Gold ETFs get a boost from banking turmoil

Mar 21st, 2023 | By | Category: Commodities

Gold ETFs have performed well in recent weeks, notching up gains due to increased demand for safe-haven assets amid stress in the global banking system.

Nitesh Shah WisdomTree ETFs

Nitesh Shah, Head of Commodities and Macroeconomic Research at WisdomTree.

The gold price has jumped 8.7% since 10 March when a bank run caused the US’s Silicon Valley Bank (SVB) to fail, marking the start of the current troubles (data as of the market’s close on 17 March).

The 10-year US Treasury yield moved lower from 4.0% to 3.4% over the same period.

Despite regulators moving swiftly to contain the crisis, a further two banks have collapsed in the past two weeks, firstly Signature Bank in the US and, most recently, Credit Suisse in Europe, leaving investors on edge.

The uncertainty drove the gold price to an intraday high of $2009/oz on the morning of Monday 20 March 2023, marking its highest value since 8 March 2022 (when the Ukraine war was unfolding). It gave up some of those gains by the end of the day, however, settling at $1,962/oz.

Commenting on gold’s renewed safe-haven appeal amid the banking fiasco, Nitesh Shah, Head of Commodities and Macroeconomic Research at WisdomTree, a specialist provider of commodity ETFs in Europe, said: “The Credit Suisse debacle that unfolded quickly on the heels of SVB highlights that when confidence is shaken in one part of the banking sector it can easily spread. All banks, deposit takers, brokers, and lending institutions with weak metrics are under the microscope.

“A liquidity lifeline offered by the Swiss National Bank on 16 March had only allayed the market’s fear for a short time before the Swiss regulator felt the need to orchestrate a takeover by UBS to save the 166-year-old institution. In the process, however, $17bn worth of Credit Suisse bonds (primarily AT1s) have been wiped out. This has further driven investors to seek safe-haven assets as they re-examine the riskiness of their portfolios.”

The recent rally has added new momentum for gold which has been trending upward since reaching a low of $1,627/oz on 19 October last year, supported by a less hawkish tone from the Federal Reserve, the reopening of China’s economy, and stronger jewelry demand. The gold price had previously suffered from March to October last year as rapidly rising interest rates raised the opportunity cost of holding non-yielding assets such as gold.

WisdomTree states that monetary policy may continue to influence gold’s performance, but for a different reason. The firm notes that central banks are currently in a bit of a quandary – additional interest rate hikes are needed in order to continue bringing down inflation but further tightening runs the risk of adding more stress to the banking system. With either tightening or loosening monetary policy potentially being interpreted as a policy mistake, WisdomTree believes that gold’s value as a portfolio hedge will continue to be in demand.

Shah said: “The European Central Bank (ECB) raised interest rates by 50 basis points on 16 March, marking a bold move given the fragile state of market confidence. However, blended with dovish commentary, markets are expecting smaller rate rises in the future and believe the 50bps hike was delivered only because the ECB felt like it had pre-committed and any smaller hike would signal conditions are worse than what the market has priced in.

“While the jury is out on whether the Federal Reserve will pivot its monetary policy early (the Federal Open Committee meeting is scheduled for 21 – 22 March), investors are seeking to protect themselves with hard assets. If the Fed doesn’t soften its hawkish stance, it risks transforming a bank liquidity issue into a recession as risk appetite and confidence has been shaken. If the Fed does act either by terminating quantitative tightening or prematurely ending the hike cycle, the central bank’s monetary largess will linger for longer. Either way, gold is likely to benefit. Gold tends to do well in recessions and is seen as the antithesis to central bank-created fiat currencies.”

While WisdomTree argues that gold’s recent gains are well supported, the firm notes a key short-term risk remains in that a broader market meltdown could spike short-term gold selling to raise liquidity for meeting other obligations such as margin calls. In this scenario, WisdomTree believes that gold is still likely to recover in time as other investors will buy the metal to shore up their defensive hedges.

WisdomTree offers the $5.0bn WisdomTree Physical Gold (USD: PHAU LN; GBP: PHGP LN), one of Europe’s largest ETPs providing physically backed exposure to gold. The ETP’s underlying gold bar holdings are stored in HSBC’s London vaults and are ensured to conform with the London Bullion Market Association’s (LBMA) rules for Good Delivery. The ETP comes with a management expense ratio of 0.39%.

Tags: , , , , ,

Leave a Comment