What the Volcker Rule might mean for gold

Added 3/29/14:

As it turns out, and unbeknownst to me when I wrote the post below (which has now been edited), the Federal Reserve has extended the term for full compliance with the Volcker Rule to July 21, 2015 with an effective date of April 1, 2014. I hope my readers will forgive the oversight on my part. Though the sense of urgency conveyed in the original post is removed courtesy of the extended compliance period, my conclusion remains the same:  I view the combination of the Volcker Rule and investigations into bank’s trading activity with respect to the gold market as major positives for gold going forward.

For the record, the first link below goes to the OCC’s announcement to banks summarizing the final regulations for the Volcker Rule published March 25, 2014. The second link goes to the full text of the Volcker Rule as published in the Federal Register – all 271 pages of it.

Office of the Comptroller of the Currency Bulletin 2014-9: Final description Volcker Ruleker

•  Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds


by Michael J. Kosares

In conjunction with the implementation of the Volcker Rule (effective April 1, 2014 with full compliance now scheduled by July 21, 2015) there has been an exodus of talent from the banks.  The latest heavyweight departure came yesterday when Jamie Dimon’s closest aide, James Cavanaugh, left JP Morgan for the Carlyle Group, a private equity firm. Cavanaugh was considered Dimon’s heir apparent.  Says this morning’s NYTimes, “Mr. Cavanagh’s decision to give up a chance at eventually running JPMorgan signals how running a large bank has become less attractive, considering the regulatory hurdles and heightened scrutiny that have dogged Wall Street since the aftermath of the financial crisis.”

Financial Times reports this morning that the big banks have been hit with nearly $100 billion in costs and settlements related to the lending scandals.  Those costs come before the banks face the even bigger potential problems associated with various market manipulations, including the forex markets, interest rates and gold.

All of this could accrue as a big positive for the gold market as we move into the second quarter of the year, and we will be monitoring events here at the USAGOLD Blog if you would like to stay informed.

The big trading banks traditionally have occupied the short side of the paper gold market.  Some feel those positions will be handed off to the hedge fund business so things won’t change much.  On the other hand, hedge funds are not considered too big to fail, thus their bets could be placed more evenly on either side of the market.

Presumably, hedging activities offered by the banks as brokers are still allowable under the Volcker Rule, and it will be up to regulators to determine whether or not a trade is speculative or a hedge placed in behalf of a client. That might be easier to do than some think in that regulators might look closely at the net position of banks by the end of any given trading day.  The position of the bank should be flat — and provably so.

All of this makes the upcoming April Fools’ Day 2014 something of a watershed for Wall Street and trading business. Whether or not the banks truly give up the speculative activity remains to be seen, but the wholesale exit of traders to the hedge funds and private equity firms might provide a clue as to what is going on behind the scenes and what the big guns are thinking. (Cavanaugh is just one example.)

Once again, the important factor is that the hedge funds will pay their losses out of pocket without the benefit of the government and Federal Reserve’s safety net — at least that’s the intent of the Rule.  We will see how that aspect of the plan works out the next time the financial sector toes the cliff, but between now and then we could see a slow evolution of a more balanced approach to the gold market than many expect.


If you are looking for a gold-based analysis of the financial markets and economy, we invite you to subscribe to our FREE newsletterUSAGOLD’s Review & Outlook, edited by Michael J. Kosares, the author of the preceding post, the founder of USAGOLD and the author of “The ABCs of Gold Investing: How To Protect And Build Your Wealth With Gold.” You can opt out any time and we won’t deluge you with junk e-mails.

This entry was posted in Today's top gold news and opinion. Bookmark the permalink.