Banking Crisis Continues
The biggest banking emergency since the 2008 Great Financial Crisis is sending gold prices soaring. Gold had its best weekly performance in 3 years. Prices are poised to break the $2,000 barrier. Investors are flocking to the safe haven asset as the economy falls into a trap created by the Federal Reserve.
The banking system is collapsing. No one knows how bad it will get. Larry Fink is the CEO of Blackrock, the world’s biggest asset management firm. He said, “We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector with more seizures and shutdowns coming.”1
The crisis is revealing the weakness of the financial system. Banks borrowed a record $164.8 billion from the Federal Reserve to stay solvent. The previous record was $111 billion – right before the 2008 crisis.
Economists warned the Fed would raise rates until something broke. Now something broke. Fed may raise rates only 25 basis points next week to save face. After that, there is talk of the Fed stopping rate hikes. Or they may even start cutting them in a few months.
To avoid a banking catastrophe, the Fed bailout is forcing them to leave quantitative tightening (QT) by the wayside. QT was meant to lower inflation by selling off Fed assets and reducing the money supply. JPMorgan Chase & Co. estimated that the additional funding from the U.S. central bank’s new ‘Bank Term Funding Program’ could add up to $2 trillion in liquidity. This infusion could undo the reductions they’ve already done and spur more inflation.
Gold Soars
Gold rose from $1,867 an ounce to above $1,980 this past week. Its best performance since March 2020.
Bloomberg Intelligence and Wells Fargo said they see gold eventually going to $3,000 an ounce. Gold prices are being fueled by more than the banking crisis. With rate hikes most likely halted, inflation will remain elevated far above their 2% target.
“The view from the gold perspective is that given disruptions in the banking system and the U.S. Treasury Department’s willingness to help, we might get accommodation that allows inflation to hang around longer at a higher level. This is a good thing for gold,” TD Securities global head of commodity strategy Bart Melek.2
There is a bigger issue that commentators seem scared to touch upon. JP Morgan Chase and other banks have tens of trillions of dollar valuations of derivatives. These are gambles on how interest rates, bond prices, stock prices, and other measures will change in future. After fifteen years of near zero interest rates, these casino bets have reached vast magnitudes beyond what characterized the 2008 crash of AIG and other speculators. If the spread of bank failures isn’t stopped, an apocalyptic level of financial ruin may hit the global economy.
The Fed has painted themselves into a corner. They are trying to achieve two opposing goals: fight inflation and save the banks. Rate increases to tame inflation create more stress in the banking system. Yet, cutting rates will allow inflation to flourish. Either case is likely to result in higher gold prices. In addition, none of the earlier gold tailwinds have disappeared. War and recession are still sending investors searching for safe havens. Investors interested in protecting their value of their portfolios should investigate gold ASAP. Contact us today to learn how a Gold IRA can help you.
