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Could Bank Runs Lead to a Run on Gold & Silver?
Taxpayers on the Hook for Losses at Mismanaged Banks
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Welcome to this week's Market Wrap Podcast, I'm Mike Gleason.
Fears of bank runs precipitating a broader financial crisis helped spark a surge in bullion buying this week.
The collapse of Silicon Valley Bank represents the second largest bank failure in history. While Treasury Secretary Janet Yellen insisted this week that the banking system is sound, many banks clearly are not in sound financial shape.
Signature Bank, First Republic Bank, and Credit Suisse, to name just a few, have run into serious trouble. In response, the Treasury Department, the FDIC, the Federal Reserve, and some mega banks have scrambled to orchestrate rescue packages.
Nobody wants to use the term “bailout.” But that's exactly what depositors are getting. Secretary Yellen announced that uninsured deposits at banks would be covered to guard against systemic risk. Effectively, taxpayers will be on the hook for losses caused by mismanaged banks.
Regulators fear a cascading loss of confidence will lead to massive withdrawal requests. And under our fractional reserve banking system, banks hold only a small percentage of cash to back all checking and savings accounts. That's why bank runs quickly lead to bank failures.
Account holders may think of their deposits as money in the bank. But in reality, their account statements represent IOUs from the bank.
Whether the bank can make good on its IOUs depends on how its portfolio of loans and other assets perform.
In the case of Silicon Valley Bank, it abandoned prudent risk management practices in favor of social objectives. SVB had no Chief Risk Officer from April to December of last year. Instead, it devoted company resources to boosting its ESG score and meeting diversity quotas.
As Fox News reported and commentator Douglas Murray argued, SVB's board was stacked with political activists who failed to prioritize sound banking practices.
Fox News Report: Meanwhile, new details emerging about SVB, namely, its strong support for far-left social causes, including more than $73 million to Black Lives Matter. While just one of its members had banking experience on a board packed with Democrat mega-donors.
Douglas Murray: If you look at the criteria that SVB had out there for not just who they wanted to employ, but who they were going to loan to, they consistently emphasized not whether the bank was going to get its money back in this mad financial arrangement that it had, but whether or not it was lending to enough minority businesses, enough female run businesses, and so on. So, you see an industry dominated not by expertise, but by the same thing everything else in the area is dominated by, diversity.
Investors are being forced to ask themselves whether they have confidence in their banks, their brokerage houses, or the companies in which they are shareholders. Woke corporations have been accused of abandoning their fiduciary duties and moving to measure their success according to how many social and political boxes they check.
Many investors who have determined that they cannot trust financial institutions as counterparties anymore are moving to hold wealth in a tangible form that is free of counterparty risk.
Bullion dealers including Money Metals Exchange have seen a massive influx of buying in recent days – much of it from newcomers who have pulled funds out of banks in fear.
The spike in demand is translating into big moves in spot prices. For the week, gold is gaining 4.1% to trade at $1,967 per ounce. The silver market is up 7.2% since last Friday's close to come in at $22.39 an ounce. Platinum is higher by 0.8% to trade at $987. And finally, palladium is unchanged and currently commands $1,445 per ounce as of this Friday recording.
We could ultimately see a run on the bank of sorts in the highly leveraged futures markets if the physical inventories that back contracts prove to be inadequate.
Institutional traders and speculators may prefer to settle in cash, but cash is no substitute for industrial users who require actual physical metal and safe-haven investors who insist on taking delivery of their asset.
Precious metals are the only financial assets without counterparty risk. They do not rely on someone else's promise to pay – they are money in and of themselves.
Fears of shortfalls of physical supplies could prompt even more buying interest, potentially causing spot prices as well as premiums to spike rapidly.
These are both scary and exciting times for precious metals investors. The upshot is that we may finally have a major catalyst for big breakout moves in gold and silver.
The banking meltdown is likely to force the Federal Reserve to finally pivot and refrain from hiking rates at its upcoming meeting. Fed officials may even launch new programs to inject more liquidity into the financial system.
For months, Fed rate hikes and uncertainty about when they would end have weighed on metals markets. But the sudden reemergence of a dovish Fed could be extremely bullish for hard assets.
Well, as this podcast is being recorded on St. Patrick's Day, we are proud to announce that Money Metals has released a new Irish Shamrock silver round. It features timeless designs closely associated with the Emerald Isle.
On the obverse is the shamrock – an emblem of St. Patrick, said to represent Faith, Hope, and Love.
The reverse features the Celtic cross, each arm bearing an Irish trinity knot, along with the inscription “Eire Go Brach” and its English translation, “Ireland Forever.”
The Shamrock round contains .999 pure silver and is available without the high premiums of items such as the American Silver Eagles produced by the dysfunctional U.S. Mint.
As with all silver bullion products right now, supplies are limited and mint capacity to produce enough of these newly minted items remains somewhat tenuous, so grab your Shamrocks today before we run out!
Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.