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Tipping Point of the Banking Crisis & Why You Should Invest in Gold & Silver

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Why We’re at the Tipping Point of the Banking Crisis and Why You Should Invest in Gold & Silver

 

When we look back a couple of years from now (possibly sooner), we’ll likely point to March 10, 2023 as the tipping point for the next financial crisis. This is the date that Silicon Valley Bank (SVB) failed. Historically, banks have only been insured for up to $250,000 per account, but in this case, the Federal Reserve clearly felt that the collapse of SVB could result in a system-wide collapse of the banking system, commonly referred to as systemic risk. As a result, the Federal Reserve guaranteed to backstop all deposits so that all the depositors were made whole. It probably helped that a few elites were reported to have millions of dollars deposited at the bank, including some high-profile international investors. As a result, all the depositors benefited.

Subsequently, Signature Bank failed, of which Barney Frank is a board member, author of the infamous Dodd-Frank Act of 2010. Of note, SVB and Signature Bank are two of the largest bank failures in U.S. history. Credit Suisse, which was on the verge of collapsing, was acquired by UBS with implicit guarantees from the Swiss government to back 109 billion francs in losses in addition to the Swiss National Bank agreeing to backstop up to 100 billion francs in losses. This guarantee potentially puts Swiss taxpayers on the hook for up to 12,500 Swiss francs or $13,500 in U.S. dollars per person.

I liken these events to the tip of an iceberg. Community Economies Collective, CC BY 4.0 <https://creativecommons.org/licenses/by/4.0>, via Wikimedia Commons What we’ve experienced over the past couple months is likely only the beginning of a system-wide issue which was driven in large part by central bank monetary policy by purchasing bonds, thus reducing interest rates. Banks, at least U.S. banks, invested a substantial portion of their assets in U.S. government bonds at substantially lower interest rates than the current yields on bonds. For example, a bank may have purchased 10-year bonds a couple of years ago at a 2% interest rate, which now may be closer to 4%. If they tried to liquidate their holdings, they would incur a substantial loss, as no one would be willing to accept a 2% return when the market is yielding 4%.

European banks may be in even worse shape, as it’s estimated that there was as much as $18 trillion in negative yielding bonds at one point in time. Considering that inflation is running rampant throughout the world (even Japan is experiencing a 3% inflation rate), and interest rates have risen, if forced to liquidate their holdings, many European banks would receive a fraction of the face or par value – much less than U.S. banks.

Recession Lights Flashing Red

By all accounts, we’re onRecession warning the brink of a recession. This is evidenced by reviewing a number of economic reports and indicators, including a negative yield curve, which is almost perfect in forecasting a recession. The commercial property sector is already hemorrhaging, which is likely to worsen as economic conditions deteriorate.  This will result in loan defaults, which will negatively affect the balance sheets of banks, thereby weakening their financial position further. This will further stoke fear among the public regarding the strength and viability of the banking system. In other words, the minor bank run that we’ve seen thus far will pale in comparison to what is to come.

Sources vary as to how much money has been withdrawn from the banking system since the collapse of SVB, but we’ve seen reports ranging from hundreds of billions of dollars to north of a trillion dollars. Considering that the entire U.S. banking system only has combined deposits of $19 – $20 trillion, this is a significant amount. Of course, bank runs these days are different from the pictures and stories we heard surrounding bank failures during the Great Depression. Back then, people lined up at the bank doors to withdraw their money before the bank collapsed. These days, it’s as simple as wiring the funds to an account outside of the banking system.

The significant outflow of funds is obviously going somewhere. Much of the money is likely being used to purchase government bonds, money market funds and being transferred into brokerage accounts. What many folks don’t realize is that a significant amount of the money is also being allocated to precious metals, such as gold and silver. Historically, gold and silver have been popular investment choices during financial and economic crises, but it has been punctuated by the fact that the rest of the world is on a mission to de dollarize.

Dollar’s Reserve Currency Status is at Risk

What do we mean by de-dollarization?  It’s simply that countries are choosing to trade in other currencies, thereby bypassing the dollar. As an example, historically, Saudi Arabia, at least as of 1973, has only been willing to accept U.S. dollars for oil. This is oftentimes referred to as the petro dollar and was conceived when Henry Kissinger and President Nixon came to an agreement or “understanding” with the government of Saudi Arabia. They (the Saudi Arabian government) agreed to only accept dollars for their oil and we agreed to provide them with defense or military support, when and if needed.

Recently, Saudi Arabia’s Finance Minister stated during the World Economic Forum (WEF) in Davos, Switzerland that Saudi Arabia is open to trading in other currencies. This for all intents and purposes signals the end of the petro dollar. Furthermore, other countries are entering into bilateral trade agreements in which they will trade in their own currencies. Agreements were recently reached between Russia and China and Brazil and China. China was also instrumental in helping to negotiate a peace treaty between Saudi Arabia and Iran.

India also appears to be abandoning the dollar by stating that they will be trading in Rupees going forward. Brazil and Argentina recently consummated a trade agreement; although, Javier Milei, Argentina’s new president, appears to be pursing stronger ties with the U.S. Even France seems to be shunning the dollar. Following a meeting with President Xi Jinping in China, President Macron stated that France, and more broadly, Europe, must reduce its dependency on the United States. All the while, by all accounts, the BRICS alliance, originally consisting of Brazil, Russia, India, South Africa and China, appears to be moving forward. Other countries recently added to the alliance include Saudi Arabia, Iran, Egypt, Ethiopia and the United Arab Emirates. This does not include the numerous countries that have officially applied or expressed interest in joining. At last count, the number of countries applying to join the BRICS nations was approaching 20, which accounts for over 50% of global GDP.

A BRICS currency will serve as an alternative to the dollar, as well as direct competition with our currency. If the BRICS currency is introduced as a commodity-backed currency, it will be the first commodity-backed currency since the U.S.BRICS Nations Leaders gold backed went off the gold standard in 1971 and will likely instantly become the dominant currency in international trade. The reason being is that all other currencies are fiat currencies, which simply means that they are backed by nothing but the full faith and credit of the issuing government.

A banking crisis, coupled with a dollar crisis creates a perfect storm for the gold and silver markets, as not only are individuals attempting to protect against a bank collapse, but they’re also attempting to divest themselves of dollars, as they view dollars as a liability. The dollar is at risk of being devalued relative to other currencies on the foreign exchange markets (FX), and is at risk of losing purchasing power due to the eroding effects of inflation. The U.S. dollar, which peaked in September of 2022 at 114,58, has been steadily declining. At the time of this writing, it’s approximately 106. The all-time low of the dollar index was 70.698 on March 16,2008 during the Great Recession.

Considering the strength of the dollar and the performance of gold and silver are inversely related, we would expect to see a substantial increase in the price of gold and silver in the coming months. dollar to gold chart last 10 years A poorly performing dollar translates into higher prices, as foreign currencies strengthen in relation to the dollar, making imports more expensive. Considering that we have a service based economy and have outsourced most of our production and manufacturing to other countries, anything we import will be substantially more expensive – especially if we happen to revisit the lows in the dollar index set in the last recession.

Historically, the alternative media has been the primary source for financial information on topics such as inflation, threats to the dollar, and the importance of precious metals, but recently, even the mainstream media, such as MSNBC and Fox News has been covering these topics. Just recently, Tucker Carlson had an excellent monologue on threats to the U.S. dollar’s position as the world’s reserve currency. If you have yet to see the clip, it’s worth a watch.

Estimates vary, but Egon von Greyerz from Gold Switzerland is on record of stating that only about 1/2% of the population is invested in physical gold and silver. However, the banking crisis, concerns about a recession and the threat to the dollar have substantially increased demand and interest in this relatively small and overlooked asset class. We have seen nearly unprecedented demand for gold and silver coins and bullion since the collapse of SVB. While demand has slowed slightly at the time of this writing, uncertainty in the Middle East with the Israeli-Iran conflict has the potential to cause precious metal prices to soar and inventory to evaporate. 

Physical Gold & Silver Trade Differently Than Digital Assets

If this is your first foray into physical gold and silver, it’s important to note that gold and silver do not trade at the spot price, as many digital investments do. Furthermore, they are assets that aren’t meant to be traded, but rather to be held over the long term. If your intent is to frequently trade gold and silver, then physical precious metals likely aren’t the best option for you. Rather, you might want to consider speculating with mutual funds or ETFs. However, these investments aren’t without risk. It’s important to remember that most, if not all these investments are highly leveraged, aren’t fully backed by precious metals nor do they undergo regular audits. Furthermore, when you exit your position, you’ll be paid in dollars versus receiving your proceeds in physical gold and silver.

When demand for gold and silver coins and bullion increases, two things happen. The most popular items, such as American silver eagles, 90% silver coins, Morgan and Peace silver dollars, pre-1933 U.S. gold coins, American gold eagles and American gold buffaloes, become hard to locate and/or the price increases. When you are buying, you can expect to pay a premium over the spot price for physical metals. As expected, those items that are most popular and in the shortest supply, trade at the highest premiums. This assumes that you’re able to locate them. Shortages occasionally happen when the U.S. Mint can’t keep up with demand or if the secondary or wholesale market dries up.

Consider Purchasing Available Stock of Gold & Silver

If you’re a first-time buyer, are reaching out to your local coin shops inquiring about availability and are seeing the major online dealers with limited supply, don’t panic. This occasionally happens; especially during crises. If you’ll recall when Covid-19 hit in Marsh of 2020, stores were completely out of N-95 masks. They were selling at ridiculous prices on eBay and Amazon until sellers were shut down due to perceived price gouging.

This doesn’t necessarily mean that you should wait until the markets settle down before buying gold and silver. The reason is that you may miss out on an incredible bull run that you’ll end up later regretting. Secondly, demand may continue to increase while supply becomes non-existent. While $2,300 gold and $27 silver, not including premiums, may sound high to you, what will the price be if the metals become unobtainable? While we’re not making any predictions, it would not be surprising to sell gold thousands of dollars and silver tens or even hundreds of dollars higher.

If you’re in the market to acquire precious metals and aren’t able to find what you’re looking for, you have a couple of options. The first, and most obvious, is to purchase what’s available. Granted, this may not be one of the most popular and widely traded coins in the industry but will still allow you to protect yourself against banking crises, a depreciating dollar, a CBDC and high inflation. It’s important to note that there are many good coin and bullion options available in the marketplace and it’s not necessary to limit yourself to those that are perceived as being the “best.” Don’t view it as settling, but rather an opportunity to participate in an industry that is likely to see substantial upside from here.

Consider Placing a Coin or Bullion Order

Another good option is to inquire about placing a special order. However, you should keep in mind that most coin dealers, including our company, have suppliers that require minimums, so if you’re interested in making a smaller purchase, then this likely isn’t a viable option. While we’ve always had the option to place orders for customers, historically, we’ve been able to meet local demand with our current inventory. However, that’s not always the case, especially if you have an interest in more obscure items or would like to make a large purchase.

What should you expect when placing an order? Most suppliers require a 10 oz gold and a 500 oz silver minimum. Furthermore, it’s helpful if you’re a bit flexible with the items that you’re willing to accept. For example, if you’re interested in 1 oz Canadian silver maple leaf coins, and the market is out of stock, other 24k government-issued foreign silver coins, such as Austrian silver philharmonics, Australian silver kangaroos and British silver britannias may be a good substitute. While we would recommend steering clear of some of the more obscure coins or mints, any coins from Canada, Great Britain, Austria, Australia, South Africa, New Zealand, China and Mexico are typically good options.

If you’re insistent on receiving a particular coin, and it happens to be the same coin that the rest of the market is interested in acquiring, you should expect to pay higher premiums and wait longer for your order to be filled. Delays may occur from wholesalers being inundated with shipping requests and/or limited supply. Fortunately, you can typically lock in a price when you place an order with a coin dealer, so there’s no need to worry about market risk – even if the items take slightly longer than expected to arrive.

Consider Privately-Issued Gold & Silver Bullion

One other comment regarding flexibility; gold and silver bullion (i.e. privately-issued) historically hasn’t been as popular as government-issued coins and tends to

Close up of several silver rounds
Privately Issued Silver Buffalo Rounds

trade at lower premiums, so this might be a good option to explore. Even though privately-issued gold and silver bars and rounds aren’t as popular as most government-issued coins, they can still be difficult to come by in a tight market. Historically speaking, larger size gold and silver bullion isn’t quite as popular and tends to be more readily available than smaller size pieces, such as 1 oz silver bars and rounds. If you’re looking to make a substantial investment, larger bars may be preferable from a stacking perspective, as it’s easier to find space for (10) 100 oz silver bars than (1,000) American silver eagles.

Another benefit of going with larger size bullion is that premiums tend to be lower on these items. In other words, the cost on a per ounce basis is less than a 1 oz bar or round. 

100oz silver bars

For example, at present, the premium on a 100 oz silver bar trades for approximately $1  less per ounce than a 1 oz bar. This means that you’ll receive more investment bang for your buck and will allow you to accumulate more of whichever metal is of most interest to you. If demand continues to persist as it has been, the U.S. adopts digital currency, or we go back to a commodity-backed currency, the more ounces you have in your possession, the better, as in theory, the value of your precious metals should be substantially higher.

Conclusion

In summary, there are a few significant reasons why individuals are considering physical gold and silver for the first time. We’re starting to see cracks in the foundation of the banking industry, which in this writer’s opinion, is only scratching the surface in terms of what’s to come.

Since initially writing this article, another bank has been seized by regulators as of April 26th, 2024. Republic First bank is the first regional bank to collapse and our money is on it not being the last in 2024. Read more about this concerning development here.

Furthermore, inflation continues to be persistently high, which erodes the value of your spending power. Not to mention, and potentially, most importantly, the dollar’s position as the world’s reserve currency is in jeopardy. Countries are moving away from the dollar, entering bilateral trade agreements and are in discussions to form other currencies which will be in direct competition with the dollar. Saudi Arabia’s willingness to accept currencies other than the dollar could spell the end of the petro dollar.

In terms of investing in physical gold and silver, in an ideal world, you would purchase the most popular and liquid physical gold and silver coins in the marketplace. However, if you are finding that your preferred items are out of stock, consider looking at alternatives, such as those highlighted above. 

As a reminder, larger size bullion is likely to be more readily available, and as an added bonus, typically trade at lower rates on a per ounce basis. Another option for larger investors is to place a special order with a local coin dealer. We’ve personally placed many of these orders over the years. While we occasionally experience delays, we’re still able to lock in a rate so that there’s no market risk between the time the order is replaced and when the items are received.

At Atlanta Gold & Coin Buyers, we keep our finger on the pulse of the financial, economic and coin and bullion markets so that we’re able to assist first-time buyers as well as long-term stackers.

We believe that the best time to purchase physical gold and silver is now. It’s not likely to become much cheaper, and the longer you wait, the higher the likelihood that you’ll be panic buying at the same time as the rest of the market. Contact us today at 404-236-9744 or via email at sales@atlantagoldandcoin.com to see while we’re the premier coin dealer in metro Atlanta and beyond.
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Tony Davis
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Tony frequently writes on various economic and numismatic related topics affecting the coin and bullion markets and has been published on some of the industry’s leading websites, including Coin Week, the American Numismatic Association, Coin Collector, Coinflation, and Coin Auctions Help, just to name a few. Visit Atlanta Gold & Coin’s website at atlantagoldandcoin.com to obtain additional information on the products, services and educational resources offered by his company. Tony can be reached at sales@atlantagoldandcoin.com or at 404-236-9744

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