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Silicon Valley Bank (SVB) collapsed after experiencing an old-fashioned bank run.
It started Wednesday when the bank tried to raise $2.25 billion in equity to shore up its balance sheet.
Customers panicked and withdrew a staggering $42 billion - making them insolvent.
The FDIC took over operations Friday, and SVB became the second-largest bank failure in US history.
What Happened?
From what I can gather, Silicon Valley Bank didn't do anything wrong. They were flush with cash in 2020 and 2021 from covid stimulus, and they used some of their customer deposits to buy Ginnie Mae mortgage-backed securities (MBS). Regulators consider such debt risk-free and didn't require the bank to maintain reserves. It turns out that SVB was over-concentrated in extremely low-yielding MBS and didn't hedge for interest rate risk.
Who could have predicted the Fed would hike rates from 0.25% to 4.75% in just 12 months? The odds of that happening were well below 1%. From the dot plot dated December 16, 2020 - the Fed forecasted rates to stay at 0.25% through 2021 and 2022. They didn't see rates rising to 0.50% until 2023 and only 2.50% years after. Nobody expected rates to end 2022 at 4.50%!
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Gold Price Forecast FAQ
How do you forecast the price of gold?
Predicting gold prices can be said to be both a science and an art. For example, analysis of gold supply and demand is scientific and completely objective whereas aspects of technical and sentiment analysis of the current gold market can be more of an art as it relies on the skills and perspective of the gold analyst.
Generally speaking, when the focus of the gold forecast is longer term then analysis of the fundamentals, ie scientific analysis, comes to the fore.
For shorter-term predictions of gold prices, the price of gold in the coming weeks and perhaps few months, technical analysis of past and current gold prices, market trends, as well as current market sentiment can be more actionable predictors. Here, the fundamentals can still play a role but generally serve more as background details.
What are the key factors for long term gold forecasts?
When forecasting what may happen to the price of gold longer term, there are many things to consider including economic trends, the impact of current and expected monetary policy, QE, debt monetization, and the aggregate impact on future currency valuation.
Does the price of gold go up when the stock market goes down?
The price of gold is often negatively correlated to the stock markets. When the markets go down, gold prices usually go up. However, this is not always true. Sometimes the price of gold and stocks both go up and down in unison. Fundamental factors play an important role and need to be carefully analyzed. Historically, however, the price of gold is not tied to the fluctuations of stock and bonds. This is one of the chief reasons when one should have gold in their portfolio – to protect the long-term value of your investments.
Does the value of the US dollar predict the price of gold?
As gold is traditionally quoted in US dollars, the price of gold is negatively correlated to the strength of the USD. The weaker the US dollar, the cheaper it is to purchase gold. Therefore, if economic factors predict a strengthening of the US dollar then this will tend to drop the price of gold, and vice-versa. According to the statistics (since 1973), the long-term correlation between the U.S. dollar index and the gold prices is -0.6 so this link is quite strong.
How do US interest rates impact future gold prices?
The level of US interest rates is an important driver of future gold prices. When investing in gold, the investor is faced with the opportunity cost of gold - a non-interest bearing asset. The higher the US interest rate for holding US dollars or investing in Treasuries, the higher the opportunity cost of holding gold. It is more likely, therefore, that a rally in the price of gold will be forecasted the lower the US benchmark interest rate.