank Collapse

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News broke on Friday, 10 March of the insolvency of Silicon Valley Bank (SVB), the United States’ sixteenth largest banking institution. The bank, which is based in California and also has an independent arm based in London, focuses on banking services for technology and start-up companies. 

The US Federal Reserve reacted with a $25bn Bank Term Funding Program (BTFP)[1] designed to offer short-term loans to depository institutions, to ensure their liquidity and combat fears that events may cause a run on smaller, less capitalised banks. The US Fed also applied for SVB to be placed into administration and took control of customer deposits. 

Likewise, the Bank of England wrote to the court to apply for a Bank Insolvency Procedure in the UK. This would have left depositors making claims to the Financial Services Compensation Scheme (FSCS) for balances of up to £75,000; however, over the weekend hastened negotiations took place, which culminated in the bank being bought out of administration by HSBC for £1.  

The stock market reaction to recent events has been negative, with both the S&P500 and FTSE100 losing ground – particularly banking stocks and other cyclical sectors such as the oil and gas industries. The US dollar also weakened following the news, as US interest rate expectations are likely to be dampened in its wake. This has provided support to the gold price which, after a two-month low at the end of February of below £1,500, quickly spiked to an all-time high above £1,600 on Wednesday afternoon (15 March). 

Rumours swirled on Wednesday that Credit Suisse would be the subject of a bailout from the Swiss National Bank, after one of its key backers said it wouldn’t provide any further financial support. The bank’s equity value was marked down aggressively as a result, which seemingly helped the gold price push new highs as reverberations rang though European banking stocks. Given Credit Suisse’s size and systemic importance, a rescue package was announced and the sterling gold price has today (Thursday) settled back below £1,600, after reaching £1,612 yesterday. Market commentators note that the Credit Suisse issue is separate and unique to those experienced in the US by SVB; however, many investors will be considering their risk sentiment and, in particular, their exposure to banking stocks.  

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[1] SVB’s Collapse Could Also Create Big Problems For Small Businesses (forbes.com)