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Bank depositors fleeing into Gold as Fed signals recession

Excitement is building among precious metals investors as gold prices continue to push up toward record highs.

Gold is on track to post its highest ever weekly close at over $2,000 per ounce. If the upside momentum carries forward into next week, a powerful breakout could ensue as short sellers are forced to capitulate.

Turning to the silver market, the price action there is less dramatic. Silver remains 50% below its all-time high. However, it has flirted with breaking above last year’s peak around $26.50. If that resistance is cleared, the white metal is capable of making up a lot of ground in a short amount of time.

Metals markets are being buoyed by dollar weakness. On Thursday, the U.S. Dollar Index sunk to a new low for the year.

Currency traders sold Greenbacks on rising recession fears and expectations for an eventual reversal in the Federal Reserve’s rate hiking campaign.

Minutes from the March meeting of the Federal Open Market Committee showed Fed policymakers expect the economy to contract later this year. They expressed concern over recent high-profile bank failures that point to broader stresses in the financial system.

More dominos will likely fall. The consequences of higher interest rates have yet to be fully reflected in the economy. But highly levered financial institutions remain highly vulnerable.

Fears over bank failures have helped to drive a surge in bullion buying that is continuing. The headlines that will follow when gold hits new daily highs could attract an additional flood of newcomers into precious metals as well.

While physical shortages and premium spikes are possible going forward, for now Money Metals remains well stocked. The only difficulty has been with our shipping department keeping up with the extreme inbound order volume.

However, we've vetted and hired another 23 employees in recent weeks. We expect our shipping speeds to return soon to the super-fast rates we are normally able to achieve.

Investors who don’t need to take immediate delivery of their bullion purchase may wish to consider putting it directly into secure storage through Money Metals Depository.

Our state-of-the-art depository in Idaho offers the highest level of protection for precious metals storage available in America and at the lowest cost. It offers fully segregated storage, meaning your bullion is never co-mingled or misused as collateral.

By contrast, deposits into bank accounts become assets of the bank to be lent out, exchanged for interest-rate sensitive bonds, or otherwise put at risk.

Banks are still trying to get away with paying paltry rates on savings despite Treasury benchmark rates being elevated. Inadequate returns provided by banks combined with fears of inadequate capital reserves held by banks are driving a depositor exodus that will likely trigger more bank failures.

In theory, bank deposits are covered by FDIC insurance – up to a limit that has been arbitrarily expanded for depositors at big banks that pose “systemic risk.” The FDIC and the Fed, through its Bank Term Funding Program, are doubling down on “too big to fail.”

But backstopping banks that take on excessive risk doesn’t make the financial system healthy. It just masks the underlying problem. It ultimately threatens to put taxpayers and all holders of U.S. dollars on the hook for the risk management mistakes of bankers.

And of course, all dollar-denominated financial assets held at banks, brokerages, and elsewhere are at risk of losing value to inflation.

The latest Consumer Price Index and Producer Price Index reports show pricing pressures moderating from last year’s peaks but remaining elevated well above the Fed’s 2% target. Even if the official inflation readings continue to come down slightly, that won’t undo the inflation that has already been released into the economy.

Precious metals prices have yet to fully reflect all the accumulated inflation of the past few years. The perception that inflation has peaked is actually now weighing on the U.S. dollar’s exchange rate as expectations grow for a Fed pivot in the near future.

By the time the central bank does start cutting rates again, we could see gold and silver markets commanding much higher prices.


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Author

Mike Gleason

Mike Gleason

Money Metals Exchange

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 500,000 customers.

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