Monthly Archives: March 2023
“In light of concerns over more bank runs like the one on Silicon Valley Bank, commentators and government officials are discussing expanding the current $250,000 cap on deposit insurance or even insuring all bank deposits. But the proposal to insure all deposits strikes fear in the hearts of some bank experts for a simple reason: In the past, blanket insurance has led to the emergence of ‘zombie banks.'”
USAGOLD note: The problem with bailouts has always been propping up bad banks. This article cites “blanket” FDIC insurance covering all deposits, but it is the Fed, in this case, that is providing across-the-board coverage through its latest iteration of quantitative easing – SVB being the prime example. Powell doesn’t need Yellen and the FDIC to deliver the goods.
“A full guarantee of all bank deposits would spell the end of moral hazard and mark the final chapter of the dollar’s multi-decade debasement. It’s said the cover-up is worse than the crime. With the latest banking crisis in the US, it’s the clean-up that could end up doing far more lasting damage. The failure of SVB et al prompted the FDIC to guarantee that all depositors will be made whole, whether insured or not.”
USAGOLD note: Much was said at the Powell press conference and the aftermatch about the Fed doing the right thing by stepping in to rescue the banking system. Precious little was said about its ramifications with respect to the stability of the monetary system and the value of the dollar. Bloomberg’s Simon White covers the back half of Fed policy, and connects the dots in this essay – a must-read. We post two charts below. The first shows the long-term debasement of the dollar since 1913 in log scale. The second illustrates that the long-term debasement is ongoing – an 8.6% decline since 2020.
Purchasing power of the US dollar
(1913-present, log scale)
Sources: St. Louis Federal Reserve [FRED], US Bureau of Labor Statistic
“‘I don’t see regional banks as having any particular problem,’ said Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011, in an interview with MarketWatch on Thursday. ‘We need to be mindful of all unmarked securities at banks — small, medium and large.'”
USAGOLD note: By “unmarked securities,” we are guessing she means bonds held in bank portfolios that have not been marked to market, an accounting procedure that cloaks the true position of the banks. The fact that Credit Suisse failed for the very same reasons as SVB – underwater bond holdings that undermined its ability to return customer deposits – tells us that Bair’s concerns are valid.
“That is certainly one possible approach. I own silver and I expect to buy more silver and more hard assets in general, because historically, if you have inflation or chaos, the way to protect yourself is with real assets.”
USAGOLD note: Rogers updates his thinking and outlook in the wake of bank failures and the Fed’s rescue plan. As you can tell from the chart below, when silver goes up, it can go up in a major way.
Silver: Average Annual Return
Chart by USAGOLD • • • Data source: Macrotrends.net • • • Click to enlarge
Gold trades sideways as it closes out an uneventful week
Silver is quietly on the rise ‘signaling a secular breakout’
(USAGOLD – 3/31/20230 – Gold is trading sideways this morning as it closes out an uneventful week. It is up $1 at $1984. Silver is up 2¢ at $24.02 and up 4% on the week. Quietly, silver has been on the rise. Though gold is the headline asset at the moment, silver has been the better performer – up 13.7% since the beginning of March compared to gold’s 7.9% gain. Investing Haven thinks silver is now “signaling a secular breakout.”
“it’s important to note,” it says in an article posted recently, “that the secular trendline is about to cross the 50% retracement… which is a significant milestone. Second, there is a physical supply crunch underway…These two factors combined suggest that a secular breakout is imminent, and investors who are positioned correctly could stand to benefit greatly. For those who are bullish on silver and are willing to take on some risk, the potential rewards could be significant.”
Average annual silver price
Chart by USAGOLD [All rights reserved] • • • Data source: Macrotrends.net
(1971-present, log scale)
Chart courtesy of TradingView.com
“Federal Reserve Total Assets surged $297 billion last week to $8.639 TN, in one week reversing four months – and over half – of recent QT (quantitative tightening). A $10 TN balance sheet by year end would not be surprising,” says Credit Bubble Bulletin’s Doug Noland in his regular Saturday update.” I appreciate that officials last weekend believed they needed to ensure all SVB and Signature depositors to stem a potential systemic bank run. Just as the Bernanke Fed had justification for opening the floodgate for unprecedented money printing… Where does it all end? For one thing, the Fed’s balance sheet will be getting much larger. I’ll assume global central bank balance sheets will also inflate.”
USAGOLD note: The additions to the balance sheet amount to a very large pool of printed money sitting in the financial system waiting to be unleashed – eventually as price inflation, as we are seeing now. In this case, the Fed is likely to argue that it expects the money to be repaid and therefore removed from the money supply, but it is being loaned to banks that are insolvent or nearly insolvent and struggling to keep their doors open. How likely is it that these loans will be repaid? There is much to this bailout that needs to be explained. For instance, if and when the rescued banks pay off their loans will they receive back the underwater securities they put up as collateral– at par?
“Gundlach called Silicon Valley Bank’s failure ‘a rate policy collision with stupid accounting rules”‘for banks, but warned of The Fed’s reaction was inflationary and antithetical to their inflation-fighting stance. ‘By bailing out depositors at SVB, that’s essentially a quantitative easing by the Fed, he said. ‘Making those depositors whole is about the same as a month or two of reversing quantitative tightening.'”
USAGOLD note: This article will bring you up to date on Gundlach’s thinking…… “I think gold is a good long-term hold,” he concluded in the same CNBC interview. “Gold and other real assets with true value, such as land and collectibles.”
“You know something is wrong when six big central banks from around the world decide to join hands in order to reassure financial markets. That too on a Sunday night.”
USAGOLD note: While Wall Street takes a ho-hum attitude, Main Street moves to protect savings, braces for another financial crisis.
“Steve Chiavarone doesn’t want to scare anyone, but what he remembers most from the last banking crisis was how sure most people were that it wouldn’t happen.”
USAGOLD note: An inside look at what it is like to be on the front lines of the investment business during a financial storm…… Now, like then, the prevailing view is that the crisis will be contained. Some will see that attitude as an acute case of denial. We recall Queen Elizabeth’s query at the London School of Economics with respect to the 2008 financial crisis: “Why did nobody see it coming?…If these things were so large, how come everyone missed them?”
Gold pushes quietly higher ahead of key reports due by the end of the week
Saxo Bank reports heavy capital flows into gold ETFs
(USAGOLD – 3/30/2023) – Gold pushed marginally higher this morning in quiet, uneventful trading ahead of a couple key reports due before the week is out – jobless claims later today and the PCE price index on Friday. It is up $4 at $1971. Silver is up 41¢ at $23.82. FX Empire’s Phil Carr says the recent pull-back in gold has to do with “end-of-quarter profit taking as traders square up their positions – ready to capitalize on precious metals’ next big move.” Saxo Bank reports seeing heavy capital flows into gold ETFs with almost $2 billion in net purchases over the past month, reversing months of selling.
Every hiking cycle over the last 70 years ends in recession or a financial crisis. ‘It’s not going to be different this time,’ Morgan Stanley strategist says.
“A week ago it was possible to argue that this observation was theoretical, now we know that it is not going to be different this time.” – Graham Secker, Morgan Stanley, chief European equity strategist
USAGOLD note: It’s because it is never different this time around that the prudent, long-term investor owns precious metals. Own metals, Sit back. Watch the show.
“With inflationary pressures still discernible, as even the economists of “Team Transitory” admit, the situation seems closer to that of 1972. If, like Arthur Burns more than 50 years ago, Powell combines the alleviation of financial distress with a premature pause in monetary tightening, he risks repeating one of the key mistakes of the Fed in the Seventies.”
USAGOLD note: Ferguson points out that the Fed balance sheet expanded by $303 billion since the rescue plan was announced perhaps spelling the end of quantitative tightening. “Indeed,” he adds,” the BTFP might turn out to be just the latest iteration of Quantitative Easing. unless there is minimal take-up by banks.”
“Dick Bove makes the point that there’s $US19 trillion worth of deposits in the US and it’s practically impossible for regulators to backstop all of these. It makes the coming days an uncertain period of time for the international banking sector.”
USAGOLD note: Gold demand is throgh the roof and much of the buying is driven by depositors seeking a safe haven from a system wide crisis.
“It is macro relevant because the US economy has proven to be far more resilient than the median investor has thought. As such, now was the time for the Fed to step on the brakes, not ease. But now, not only is the Fed backing off from 50 basis point hikes, it has restarted a stealth-QE program at the first sign of systemic risks.”
USAGOLD note: Papic says the best option at present is to be “long gold, commodities, and emerging markets.
Gold takes a breather in quiet, uneventful trading
Morris says we’ve had four compelling times to buy gold in 100 years, and this is one of them
(USAGOLD – 3/29/2023) – Gold is taking a breather this morning in quiet, uneventful trading. It is down $6 at $1970. Silver is down 11¢ at $23.27. Over the past month, it is up 7.7% amidst lagging confidence about the financial system’s stability. Silver is up 11.2% over the same period. Byte Tree’s Charlie Morris says, “the next few years will be tricky for investors, and gold will have an important role to play in portfolios.”
“Over the past 100 years,” he says in a recent advisory, “there have been four compelling times to buy gold. In 1929 it proved to be a saviour ahead of the great depression. Then in 1969, it preceded the great inflation of the 1970s. In 2000, it cemented itself as the most liquid alternative asset of the 21st century in anticipation of the credit crisis. And just recently, gold is signaling strength ahead of what looks to be an emerging sovereign debt crisis.”
(!834 to present, log scale)
Chart courtesy of TradingView.com • • • Click to enlarge
“Europe’s financial regulators are furious at the handling of the Silicon Valley Bank collapse, privately accusing US authorities of tearing up a rule book for failed banks that they had helped to write.”
USAGOLD note: One eurozone official called the US bailout of uninsured deposits “total and utter incompetence.”
“In the end, it may be convenient to pin the blame of the recent financial turmoil on several banks, when in reality what the fallout of these institutions revealed are the large cracks hammered in large part by the Fed itself. As central banks globally launched their aggressive rate-hiking campaigns, markets on both sides of the Atlantic have simply become the collateral damage. And if traders think policymakers will pause, they may be mistaken.”
USAGOLD note: The problem is systemic, hence costly, widespread, and probably enduring…… Authers and Lee explore the Fed’s options and what they might mean for markets in considerable detail. If the Fed decides to continue raising rates while unleashing massive liquidity to rescue the banking system, one cannot help but conclude that the inflation it fights with one set of policies, it creates with another – a hawk and a dove at the same time.
“It is far easier to hold off political pressures in an era where global interest rate and price pressures are pushing downwards. Not anymore. Those days are over and things are going to get harder for the Fed. The trade-offs it faces next week might only be the start.”
USAGOLD note: Rogoff explains that a great deal has changed since the financial crisis of 2008 – different times, different set of circumstances. The Fed’s inflationary chickens have come home to roost.
The Fed may provide as much as $2 trillion in liquidity relief for banks after the SVB collapse, JPMorgan says
“‘The usage of the Fed’s (Bank Term Funding Program) BTFP is likely to be big,’ JPMorgan analysts said.”
USAGOLD note: We blinked a couple of times when we saw that number……Unless the Fed accounts for the new liquidity injection differently, the $2 trillion amounts to a 25% addition to its balance sheet (from $8 trillion to $10 trillion.) I don’t think most investors know the scope of this bailout.
Gold inches higher as it attempts to recover from technical selling
Former FDIC head says all banks vulnerable to mark-to-market losses – small and large
(USAGOLD – 3/28/2023) – Gold inched higher this morning as it attempts to recover from technical selling that began at the $2000 resistance level. It is up $3 at $1962. Silver is up 1¢ at $23.17. Before the sell-off, gold had made impressive gains primarily on safe-haven buying spurred by concern about unsettling probems in the banking sector. The press touted those problems as residing mainly in the regional and community banks, but former FDIC head Sheila Bair believes the problem goes much deeper than that.
“We need to be mindful of all unmarked securities at banks — small, medium, and large,” she recently told MarketWatch. In short, the same circumstance that brought down Silicon Valley Bank – an underwater, illiquid bond portfolio – could also affect the larger banks. The subsequent collapse of Credit Suisse, which ultimately failed for the same reasons, adds considerably to her argument. A recent Columbia University study pegged the unrealized, mark-to-market losses in the banking system at $2.2 trillion, rather than the FDIC’s $620 billion figure advanced early in the crisis. Since the new rescue plan began, the Fed has added almost $392 billion to its balance sheet, which now stands at $8.73 trillion.
Federal Reserve balance sheet and gold
(Log scale, 2008-present)
Chart courtesy of TradingView.com • • • Click to enlarge