The Monthly: November 2023

02 Nov 2023 / Corporate research

Feature article:

Gold and a Chinese Credit Event

A Western phenomenon?

If you own, or are considering owning, gold or gold equities, it’s likely that you’re concerned about protecting your wealth, or the performance of your fund, in the expectation of some kind of financial instability. Maybe your confidence in policymakers is ebbing, or you’ve researched debt bubbles in history and concluded that physical gold and silver have been the safest places to be invested when they unwind. Maybe, you can’t put your finger on it. You don’t know where it might come from, but something doesn’t feel right.

It’s debatable whether we’ve been conditioned as investors to assume that financial instability is a Western phenomenon. The bursting of the tech bubble and Lehman’s failure have conditioned us to focus on Western financial systems for sources of financial turbulence. The failure of Silicon Valley Bank (SVB) on 9 March 2023, followed shortly after by Signature Bank and First Republic, focused attention on the US as a source of systemic risk once again.

The Fed’s rapid increases in interest rates led to huge unrealised losses on bond portfolios  held on the asset side of regional bank balance sheets. This led to a credit event in the form of old-fashioned bank runs with customers pulling deposits, a source of funding on the liability side. Forced to sell bonds, banks crystallised losses, rapidly turning some of them insolvent. A $400bn infusion of life support from the FHLBs (Federal Home Loan Banks) and the Fed’s Bank Term Funding Program (BTFP) pulled us back from the brink. While investors’ attention has shifted, the support remains in place and the BTFP recently posted a record $107bn high.

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