By: Rhona O'Connell, Head of Market Analysis
Banking fears take gold through $2,000; risk hedging and asset correlations
Last week, in the wake of the collapse (and subsequent purchase by HSBC) of Silicon Valley Bank, we noted that “After many months with interest rates taking the headlines where gold is concerned, with geopolitics as a supportive factor, gold’s long-term role as a hedge against risk has again been brought to the fore”.
The issues at Credit Suisse heightened concerns about the stability of the global banking system overall and have propelled gold through the $2,000 level, although the most recent short-term spike has now been unwound.
Key points
The focus now has shifted away from the United States’ banking system and is concentrated on the European sector. This is a natural market contagion, but on the basis of press reports it does rather look as if there were issues at play here that were specific to Credit Suisse itself rather than the banking system as a whole, something that was highlighted when in early March the United States Securities and Exchange Commission queried the bank’s annual report. Then the failure of State Valley, the collapse of Silvergate and problems with First Republic Bank (and its downgrade by S&P) severely undermined investor confidence. Eyes will turn across the Atlantic on Wednesday with the outcome of the FOMC meeting and Jay Powell’s Press Conference.
As far as gold is concerned the message is much the same as it was when we wrote last week; it is, as has been noted by many observers over the years, the only non-fiat currency - i.e. it is the only currency that does not bear counter-party risk and it is this feature that has come to the fore this month.
Gold’s correlation with other asset classes has been a subject of much study and the fact that it often has a negative or near-zero correlation with most other asset classes drives its role as a mitigator of risk, or alternatively, pushing the efficient frontier. In other words, the addition of gold to an investment portfolio increases the rate of return for the same level of risk; or it would reduce the level of risk attached to a steady rate of return. The World Gold Council has carried out extensive quantitative analysis on this subject and the chart here shows gold’s one-year rolling correlations with asset classes that are typically found in investors’ portfolios. There is some distortion due to the markets’ meltdown as the pandemic took hold, but in general the correlations with the majority of asset classes are well below 0.5, especially when it comes to U.S. Treasury bills.
Gold; correlations with major asset classes
Source: World Gold Council
Gold and the European banking sector
Source: Bloomberg, StoneX
Gold and the VIX Uncertainty index; note how the correlation has become [positive in the face of banking uncertainties
Source: Bloomberg, StoneX
Gold and the 2Y rate plus correlation
Source: Bloomberg, StoneX
Gold; Producer currencies
Source: Bloomberg, StoneX
Gold; consumer currencies
Source: Bloomberg, StoneX
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