Former Fed advisor: Recent Gold and Silver selloff reflect rot in the financial system

A former Federal Reserve advisor said the recent selloff in gold and silver wasn’t just nervous investors booking profits on oversold assets. She thinks it signals deeper structural rot in the financial system.

After peaking near $4,400 an ounce, gold was hammered lower, falling to close to $4,000 before stabilizing around $4,100.

Silver dropped even more substantially in percentage terms, plunging from over $54 to the $48 range.

The correction wasn’t unexpected. Both metals were overbought, and bull markets don’t go up in a straight line. Corrections are healthy in an upward-trending market.

However, in an interview with Kitco News, Danielle DiMartino Booth said she thinks more than just profit-taking drove the recent gold and silver selloff. The former advisor to ex-Dallas Fed President Richard Fisher said it reflects an increasing lack of liquidity in the financial system and that it will ultimately force the Federal Reserve to loosen monetary policy more quickly than anybody expects.

“It certainly looks like the system is running out of sufficient liquidity, and that the Fed is going to be forced to pull over to the sidelines.”

In fact, the central bank has already pulled the car off the road. It cut rates at the last meeting, despite signs of persistent inflation. And in another signal that we are entering an era of even looser monetary policy, Federal Reserve Chairman Jerome Powell hinted that balance sheet reduction is about to come to an end.

These moves make little sense given the inflation data. But when you factor in the massive level of debt in the economy, it becomes clear why the Fed is easing.

This once again reveals the Catch-22 the central bank finds itself in.

JPMorgan Chase CEO Jamie Dimon also recently warned of liquidity problems after his company took a $170 million charge-off following the bankruptcy of subprime auto lender Tricolor. He also noted the meltdown of First Brands Group, an auto parts maker that collapsed after it failed to refinance $6 billion in debt accumulated through acquisitions.

Dimon said these cases reflect more general stress in the private lending sector and among regional banks. “When you see one cockroach, there are probably more,” Dimon said during an earnings call. “Everyone should be forewarned on this one.”

Booth said she thinks the recent gold and silver selloff also hinted at tight liquidity. She said investors weren’t unloading gold and silver just to book some profits. They sold out of necessity — a “dash for cash.”

She noted that the last time we saw a big selloff in metals like this was in the early days of the pandemic.

“I think that’s what we’re witnessing right now. I think we’re witnessing a repeat of what we saw in March of 2020,” she said, noting that investors who receive margin calls often must raise cash quickly. If they can’t take out a short-term loan or interest rates are too high, they are forced to sell their most profitable and liquid assets. That is often gold and silver.

“People tend to, if they get margin calls, if liquidity becomes an issue, they tend to sell their winners.”

Booth said the resulting volatility is not a sign of a healthy market.

“You never want to see gold behave like a meme stock.”

The private credit market has grown exponentially in recent years and now carries about $1.7 trillion in debt. Booth pointed out that artificially low interest rates, courtesy of the Fed, coupled with lax underwriting standards, drove this explosive growth.

In other words, the central bank’s interest rate policy incentivized a lot of bad debt.

Booth said she sees a significant risk of contagion in the private credit market.

“If we are seeing these blowups in the private credit market... they are indicative more so of banks not necessarily having proper due diligence and sound enough underwriting standards when the money was flowing freely.”

This is precisely why Dimon is worried about “cockroaches.”

“If the lending standards have been laxer than they should have been, then we’re going to find, as Jamie Dimon would suggest, more cockroaches,” Booth said.

Bank of England Governor Andrew Bailey also recently expressed concern about private credit in testimony before parliament, saying “alarm bells” are ringing in the sector. He noted parallels between the current state of U.S. private credit and the subprime mortgage sector back in 2006–2007.

Bailey said that when he broached the issue, industry analysts claimed “everything was fine in their world, apart from the role of the rating agencies,” noting that this echoed the confusion over the quality of subprime debt almost two decades ago.

“I said, ‘Well, we’re not playing that movie again, are we?’ If you were involved before the financial crisis and during it, alarm bells start going off at that point.”

Both the Fed and the IMF have warned about systemic risk posed by the situation.

Booth also pointed out the rapid rise in consumer debt. According to the New York Fed, household debt has ballooned to a record $18.4 trillion. American consumers owe $1.3 trillion in revolving (credit card) debt alone. Meanwhile, credit card and auto loan delinquencies are starting to rise. 401(k) hardship withdrawals have reached a two‑year high.

Analyst Greg Weldon describes this as a “debt black hole.” Debt is the most powerful force in the financial system right now, and it’s sucking everything around into it.

Even in late 2007, most analysts in the mainstream claimed there weren’t significant problems and that issues in the subprime mortgage market were “contained.”

Of course, they weren’t.

It remains to be seen whether the private credit market will devolve into a 2008‑style meltdown. But experience shows that loose monetary policy creates all kinds of malinvestments that eventually have to unwind. We still haven’t reckoned with the damage caused by more than a decade of zero percent interest rates after the 2008 financial crisis — much less the monetary excesses of the pandemic era.

And it’s pretty clear that the markets are trying to tell us something. There is a lot of stress in the system. We’ll have to watch carefully to see how it all plays out.

And keep in mind, looser Fed monetary policy means an expanding money supply, which is — by definition — inflation.

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