March 2023 - Week 3 Edition

Banking Crisis Ignites Gold Buying Frenzy

Gold rose almost $100 in four days, March 9-13, responding to the failure of a major California bank, one which finances the technology sector and cryptocurrency craze. Silicon Valley Bank (SVB), the 16th largest bank in America, is the largest bank failure since Washington Mutual at the start of the 2008 financial crisis. Gold and silver rose Friday over the bank failure and then the metals rose even faster on Monday after it was clear that the government would bail out all bank depositors with inflationary money.

Could This Be the Start of Another Round of “Zombie Banks”?

It happened much like this in mid-March 1985, when then-Ohio Governor Richard Celeste was told by regulators the state’s largest savings and loan (thrift), called Home State Savings Bank, was about to close its doors. Celeste “temporarily” closed all 70 thrifts in the state for about a week while he and his regulators sorted out which were qualified to re-open. Six days later, he re-opened the healthy S&Ls, but he limited all withdrawals to $750 per account, which crippled retired people from making necessary withdrawals and investors from taking out large amounts of money to make significant purchases.

That didn’t stop the rest of the nation from making a run on their regional banks and S&Ls. Over the next decade, we saw the greatest bank run in American history – bigger than the Great Depression in the number of failed banks. In fact, nearly one-third of all of America’s S&Ls failed (1,043 out of 3,234) and almost 15% of our nation’s banks (over 2,000 out of 14,000) also failed. This usually leads to U.S. taxpayers footing the bill.

As a result of this bank run, in the late 1980s, the rare coin market had its greatest surge in prices since the late 1970s gold bull market, partly as a result of so many taking their money out of banks and investing in bullion or buying rare coins.  That happened again to a lesser degree in the 2001-11 gold bull market, which included the 2006-09 real estate collapse, the 2008 Great Recession, market crash and debt ceiling crisis.

The problem is that nobody was indicted and sent to jail for any bank crimes. In fact, few were even fired, and many got hefty bonuses in the years their banks went under! The long-term systemic problem in banking is the “fractional reserve” system, in which the bank lends your money out to others, keeping a small portion (usually 15% or less) in the vaults.  When you combine that with faulty risk analysis, which seldom accounts for normal historical disruptions, you have the formula for a run on the banks.

In the recent situation, we had artificially low interest rates for almost 14 years, from 2008 to early 2022, so when we see a sharp rise of inflation (following $6 trillion in cash infusions) causing the Fed to raise rates, the banks seemingly had no clue how to handle the rising bond rates, rising savings payments and related costs. The banks were not prepared for the shock of higher costs and losses.

Even Barney Frank, the co-author of the Dodd-Frank bill requiring tighter financial reporting by businesses and banks, was surprised by the recent crisis. When New York’s Signature Bank became the third large bank to fail in the last week, it seems Barney Frank was one of its board members. Naturally, Frank blamed something else, cryptocurrencies, which were in their infancy when Dodd-Frank was enacted into law in 2010.

The other main problem with the government’s bailout addiction is that they often let bank profits enrich bankers, while punishing taxpayers when bank losses or bankruptcies happen. In short, that’s “privatizing the profits, and socializing the losses.” While bank accounts are insured up to $250,000 per account, the government routinely bails out accounts far above that limit, which makes us ask, “Why even pretend there is a limit? Why take the time to break up your million dollars into four separate accounts?”

The Special Problems – Long Ignored – With Silicon Valley Bank

Regulators must have been blinded by the sand – silicon – on Sand Hill Road, the home address of so many tech giants, and Silicon Valley Bank. Even though most banks have an average of about 40% of their deposits extending over the $250,000 insured limit, SVB had nearly 90% of its deposits above the $250,000, technically uninsured, limit. Why didn’t the regulators notice this as a potential red flag?  

A second red flag was the red-hot stock price, up about 45% in the first month of 2023.  Its deposits followed the same red-hot trajectory.  During COVID, from the start of 2020 to the first quarter of 2022, the bank’s deposits more than tripled to $198 billion. The bank deposited most of this money in securities, seeking high-yield (high-risk) income, the same mistake the S&Ls made in the 1980s – a third red flag.

A fourth red flag is that the bank operated without a “chief risk officer” (CRO) for nine months, finally hiring one (poor timing) right before the bank’s collapse. They were without a CRO during the critical nine months after collecting $198 billion in deposits while the Fed was raising rates at the fastest pace in history. The bank invested in long-term bonds, which decline in price as interest rates rise. Their risk manager (pre-April 2022) probably would have stopped that from happening but she left that month.

SVB didn’t hire a new person until January 2023, when the stock price was soaring. It appears nobody was flagging risky trades during the time when the Fed was making long-term bonds extremely risky.

A fifth red flag would have been all the celebrities touting the bank, like Oprah Winfrey or Mark Cuban, who would take big losses if not rescued. With several big-name corporate, banking and celebrity VIPs having funds at SVB, I’m sure it helped more people rest assured that the Biden Administration would bail everybody out in the end, and they did.

In summary, fast-rising interest rates destroyed the value of bond holdings, while stocks and real estate holdings were also declining in 2022, so nothing was rising for banks. As a result, FDIC Chairman Martin Gruenberg said that banks under his purview have accumulated $620 billion in unrealized losses on investment securities as of the fourth quarter 2022 due to rising interest rates alone. That’s the “mark to market” losses banks would have to take if they need to sell securities to meet liquidity needs, but of course if they all tried to sell at once, prices would fall off a cliff, and the losses would be much greater.

There’s much more to learn from this crisis and we are watching it closely. The main thing we need to learn is that this is a lot like the bank and S&L crisis of the late 1980s when rare coin prices soared. And when the real estate bubble and financial crisis of 2008-09 occurred; gold, silver and rare gold coin prices soared. When we experienced the dollar and inflation crisis of the late 1970s, both precious metals and rare coin prices soared. This is just the opening of what could be a long siege on banks and other financial institutions, so call your professional account representative now for a diversified balance sheet of both bullion coins and rare coins to face the financial storms ahead.

P.S. On Tuesday, March 14, Moody's Investors Service downgraded its outlook on the U.S. banking system from “stable” to “negative,” citing heightened risks for the sector after the rapid unraveling of SVB Financial Group fueled fears of contagion. Reuters reported Moody’s as stating that “Bank runs at Silicon Valley Bank, Silvergate Capital Corp and Signature Bank have deteriorated the operating environment for the sector that is now battling a crisis of confidence, both from investors and depositors.”

Be aware, alert and read our weekly updates; and stay in touch with your friendly neighborhood account representative. These are the kinds of warnings that kicked off the S&L crisis and the gold surge of 2011.

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