Gold price eyes $2k again as U.S. regulators face tough questions on what caused bank collapses

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(Kitco News)
The gold market saw renewed gains Tuesday as top U.S. bank regulators faced tough questions about what led to the unexpected collapse of Silicon Valley Bank and Signature Bank.

The bank failures triggered a broader market selloff and a shift in Federal Reserve rate expectations, which reversed from more rate hikes to rate cuts.

U.S. bank regulators testifying before the Senate Banking Committee Tuesday included officials for the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Treasury Department.

U.S. lawmakers zeroed in on looking into new rules to prevent something like that from happening again.

“It may be tempting to look at all this and say, we don’t need new rules. The real problem was these arrogant executives,” said Senator Sherrod Brown. “But there will always be arrogant executives. That’s exactly why we need strong rules.”

Bank regulators promised to review the existing rules while stressing that the U.S. banking system is resilient and sound.

“I anticipate the need to strengthen capital and liquidity standards” for banks with over $100 billion in assets, said Federal Reserve Vice Chair for Supervision Michael Barr.

Barr also revealed the extent of money outflows SVB faced during the collapse. “That morning, the bank let us know that they expected the outflow to be vastly larger based on client requests and what was in the queue,” Barr told lawmakers. “A total of $100 billion was scheduled to go out the door that day.”

Some proposals to enhance regulation included plans to strengthen the Fed’s stress tests, implement a “long-term debt requirement” for large banks, and improve liquidity rules.

The Fed will release findings from its internal investigation on what happened at Silicon Valley Bank on May 1, and Barr welcomed further independent reviews of the Fed’s actions. He also told the panel that SVB collapsed because its management failed to address liquidity risks and was deficiently managed.

On top of that, Barr faced questions on why the Fed’s 2022 stress tests did not include a scenario of a surge in interest rates.

Federal Deposit Insurance Corp. Chairman Martin Gruenberg noted that options for changes to the deposit insurance coverage would be published on May 1. The coverage is currently capped at $250,000. Gruenberg also highlighted that the collapse of SVB will cost the U.S. government about $20 billion.

Meanwhile, markets were digesting the news that U.S. regulators would backstop a deal for First Citizens Bank to buy Silicon Valley Bank for up to $500 million in stock.

“A deal backed by U.S regulators for First Citizens Bank to purchase failed Silicon Valley Bank (SVB) has boosted global sentiment and cooled jitters over the banking sector. The renewed appetite for risk is likely to stimulate demand for global equities at the expense of safe haven assets,” said FXTM senior research analyst Lukman Otunuga.

Gold price

Despite some profit-taking at the start of the week, the gold market is taking the news well, rising more than $20 on the day, with June Comex gold futures last trading at $1,993.30 an ounce.

“After kissing the psychological $2,000 level three times last week, bears have exploited this stubborn resistance to attack, with easing banking fears further dulling the metal’s safe haven allure,” said Otunuga. “While prices could trade lower in the shorter term to medium term, the longer term still remains in favour of bulls due to expectations around the Fed cutting interest rates in September.”

Gold is not far off from the $2,000 mark and is considerably higher than its recent lows, said OANDA’s senior market analyst Craig Erlam.

“That suggests … that investors either don’t think the mini-banking crisis is behind us or, perhaps more likely, that scarring from it in credit markets has permanently reduced the tightening required from central banks,” Erlam said Tuesday. “That could be bullish, if so, for gold and traders may even have one eye on the all-time highs if rate cuts this year become a reality.”