Exodus from Small Banks Prompts Plea for Full Guarantees

As interest rates show signs of peaking, the gold prices are nearing new all-time highs.

The gold market hit the $2,000 level this week and showed resilience following the Federal Reserve’s quarter point rate hike announcement. As of this Friday recording the monetary metal comes in at $2,002 per ounce, with prices up a slight 0.2% since last Friday’s close.

Bulls are expecting gold’s momentum to carry forward to new record highs above $2,100 an ounce. Last spring, gold’s rally failed just below that level. And short sellers in the futures market are eyeing an opportunity to knock gold prices back down at resistance levels.

It may take multiple attempts, but if gold can break out of its three-year trading range decisively to the upside, the market will enter uncharted territory. With no overhead resistance left to defend, bears may be forced to capitulate. A short squeeze could potentially catapult prices much, much higher.

Turning to the silver market, it has been underperforming gold in recent weeks. Not the case this week. Silver is up 2.8% for the week to bring spot prices to $23.52 per ounce. Platinum is off 0.4% this week to come in at $989. And finally, palladium is putting in a weekly decline of 0.9% to trade at $1,456 per ounce.

Metals investors continue to await the end of the Federal Reserve’s rate hiking campaign. This week Fed chairman Jerome Powell signaled there would likely be one more hike to come.

But looking out a year ahead, the bond market is pricing in a significant likelihood of rate cuts. Longer-term interest rates peaked five months ago.

We’ve suggested throughout the Fed’s rate hiking campaign that it would be a mistake to wait for central bankers to announce they are done hiking before moving into precious metals. And even though the Fed funds rate has surged over the past from effectively zero to its current range of 4.75% to 5%, gold is on the verge of hitting new all-time highs just as short-term rates hit new cyclical highs.

Selling or reducing a core position in physical precious metals carries its own risks. As we’ve seen recently, financial shocks such as bank runs can happen at any time.    

Some members of Congress are calling on the FDIC to guarantee all bank deposits, even those that fall outside the scope of insurance. They cite the unfairness of extending emergency guarantees on a selective basis to large banks deemed to pose a systemic risk to the financial system.

The government’s latest round of big bank bailouts threatens the survival of smaller, regional banks who lack the political clout to obtain preferential guarantees.

But an unlimited, universal guarantee of all bank deposits would threaten to bring about the complete nationalization of the banking system under the Federal Reserve.  Some Fed watchers fear the central bank’s FedNow instant payments system, which is slated to be rolled out in July, will pave the way for Fed bank accounts and FedCoin – the nickname for the central bank digital currency that has been in ongoing development.

While Congress has yet to authorize the creation of a central bank digital currency, or CBDC, some states are already preparing laws to nullify any federal digital currency mandate.

Last month, an Oklahoma House committee unanimously passed a bill to require businesses and government agencies in the state to accept payment in physical cash. The bill would specifically protect Oklahomans from being forced to use digital dollars.

And this week Florida governor Ron DeSantis urged state lawmakers to pass a bill that would ensure Floridians don’t have to use any central bank digital currency in transactions conducted within the Sunshine state. DeSantis warns that a CBDC would enable the Biden administration to keep tabs on citizens’ transactions and potentially revoke the ability of individuals or businesses to engage in commerce.

Under a centrally controlled digital currency, entire categories of transactions could potentially be banned, as could individual users of the currency.

Meanwhile, it would be much easier for Congress to spend any sums of money it doesn’t have, and for monetary authorities to inflate the supply of currency units demanded by the government, if they no longer had to go through the bond market.

While any attempt that forces Americans to accept digital wallets or accounts at the Federal Reserve would likely be met with resistance, a deeper crisis in the U.S. banking system could trigger the sort of emergency rationale needed to impose a central bank digital currency.  

Holders of physical precious metals need not worry about whether the government will step in to guarantee them or try to replace them with digital IOUs. Gold and silver have intrinsic value. They require no official promises in order to retain their value and cannot be cancelled, transferred, or lost digitally. 

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

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