In a turbulent week which saw international stock markets tumble and government bond markets rise, gold and silver has outshone all other assets. The gold price has now reached a new record high against the Euro and other currencies such as the pound sterling. This has led many people to question what is behind the gold price move and should they buy gold bullion now?
Stock markets sold off as news spread that the US Silicon Valley bank had failed as customers increasingly withdrew money out of the bank, forcing the US bank to sell their government bonds at large losses. The US government intervened by guaranteeing customer deposits after other banks had experienced a rapid increase in cash withdrawals. There are growing concerns that other banks could fail and cause a domino effect across the international banking sector as seen in the great recession of 2008.
Shares in banks saw heavy losses in the week which pulled other company shares down as well. There were very few places to hide from the turmoil for the retail investor as fear changed to panic in the markets. This led to a ‘risk off’ environment which usually benefits safe haven investments such as gold bullion.
The gold price began to take off and surged to break into record high prices against the Euro, meaning that the Euro has never been as low against gold as it is now. The euro is not a special case, however, as other currencies are also trading at record lows against gold.
The main reason for the rise in the gold price is that the market now believes that the central banks will not be able to continue to raise their base interest rates due to the pressure that it is placing on the banking sector. Many banks bought long-term low yielding government bonds whilst interest rates were very low, but central banks have recently hiked interest rates at their fastest pace ever to reduce inflation, prompting investors to withdraw cash from their low yielding bank accounts into higher return government bonds.
Sudden outflows of bank capital have led to banks needing to sell assets at a loss to allow customers access to their money. In some cases, such as the US Silicon Valley bank, these losses had become so severe that the regulators had stopped the bank from operating.
Higher interest rates are generally bad for gold because investors can earn a return on interest paying assets whereas gold bullion does not have any cashflow. The higher interest rates go, the less attractive gold bars and coins look.
However, the market now believes that we may see a return of lower interest rates as central banks looks to save their economies from a banking crisis. This will once again make gold more attractive to investors.
A leading British gold bullion company announced that they are seeing demand for gold coins and bars at levels not seen in years and are struggling to replace stock despite higher gold prices. The founder was quoted this week as saying, “we are seeing very high demand for our gold and silver bullion products and are struggling to buyback stock despite offering the highest buyback rates that we have ever offered”.
It seems that investors are fearful of the economic future and are looking to store their wealth in assets that will hold their value in the event of an economic crisis. Many famous market analysts are predicting financial Armageddon as high inflation levels persist and central banks become evermore limited in actions that they can take to prevent prices rising.
Gold and silver have traditionally performed very well in environments with low economic growth and rising consumer prices. It seems that despite gold being at record highs against the euro, there may be much more upside for bullion prices and if central banks begin to lower their interest rates this year, this may only be the start of a much larger upside move for gold and silver bullion investments.
Disclaimer: The information provided in this article is being provided solely for informational and promotional purposes and should not be construed as investment, tax or legal advice.