- Gold nears all-time high as investors seek haven assets
- US regional banking sector stress in focus
- Bitcoin up 75%
Investors in gold were holding their breath today as the 'barbarous relic' very nearly made history amidst the turmoil in stock and bond markets.
Earlier this morning the precious metal traded at $2,072.19 per ounce in London, just shy of its 2020 record of $2,072.49, before easing back to $2,033.
Part of the reason for the resurgence of interest in gold is the US Federal Reserve's tighter monetary policy. Last night the Fed increased interest rates by a quarter of a percentage point but left the door slightly ajar in terms of future rate hikes.
One of the variables the central bank is grappling with is the wider effect on bank lending to small and medium size businesses caused by the collapse of Silicon Valley Bank.
While the Fed gave investors reassurance that the banking system is robust, a few hours later California-based PacWest Bancorp (PACW:NASDAQ) saw its shares slide 60% after it said it has ‘explored strategic asset sales.’
The yellow metal has been on a tear since October 2022 gaining around 30%. The US dollar tends to have an inverse relationship with gold and helpfully it has dropped around 12% over the same timeframe.
Investors tend to flock towards haven assets like gold during times of financial stress. Perhaps surprisingly given the collapse of digital currency platform FTX, Bitcoin has also been in demand suggesting investors see it as a haven asset.
Bitcoin is up 75% in the last four months to just over $29,000.
WEAK DOLLAR AND GOVERNMENT DEBT WORRIES
It isn’t just worries over the banking system which is giving gold a lift. Treasury secretary Janet Yellen warned Congress (1 May) the US government could run out of cash as early as 1 June unless an agreement can be reached to raise the nations’ debt limit from its current legal ceiling of $31.4 trillion dollars.
Technically, the US could default on its debts unless a political solution is found. Historically, an eleventh-hour deal has been struck which appeases markets.
This time around the risks look more finely-balanced. A protracted stand-off between the Biden administration and Republicans has raised fears the US could heading for an historical default.
The price of US sovereign credit default swaps (an instrument which pays out if the US defaults) have soared 133% in the last month, reflecting investor fears.
That said, the implied probability or chance of default is around 1% which suggests a political agreement is more likely than not.
