Gold rallied, oil plunged on bank troubles

Key takeaways

  • Global banking troubles have impacted commodity prices.
  • Gold prices have been up while oil prices have been down.
  • Rate hikes, inflation, and demand are other factors to watch.
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Since Silicon Valley Bank was taken over by regulators on March 10, gold prices are up more than 6% and oil prices are down roughly 8%. What's at play here? Here's a closer look at what's happening in the commodity markets amid the recent global banking turmoil.

Bank woes have helped gold shine

Gold's function as a safe haven has been on display since Silicon Valley Bank collapsed. New York gold prices have increased to $1,945 per ounce since regulator's seized SVB (see Gold rises amid bank troubles chart below). Many investors view gold and other real assets as a bulwark against economic uncertainty. Its performance over the past couple weeks has reflected that.

Gold rises amid bank troubles

Gold rises amid bank troubles chart
Source: FactSet, as of October 4, 2022.

Gold prices were crushed during most of 2022 as interest rates were rapidly rising and the dollar was strengthening (gold prices tend to fall when the dollar increases and they tend to rise when the dollar decreases). Since bottoming in the fall of 2022, gold prices are up sharply, and the recent bank troubles have helped pushed gold within striking distance of $2,000—a price level that many gold investors believe is technically significant.

The Hightower Report's March 21, 2023, Weekly Metals Market Outlook (which you can find on in the markets & sectors research page) appears to affirm the impact that global banking worries have had on metals markets.*

"Needless to say, fear toward the global banking sector remains in place… with flight to quality instruments like gold and silver clearly remaining in vogue," according to the report. While other factors remain relevant, the Hightower Report asserts that the predominant trend for gold right now is what's happening with the global banking system. "Signs of trouble at any other financial institution beyond the 3 main banks (Credit Suisse, Silicon Valley Bank, and First Republic) that have fostered anxiety will likely accentuate flight to quality buying of gold…"

Another dynamic at play is that central banks around the world have become big buyers of gold, helping support prices. 1,136 tons of gold were bought by central banks in 2022, the most since 1950, according to the World Gold Council. Increasingly, many central banks have been buying gold because they believe it may hold its value better than currencies and bonds, and because it helps provide diversification with other financial assets.

Oil prices fall on global bank worries

While gold prices have been rallying on bank troubles, oil prices have been dropping. In fact, oil prices have been cut in half since their recent peak in June 2022 (see Oil prices have fallen sharply chart below).

Oil prices have fallen sharply

Gold rises amid bank troubles chart
Source: FactSet, as of March 22, 2023.

Global banking problems over the past several weeks exacerbated that decline, with crude oil prices now trading at lows not seen since December 2021.

The 8.3% decline in West Texas crude oil prices since March 10 can be attributed largely to worries about the global economy in the wake of bank struggles that market watchers worry could tip global economies into a recession.

The Hightower Report's March 21, 2023 Weekly Energy Market Outlook also tapped banking concerns as a primary driver sending oil prices lower. "Seeing another financial institution threatened could extend energy demand fears and keep selling pressing the short side." The report also cites a number of fundamental factors that could keep prices from rising, including data showing that "global crude oil in floating storage increased by 2.6% over the last week, adding to the negative environment for oil prices."

The curious case of gas prices

Gas prices have not fallen commensurately with oil prices, but they are still down substantially over a longer horizon. The US national average regular gas price was $4.26 per gallon a year ago and is now $3.44, per AAA.

The decline in energy costs has been a welcome one for global economies. Despite a myriad of risks pressuring global markets, Fidelity's latest business cycle update notes that, "Europe's warmer-than-typical weather and lower energy prices have reduced recessionary risk and improved consumer and business sentiment."

Despite the decline in oil prices, the market's sensitivity to inflation (which is driven in large part by energy prices) remains strong, and any uptick in energy costs would be cause for concern.

A lot going on

The market has generally responded positively to the Swiss National Bank-aided purchase of Credit Suisse by UBS. But there could be more banking troubles in the road ahead. Positioning for this possibility, US Treasury Secretary Janet Yellen has said the US is prepared to protect more banks if needed.

There's also the Fed—which raised interest rates this week another quarter point—to consider. The US central bank is dealing with both the spillover effects of the banking crisis along with their existing trajectory of raising rates to combat inflation. With all these factors coinciding, commodity prices could remain volatile over the near term.

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Past performance is no guarantee of future results.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

The energy industries can be significantly affected by fluctuations in energy prices and supply and demand of energy fuels, energy conservation, the success of exploration projects, and tax and other government regulations.

The precious metals market can be significantly affected by international monetary and political developments such as currency devaluations or revaluations, central bank movements, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries.

Fluctuations in the price of precious metals often dramatically affect the profitability of companies in the precious metals sector.

The precious metals market is extremely volatile, and investing directly in physical precious metals may not be appropriate for most investors.

Bullion and coin investments in FBS accounts are not covered by either the SIPC or insurance "in excess of SIPC" coverage of FBS or NFS.

The S&P Goldman Sachs Commodity Index is a composite of commodity sector returns in commodity futures that are broadly diversified across commodities on a fully collateralized basis with full reinvestment. * The Hightower Report is not affiliated with Fidelity and the views expressed in this report are not Fidelity's.

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