US Interest Rate Hike Follows First Republic Bank Buyout

The contents of this article are accurate at the time of publishing, are for general information purposes only, and do not constitute investment, legal, tax, or any other advice. Before making any investment or financial decision, you may wish to seek advice from your financial, legal, tax and/or accounting advisers.  

The gold price briefly reached a peak of £1,638.63 ($2,060.13) on Wednesday evening (3 May) following the US Federal Reserve announcement to raise interest rates to a 16-year high. This marked the tenth consecutive rate increase since March 2022, with the target range for US rates now set at 5-5.25%.   

The Fed Committee voted unanimously in favour of the latest rate increase, although it also notably signalled a potential end to its interest rate ‘tightening cycle’. The decision came despite a slowing US economy which saw the quarter-on-quarter GDP growth rate fall to 1.1% in the first quarter of 2023; the annual inflation rate, however, remains stubbornly high at 5%, according to the March reading. All eyes are now fixed on Friday’s US non-farm payroll numbers, a key data point for judging the health of the US economy.   

Domestically, the UK inflation rate registered at 10.1% in March and the Bank of England interest rate decision will now follow on 11 May, at which point the bank will also have its April inflation reading to consider. Expectations are for another 0.25% point, which would take the key policy rate to 4.25%. 

The Fed’s rate decision follows the takeover of First Republic Bank by JP Morgan Chase, after First Republic lost deposits worth around $100bn. The buyout of First Republic – which specialised in big home loans and was the fourteenth largest lender in the US – followed the collapse of Silicon Valley Bank (SVB) and Signature Bank in March. The uncertainty in the banking system from these events, in turn, spilled over into European markets and in March, Credit Suisse was purchased by UBS. 

Gold and precious metals have long been popular amongst investors looking to diversify their portfolio and hedge their investment risk against macroeconomic challenges and tough market conditions. Gold sits outside of the traditional banking system, which means exposure to systemic risk is mitigated, and it is therefore often regarded as a ‘safe haven’ asset. A rising number of investors with self-invested pensions are considering how to manage these investment risks and are increasing their asset allocation to gold. 

Last year, The Royal Mint saw a near 26% uplift year-on-year in the number of gold investments. We recently polled 2,000 investors and the research showed that this trend is set to continue, with almost a quarter of UK investors (23%) planning to invest in gold in 2023.