Gold price surges as USD is eroded by SVB collapse ahead of US CPI

Gold made a six-week high overnight as the fallout from the failure of Silvergate Financial Corp., SVB Financial and Signature Bank continues to ricochet through markets.

The US dollar has been hit hard, undermined by the Treasury yields protracted retreat with the two-year note trading more than 100 basis points lower from its 15-year peak above 5% last week, touching 3.94% yesterday.

Yields collapsed further out along the curve but to a lesser extent the longer the duration. Importantly for the gold price, real yields collapsed with the closely watched ten-year falling to 1.16% from the high seen last week at 1.72%. Real yields are the nominal yield less the market priced inflation rate for the same tenor.

With gold being a non-interest bearing asset, the disintegration of returns from other assets might assist the yellow metal.

In a similar way that the VIX index is an indicator of market-priced volatility for the S&P 500, the OVZ index is a measure of gold volatility. Not surprisingly, it has climbed in this current rally for the precious metal as markets recalibrate in wake of the recent disruptions.

Elsewhere in the gold options market, the one-month 25 delta risk reversal has sprung higher. This indicates that the market is potentially clambering to buy gold calls more than gold puts and may signal that demand is picking up for perceived haven assets.

US CPI due out later today may not have the same impact on Fed rate hike expectations that it would have had without the collapse of the banks. The interest rate market is now placing a 70% probability of a 25 basis point lift rather than a 50 bp move that was priced in last week.

If CPI prints below forecasts of 0.4% month-on-month for February, it may see the chance of a rise in rates by the Fed next week deteriorate. This could see the US dollar come under pressure, potentially adding to gold’s allure.

Gold against US dollar (DXY), US ten-year real yields and volatility (GVZ)

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