The Precious Metals Week in Review – March 17th, 2023

1. Silicon Valley Bank’s collapse reverberates in global markets. Trading has been halted in First Republic Bank Monday morning after shares dropped by a record 67 percent before the market opened. This is after Joe Biden claimed, “US banking is safe”. The San-Francisco-based bank, whose clientele includes Mark Zuckerberg saw its share price plunge from $81.76 to $27.08 as fears of a contagion in the sector spooked traders after the collapse of Silicon Valley Bank. Western Alliance Bancorp dropped nearly 75 percent as the opening bell sounded while shares in PacWest Bancorp dropped more than 35 percent. Just one member of Silicon Valley Bank’s board of directors had a career in investment banking, while the others were major Democratic donors. SVB hired board members obsessed with diversity, invested $5BN for a ‘healthier planet’, and held month-long Pride celebrations, but had no Chief Risk Officer for eight months last year. When the bank fell last Friday, it touted that its board included ‘1 black,’ ‘1 LGBTQ+’ member, and ‘2 veterans.’ It also noted that its board is 45 percent women. The board is now being investigated by federal authorities after it failed to prevent the bank from going under while it was investing clients’ money in risky low-interest government bonds and securities. Now, many are slamming the financial institution for focusing too much on woke policies and not enough on its investments. Biden moved to shore up trust before Wall Street opened after the White House yesterday promised SVB customers would be ‘made whole’ and that ‘no losses will be borne by the taxpayer.’ “Americans can have confidence that the banking system is safe,” the president told a press conference. But he warned that those who backed the failed bank “knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.” SVB’s swift downfall on Friday – the second-largest banking collapse in history, has ignited anxiety over contagion amid the Fed’s sharpest rate hike cycle since the early 1980s. The failure of SVB tore into global markets overnight as Biden slept, with European bank shares suffering their biggest drop in more than a year and bond markets seeing a gigantic repricing of rate hike bets.

2. US authorities took extraordinary measures to shore up confidence in the financial system after the collapse of Silicon Valley Bank, introducing a new backstop for banks that Federal Reserve officials said was big enough to protect the entire nation’s deposits. The Sunday announcement by the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp. followed a frantic weekend that saw the surprise closure of New York’s Signature Bank along with mounting concerns about spillover effects to other regional lenders and the wider economy. Regulators acted on a number of fronts to contain the potential fallout:

• The FDIC said it will resolve SVB in a way that “fully protects all depositors.” Similarly, “all depositors” at Signature will be made whole.
• The Fed also announced a new “Bank Term Funding Program” that offers one-year loans to banks under easier terms than it typically provides. $25 billion is available.
• The central bank relaxed terms for lending through its discount window, its main direct lending facility.
  The response helped soothe investors worried about additional bank runs or the risk a fresh financial crisis would trigger a recession. US stock futures climbed on Monday after bank shares plunged last week by the most since the March 2020 pandemic shock.

3. Less than a week after Federal Reserve Chair Jerome Powell opened the door to a re-acceleration in the pace of interest-rate hikes, traders slammed it shut again amid the sudden eruption of financial strains at US regional banks. Goldman Sachs Group economists said they no longer expect the Fed to deliver a rate increase next week, even after US authorities moved to contain a crisis spurred by the exodus of depositors from Silicon Valley Bank and Signature Bank. Treasury two-year yields dropped 18 basis points to 4.34%, heading for their steepest three-day decline since October 1987, when the Black Monday equities rout stunned markets. Just as that shock interrupted a tightening cycle, traders are now rapidly shifting back to betting on Fed rate cuts for the second half of this year. Fed officials are entering a quiet period before the March 21-22 meeting. Economists as of last week were overwhelmingly expecting a quarter-point increase at the meeting, with six forecasting a half-point move.

4. Investors are embracing the gold market amid the quickly escalating banking contagion fears. Strong demand for the precious metal keeps prices at 5-week highs on Wednesday. Gold extended gains and copper dropped as the collapse of Silicon Valley Bank soured risk sentiment and curbed expectations for more aggressive rate hikes by the Federal Reserve. “With two-year yields almost down 1% in less than a week and the market increasingly pricing away the prospect for a rate hike, gold has to go higher,” said Ole Hansen, head of commodities strategy at Saxo Bank. “Gold is the most rate- and dollar-sensitive commodity.” With the global market rout stoking fears of a more significant fallout, gold is trading above $1,960 an ounce and is up 7.6% since the start of the year. “We expect this banking turmoil to reinvigorate investor demand over the longer term,” said ANZ senior commodity strategist Daniel Hynes. Demand for the precious metal is growing, with more than 300,000 ounces added to physically backed gold ETFs (Exchange Traded Fund) in the last trading session, according to data. This marked the largest increase since June. And analysts are saying that this could just be the start of the institutional investor coming back into the gold space, with a lot more upside potential for the price. “Any escalating financial sector distress would almost certainly see an initial gold selloff to raise liquidity, followed by fresh safe-haven buying,” Rhona O’Connell, an analyst at StoneX, wrote in a note. “It’s perceived market role likely now to revert to risk-hedging as the headline element.” Silver, platinum, and palladium also gained ground.

5. The US is committed to replenishing the Strategic Petroleum Reserve but won’t rush to do so immediately despite the recent decline in oil prices, a top Biden administration official said. “Why don’t we take this one day at a time,” Special Presidential Coordinator for Global Infrastructure and Energy Security Amos Hochstein said in an interview. The SPR, which was designed to shield the country from supply disruptions, is currently at 371.6 million barrels, the lowest since the 1980s, after the historic release of 180 million barrels last year to tame gasoline prices in the wake of the war in Ukraine. The administration previously laid out a plan to refill the reserve at prices close to $70 a barrel. WTI (West Texas Intermediate) futures tumbled to almost $66 in New York on Wednesday.

6. In the week ending March 11, the advance figure for seasonally adjusted initial claims was 192,000, a decrease of 20,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 211,000 to 212,000. The 4-week moving average was 196,500, a decrease of 750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 197,000 to 197,250.

7. Oil steadied near the lowest closing price in 15 months after a three-day rout started by the US banking crisis and accelerated by options covering. West Texas Intermediate futures hovered near $67 a barrel after tumbling around 12% over the previous three sessions. The turmoil whipped up by the collapse of Silicon Valley Bank and fresh upheaval at Credit Suisse Group AG has reverberated across global assets, with selling in oil gathering pace as firms tried to limit their exposure in the options market. A long-term time spread for global benchmark Brent has weakened during the recent selloff, narrowing to $2.94 a barrel in backwardation on Wednesday. That compares with $5.26 at the end of last week.

8. The Euro rallied a bit during the trading session on Thursday to break back above the 1.06 level. By doing so, the market suggested a little bit of bullish behavior. Still, after the absolute beating that the market took during the trading session on Wednesday, it’s difficult to imagine that the Euro will suddenly take off to the upside.

9. The USD/JPY pair fails to capitalize on the previous day’s solid recovery of over 200 pips from its lowest level since February 14 and comes under some renewed selling pressure on Friday. The USD/JPY dropped further, falling to as low as 131.99, as Treasury Bonds rallied. A firm break below 132.00 could trigger an acceleration to the downside.

Signature Bank was seized by the government Sunday after regulators lost faith in management and depositors fled. “The bank failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s leadership,” the state’s Department of Financial Services said in a statement Tuesday. “The decision to take possession of the bank and hand it over to the FDIC was based on the current status of the bank and its ability to do business in a safe and sound manner on Monday.” The United States Department of Justice and Securities and Exchange Commission were investigating whether Signature Bank failed to prevent money laundering before the firm collapsed on Sunday. The collapse, the third-largest bank failure in US history, followed a surge in customer withdrawals on Friday that totaled about 20% of the company’s deposits. “By Sunday morning, the executives of the bank believed they had satisfied the need for the data and had secured the capital from the discount window and elsewhere,” Frank said. He reiterated his belief that the bank would have been able to open on Monday and said that he still suspected the bank’s willingness to engage with crypto companies led to its closure. Signature was the third bank in the country to topple in a week, as depositors fled lenders tethered too closely to the digital world’s slump. But Signature was something different, treating crypto as a side gig to its longtime role in New York’s overlooked neighborhoods and businesses. For most of its life, it had gotten on just fine as a bank, quietly well-connected, sometimes controversial, and most traditional. “They did business the old-fashioned way,” said John Catsimatidis, the Republican donor, oil investor, and supermarket owner. He had been an admirer, buying shares after its first public offering in 2004, but thought the bank made mistakes by loaning against taxi medallions just before the market for them collapsed and then getting into crypto. “They tried to ride the heights.” The regulators “wanted to send a message to get people away from crypto,” Frank said in a radio interview Monday. “We were singled out to be the poster child for that message.”

In America, the freedom to succeed has always included the freedom to fail. Or at least it used to. Now we live in a world where certain politically favored businesses are propped up, backstopped, and bailed out by the government no matter how reckless they may be. That is exactly what happened during the 2008 financial crisis, and that is what is happening now with the banking panic set off by the failure of Silicon Valley Bank. Just like in 2008, the cause of the current panic is excessive risk-taking in the private sector that has been aided and abetted by the government. To recap the 2008 fiasco: Congress pushed hard to expand homeownership and encouraged relaxed lending standards. Banks then underwrote risky mortgages to subprime borrowers, which were then bought by the government-sponsored firms Fannie Mae and Freddie Mac and repackaged into mortgage-backed securities. When subprime borrowers began to default, the whole system melted down along with our entire economy.

This time, the characters and setting are slightly different, but the plot remains the same. Under the Biden administration, Democrats have increased spending by over $10 trillion – more than the economies of Japan, Germany, and Australia combined. This spending spree fueled record inflation, inevitably requiring the FED to raise interest rates. Meanwhile, in the private sector, Silicon Valley Bank (SVB) engaged in risky borrowing and lending on behalf of California’s donor class while committing billions of dollars to woke projects fighting climate change. The bank boasted that it was ‘living its values’ by pursuing left-wing environmental, social, and governance goals and donating millions of dollars to liberal nonprofits. When interest rates went up, their long-term bonds imploded and SVB was left holding the bag.

But SVB is not solely responsible for misallocating its resources to left-wing priorities; the Biden administration actively encouraged them to do so. Rather than ensuring the strength of our banking system, Biden ordered bank regulators to push an environmental agenda. At the time of SVB’s collapse, the Federal Reserve was rolling out its latest climate-risk guidelines. Instead of encouraging dangerous behavior in the private sector, the government should allow bad actors to bear the brunt of their bad decisions. We have bankruptcy laws for a reason. Bankruptcy is an orderly process that allows a failed business to restructure or be bought out by a solvent competitor, ensuring that the strong survive and the weak fall to the wayside, which is critical for maintaining a functioning free market. The alternative is what we have today: banks make foolish decisions enabled by imprudent government policies and the American people pay the price. Of course, President Biden says taxpayers won’t pay for the bailout, but that is disingenuous – every American with a bank account will pay higher fees to replenish the billions spent by the FDIC to backstop failing banks.

It is relatively common that what should be recognized as a warning flag of major trouble is often ignored until things get so bad that it is almost impossible not to notice. Geopolitical, economic, and environmental uncertainty can be expected to continue in the near term. Astute investors continue to seek out alternative investments for their portfolios to aid in diversifying them away from overexposure to any single asset class. Some are seeking out buying opportunities from temporary price dips to add more physical precious metals into their portfolios. Remember that one of the keys to profitability through the ownership of physical precious metals is to acquire the physical product and hold on to it for the long term without overextending your ability to maintain its ownership.

Trading Department – Precious Metals International, Ltd.

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