Gold rises as more banks struggle here's what happened
Good morning Lions I trust you're all safe and well these are turbulent times as we're in for a massive market correction as the economy returns to precovid times. You might recall my article at the start of the year In 2023 Liquidity will be king. The first financial quarter is almost over and we are seeing the truth behind how important liquidity is and it's damaging impacts when it is low. The Crypto sector isn't the only sector at risk of collapse.
Gold surges passed $US2000 per ounce
While we experienced a decent dip in precious metals this was mainly brought on by banks selling their holdings to meet liquidity issues and has since recovered and now breached the $US2000 per ounce mark.
I don't think we will see gold drop this year until maybe December or Feb next year as interest rates continue to rise to battle inflation. Although the method sounds like a good one it is also adding to the liquidity issues and causing further financial crisis that will create their own problems in the 2024 financial year.
How did we get here?
During COVID the tech sector reached new all time highs as the sector pivoted to work from home and a heavy reliance on tech based businesses. This meant a large amount of deposits came into banks that specialised in technology such as Silicon Valley Bank.
The issue that arose for the banks is that they didn't have enough placed to invest the large amounts of deposits they were getting. Banks make money typically by lending out your money, for example say you deposit $1 in a bank the bank than lends that $1 to someone else through a loan. They charge interest which pays them and provides you a small return.
If a bank can't or doesn't make money off the money deposited the begin to suffer a loss as the cost to manage funds outweighs the profit. So the banks turned to Government bonds.
Bonds at a loss
Bonds can be a safe investment option but they can also be extremely risky as they have come to proven. As bonds have a "maturity" time period which is the length of time you must hold a bond for to gain the profit. Bonds were paying 2% interest for 10 year maturity, which is a safe bet at the time given interest rates were low.
You can always sell a bond to the market to release your gains earlier if the demand is high for the bonds. But this is where the trouble has hit the banks caused by the worlds Reserve Banks.
Bonds and Interest Rates
With the never before seen aggression of lifting interest rates by Reserve Banks this alters the return on investment (ROI) for new Bonds. With every interest rate rise so to is the profit for new bonds. Meaning previous bonds become worth less than newer created bonds.
This isn't always bad as these create varying price points for investment but given interest rates have grown so much in so little time they ultimately destroy previous bonds.
While many depositors began withdrawing their funds as the economy switched back from a "work from home" to "return to work" and now previous investments that suffered under lock downs were returning it provided cheaper entry points for investors.
Banks than need to sell the bonds at a loss to ensure they have enough liquidity to pay out depositors and unfortunately, they don't have enough money because they too are waiting on people to repay loans.
In short, the bank can't pay you your money because they don't have it.
Whose fault is it?
Governments for wanting a quick return to office without budgeting and planning for the financial implications and lack of a transitional phase. RBA for rapidly raising interest rates without giving the financial sector time to recover, people withdrawing and selling off assets to pay down debt due to the rapidly increasing interest rates.
I think the full brunt of the economic crisis won't be felt until 2024, hang tight. But in the mean time watch the price of Gold sore as people look to store their wealth somewhere. It will than come crashing down, to what? no one knows.
image sources provided supplemented by Canva Pro Subscription. This is not financial advice. Readers are advised to undertake their own research or seek professional financial services.