Mixed Signals for Banks; Public Flocks to Gold & Silver

Previously we touched on the failure of Silicon Valley Bank, as well as First Republic Bank, the 2nd and 3rd largest bank failures in United States history respectively.  We also asked the question on whether or not this was a contained situation or if these failures were likely to spread and cause contagion across the banking sector both domestic and abroad.  Since last week, more fireworks have lit up the sky, being launched directly out of the banking sector once again, led by one of the most well known banks in the world, Credit Suisse.

A bank that was just two weeks ago worth right under $8 billion USD, collapsed, facing a similar run on public deposits.  This in tandem with massive unrealized losses on long-term bond purchases left Credit Suisse crippled and without the liquidity needed to function.  Days later, Credit Suisse was bought out by UBS for what is reportedly between $2-3.5 billion USD, with UBS absorbing over $5 billion USD in losses.  Credit Suisse has operated in Switzerland for 167-years, surviving the Great Depression, the Dot Com Crash, the Great Financial Crisis, but has now collapsed under current global financial conditions.

With three major banking collapses in a matter of weeks, all eyes turned to the FOMC meeting and Federal Reserve Chair Jerome Powell this Wednesday to see what the Federal Reserve would do in response.  Would they continue hiking rates putting even more pressure on the financial system or would they signal a pause, giving the system some breathing room.  Remember, we are in a moment in time where physical assets such as silver and gold have positioned themselves highly favourably regardless of the outcome.  The Federal Reserve can keep hiking and slowly destroy the system, causing mass national defaults that calls into question the value of the U.S. dollar and all other fiat currency or they stop hiking and turn the printers back on, inflation will not be defeated, and off it will run.  In both scenarios, silver and gold benefit their holder due to being timeless stores of value.  What happened was somewhat of an in-between, and silver as well as gold reacted strongly due to the mixed signals given to the banking sector.

First, the Federal Reserve announced a 25bps rate hike, slowing pace from their previous 50-75bps hikes from past meetings.  In addition to slowing their pace, Jerome Powell stated that on-going rate hikes is no longer the path forward, signalling to a potential pause after one more 25bps hike next meeting.  Not only does this rate hike put more pressure on a banking system that is cracking at the seams, it was a clear signal that they were reeling back how aggressive they planned to fight inflation.  This chart below becomes incredibly important:


The Federal Reserve is still BEHIND inflation.  Even with one more .25% rate hike, the real rate would still be negative meaning they have not slowed inflation down in the long run.  If they pause or outright cut rates now, inflation is set to take off like a rocket, springing silver and gold into the spot light as real money.  It is worth noting again that Paul Volcker in the 1970s needed interest rates at 20% to quench inflation running at 13%; a positive 7% real rate.  Volcker needed to get rates above inflation, the Federal Reserve is not even there yet, and the system cannot handle the rates where they are.  This is the rock and a hard place we spoke about before, and why silver and gold are set to shine.

Another important chart that should be considered is the one below that highlights what happened the last three times the Federal Reserve has made major rate cuts after significant hikes as they have recently done.


The S&P stock index takes its largest tumble of that particular financial collapse.  S&P 500 in 2000, 2007-8, 2019-20 highlighted above, and the Federal Reserve Effective Funds Rate highlighted at the bottom.  If the Federal Reserve were to pivot now and cut rates, while behind inflation, stocks may not absorb value as some are predicting.  History has shown, that during those times, silver and gold have seen some of their largest percentage gains.


To top it all off, in the face of what was laid out above, Jerome Powell stated that even though the FDIC is capped at $250,000 per insured depositor, the Federal Reserve had the tools to protect ALL public deposits in the event of a widespread bank failure.  Considering the FDIC has $125 billion in total assets on their balance sheet while the United States has almost $18 trillion in deposits, the only way to cover all deposits would be to print an absurd amount of currency making the 2020 stimulus-printing spree look like a regular afternoon.  If this were to occur in conjunction with the Federal Reserve cutting rates, silver and gold wouldn’t have a headwind in sight.  Putting aside what it would take to cover all deposits were there to be a wide-scale banking failure, the very same day, head of the U.S. Treasury, Janet Yellen, stated she had not considered nor discussed a blanket insurance for U.S. depositors, giving the complete opposite message of Jerome Powell not hours apart.  These mixed messages from financial authorities within the United States have put banking stocks on a progressive tumble as depositors further worry if their money is safe in the bank.  While on the other hand, silver and gold continue to carry momentum rallying upward on the week reacting positively to the chaos in the market; protecting their holder along the way.

In the midst of the financial turmoil that is slowly hitting each country, you would not be alone in wanting to stock up on silver and gold to protect the wealth you have so rightfully earned.  Just this past February, out of Switzerland alone, 19 countries purchased gold, with China and India leading the charge.  China purchased almost 58 tonnes, while India purchased almost 26 tonnes.  If you want to get in on the gold buying spree being done by central banks and governments alike, look no further than the beautiful 1/2oz Gold Trojan Bar from vintage refiner Johnson Matthey; an asset that’ll forever hold its shine, and store value during difficult times.

1/2oz Gold Trojan Bar