On the 10th of March 2023, regulators shut down Silicon Valley Bank (SVB) which became the largest bank failure in the United States since the late 2000s global financial crisis and the second-largest in US history.
Who was SVB?
Established in 1983, SVB focused on offering banking services to technology startups, providing funding to nearly 50% of US venture-backed technology and healthcare firms. Although not widely recognised beyond the Silicon Valley region, SVB ranked among the top 20 commercial banks in the US, holding total assets of $209 billion as reported by the FDIC at the close of last year.
SVB was the go-to bank for small, higher-risk start-up companies
Small, high-risk start-ups favoured SVB as their banking partner, depositing substantial sums with the bank during the pandemic. Nevertheless, SVB was unable to lend out all the funds it collected, leading to the investment of a substantial portion in longer-term US government bonds to achieve superior returns.
The Fall of SVB
Initially successful, this approach proved effective only while interest rates remained low. However, when inflation surged, and central banks hiked interest rates, bond yields increased, and bond prices plummeted. As start ups depleted their cash reserves and encountered difficulty in securing new funding from investors, they withdrew their funds from SVB's deposits.
In an attempt to secure its finances, SVB's management sold a segment of its bond portfolio for $1.8 billion, incurring a significant loss. To improve its financial standing further, SVB needed to raise $2.25 billion through an equity raise. Unfortunately, investors displayed no interest in participating, leading to a decline in customer confidence. This, in turn, triggered a swift loss of solvency, causing the bank to falter within hours.
Demand for Gold jumps with the demise of SVB
With the collapse of SVB demand for Gold increased as investors attempted to safeguard themselves from the consequences. Purchasing physical gold allows investors to move their wealth out of the banking system and protect it from most counter-party risk. When market confidence falls we see a surge in gold demand as investors rush to safe haven assets.
What do we think will happen in the coming months?
Right now there is an air of panic as investors rush to move their investments to safer options like gold. Amid the collapse of SVB and a few other smaller banks in the US there is some fear and reminder of the 2008 banking collapse.
At Minted we expect to see gold demand increase further in the coming months.
Over the past two years, there has been a significant increase in demand for physical gold, which is usually a preferred safe haven asset during times of uncertainty. Investors, ranging from individuals to large institutions, are turning to gold to safeguard their wealth and purchasing power. The current economic conditions, such as inflation, recession fears, and geopolitical tensions, have already made investors uneasy. The possibility of a bank collapse may be the decisive factor for some investors seeking a safe haven in this turbulent environment.
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