Gold prices are near record highs amid global geopolitical tensions and an ongoing crisis in the U.S. banking sector.
Gold futures on the New York Mercantile Exchange hit a record high of $2,072 per ounce on May 4. Spot gold price on the day was also within a few cents of its all-time high of $2,072.49, according to Refinitiv, a global financial markets data provider.
Prices have since dropped, and as this article was published, May 11, gold prices were at $2,011.12 per ounce, reported Business Insider. As a way of comparison, in October last year, gold prices averaged $1,664 per ounce, reported data provider Knoema. An average closing price for that year was $1,801.87, according to macrotrends.com.
The U.S. banking crisis has played a big role in the continued rise of gold prices. Four American banks have closed in less than two months.
The first was Silvergate Bank in California. The bank, which serves cryptocurrency clients, had $11.9 billion in clients’ digital assets as of the third quarter of 2022. On March 8, Silvergate Bank announced the end of operations and voluntary liquidation of assets.
It was followed by the Silicon Valley Bank of California (SVB). On March 10, U.S. regulators shut down the bank, citing illiquidity and insolvency. The Federal Deposit Insurance Corporation (FDIC) took over the bank’s deposits. SVB, which serves the needs of the technology industry, had total assets of approximately $209 billion and total deposits of approximately $175.4 billion at the end of 2022.
Two days later, on March 12, the FDIC announced the closure of Signature Bank based in New York, citing systemic risk. Signature Bank is also one of the leading banks in the cryptocurrency industry, with total assets of $110.4 billion and total deposits of $88.6 billion at the end of 2022.
After the closure of these three banks, First Republic Bank lost $100 billion in deposits in March. The rescue of some of the United States’ biggest banks lasted only a few weeks. The FDIC announced on May 1 that the majority of First Republic Bank’s business would be sold to JP Morgan Chase & Co. First Republic Bank, thus collapsed.
At present, Pacific Western Bank, a regional lender in California, is getting negative attention. Ratings agency Fitch has placed the bank on “rating watch negative,” citing the impact of a potential transaction and “uncertainty regarding the bank’s strategic direction.”
Pacific Western Bank on Wilshire Boulevard, Beverly Hills, Calif., May 4, 2023. (Jill McLaughlin/The Epoch Times)
Pacific Western Bank said it was exploring options, including a sale, after its share price plunged 60 percent on May 3. In its latest statement, the company said it had been “approached by several potential partners and investors,” that discussions were ongoing, and the company would “continue to evaluate all options to maximize shareholder value.”
But the shares rose sharply in the following business days, and the bank said its business remained “sound.”
Interest Rate Hikes
American banks’ closure in series and increasing gold prices are closely related to the Federal Reserve’s continued interest rate hikes. The Fed has raised interest rates 10 times in 14 months, from zero to between 5-5.25 percent. On May 3, the day before gold prices hit a record high, the Fed raised interest rates by a quarter point.
Although the Fed’s interest rate hike was meant to curb inflation, too high an interest rate would hurt the economy, economist Li Songyun told The Epoch Times on May 8. Many investors are pessimistic about the economic outlook and even predict that the global economy will go into recession, so they are investing in gold to preserve assets, Li said.
Central Banks Snapping up Gold
In response to rising geopolitical tensions, central banks of countries began buying gold in bulk last year, especially after the United States and its allies froze Russia’s dollar reserves.
Global central banks’ annual demand more than doubled to 1,136 tonnes in 2022, up from 450 tonnes the previous year and a 55-year high, according to the World Gold Council’s Gold Demand Trends report. Purchases in the fourth quarter of 2022 alone amounted to 417 tons.
The gold buying spree has not abated this year. According to the latest report from the World Gold Council released on May 5, central banks worldwide added another 228 tonnes of gold to their reserves in the first quarter of 2023, a record high for the first quarter in the Council’s data.
Central banks worldwide began buying gold in bulk in 2022. (Blue Andy/Shutterstock)
Krishan Gopaul, a data manager at the Council, said that since October 2022, central banks’ gold reserves have risen to their highest level since November 1974 (36,782 tons).
The World Gold Council’s figures are based on the International Monetary Fund (IMF)’s data, supplemented by data published by central banks but not reported to the IMF. Notably, in the second half of 2022, a record amount of central banks’ gold purchases came from mysterious buyers who did not report to the IMF. They are widely suspected to be Chinese, Russian and Middle Eastern entities.
The gold held by a country’s central bank is called gold reserves and is used to support the value of the country’s currency. Currently, the United States has the world’s largest gold reserves at 8,133 tons, more than Germany in second place and Italy in third place.
In addition, the latest World Gold Council report said that demand for jewellery had been boosted since the lifting of COVID-19 restrictions in China, with consumption in the country reaching 198 tonnes in the first quarter.
