Investors Flock to Gold as Banks Collapse

Written by Luke Burgess
Posted May 3, 2023

The banks are in it deep.

Three of the four biggest U.S. bank failures in history have occurred over the past 55 days. And depositors across the nation are (rightfully) getting concerned.

With $230 billion in assets, First Republic Bank was the latest victim of its own high-risk lending practices. The FDIC took control of the bank on Monday, selling its assets off to JPMorgan Chase. 

The First Republic Bank collapse comes at a time when the global economy is already facing significant challenges outside of bankers' control, including rising inflation, supply chain disruptions, and a labor shortage.

First Republic Bank's focus on jumbo mortgages, which are home loans that exceed the conforming loan limits set by government-sponsored entities like Fannie Mae and Freddie Mac, proved to be its downfall. It's collapse serves as a reminder of the risks associated with high-risk lending practices, particularly in the current economic environment.

The collapse of First Republic Bank is particularly concerning because it was seen as a well-capitalized institution with a strong reputation for risk management.

The bank had a Tier 1 capital ratio of 15.1%, well above the regulatory minimum of 6%. This means that even well-capitalized banks may not be immune to the risks associated with high-risk lending practices.

The collapse of a bank with a significant presence in the jumbo mortgage market could have a ripple effect throughout the housing market.

Jumbo mortgages are typically used to finance high-end properties, and their collapse could lead to a decline in demand for such properties. This could, in turn, lead to a slowdown in the housing market, which could have broader implications for the economy as a whole. Think 2008.

In addition to the impact on the housing market, the collapse of First Republic Bank could also have a broader impact on the financial system.

The collapse could lead to a loss of confidence in the banking system, which could lead to a run on other banks. That could create a credit crunch as banks become more cautious about lending.

As investors grapple with the fallout from First Republic's collapse, many are turning to gold as a way to hedge against potential risks in the financial markets.

Gold has long been recognized as a safe-haven asset during times of economic uncertainty, and historically its value tends to hold steady even when other assets are losing value.

During the 2008 financial crisis, for example, gold prices rose sharply as investors fled from other assets. Similarly, during the COVID-19 pandemic, gold prices surged as investors sought out safe havens amid widespread economic uncertainty.

One of the primary reasons why gold is considered a safe-haven asset is its lack of correlation with other assets. Unlike stocks and bonds, which tend to move in tandem with the broader economy, gold prices tend to be negatively correlated with stock prices. This means that when the stock market is in decline, gold prices tend to rise.

This negative correlation can be particularly valuable during times of economic uncertainty. When banks are failing and the broader financial system is under stress, investors may flock to assets such as gold. This can lead to a surge in gold prices, providing a buffer against potential losses in other parts of an investor's portfolio.

In addition to its value as a safe-haven asset, gold has a long history of providing attractive returns for investors. Over the past decade, the price of gold has risen steadily, and many analysts believe that it has the potential to continue rising in the years ahead.

The collapse of First Republic Bank highlights the risks associated with high-risk lending practices and serves as a reminder of the importance of risk management in the banking industry.

In uncertain times such as these, gold provide investors with a way to diversify their portfolios and hedge against potential risks in the financial markets.

Until next time,
Luke Burgess Signature
Luke Burgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

Banking Crisis Just Kicked into High Gear