A Metals Margin Call and the End of Fiat Part 1
A shortage of Gold and Silver in Western Banks is about to set the Global Dollar System on fire
Good Morning - Something big is about to happen in gold and silver markets. As the End-of-Cycle approaches the surge in demand for gold and silver is about to skyrocket and there simply won’t be enough to salvage the Western financial system when it falters.
Over the last 20 years a massive reallocation of financial power has shifted from West to East starting with China’s liberalization of gold trading in the 2000s. It is hard to state with precision the volume and scale of the redistribution because no one really knows how much gold is held by the People’s Bank of China (PBOC), nor do we know how much gold is actually under lock and key at Fort Knox (rumors abound). However, a growing chorus of experts believe the metals moves from West to East is a game changer and so do I.
It has been nearly a century since the last monetary cycle ended in 1929. The Great Depression may have begun with a stock market meltdown but it was the collapse of some 9000 US banks that ultimately forced the world into a desperate economic crisis.
It was the collapse of some 9000 US banks that ultimately forced the world into a Great Depression.
While the US Government (USG), as ever, was completely unprepared for the crisis, FDR’s administration passed the infamous Executive Order 6102 "forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States." The unprecedented move was specifically designed to confiscate as much private gold as possible to recapitalize a broken banking system and fend off a USG default.
One hundred years later, the Western world faces a far more dangerous financial nightmare than in 1929 but this time we face a gold and silver shortage at the same time.
How has this happened? Recall what former Fed Chairman Ben Bernanke told Texas Congressman Ron Paul back in 2011 (see below): gold is a rock banks hold because of “tradition.” Such arrogant delusion led Western bankers to empty their volts in favor of other more “pristine” assets. Again, the full extent of this emptying is unknown but soon to be exposed.
The banker-crafted Dodd-Frank reforms Post-Global Financial Crisis (GFC) forced the entire Western banking system to hold US Treasury bonds (and other agency backed debt), an asset devaluing by the day as interest rates rise and fiscal spending explodes. In gold terms, Treasuries have lost 30% of their value since 2020 and 75% since 1999. However, the real story is the Western shortage of precious metals.
How do we know there is a shortage? Asian Banks are buying en masse and the Shanghai Gold Exchange (SGE) now rivals the London Metals Exchange (LME) for control of metals prices, but the US on paper still has the largest reserves in the world, right?
The supply-demand imbalance of precious metals is best expressed in the spot markets. A growing body of evidence suggests that the London Bullion Market Association (LBMA) understates the actual turnover of gold and silver spot markets (traded for immediate delivery) on a daily basis by as much as 10:1, maybe higher. As David Jensen wrote in May,
“with an estimated global supply deficit of 265M oz. of silver in 2024 and tight global vault stocks of silver, delivery demand against the London spot contracts could well trigger default by spot contract issuers.”
Bottomline, as demand rises, Bullion Banks holding these spot contracts could be liable for at least a $500B loss for silver contracts alone. However, such losses pale in comparison to prospective losses in the event of a GFC Part 2.
The issue at bar is the slow motion (so far) collapse of the banking system. The Klaros Group estimates that at least 290 banks remain vulnerable because of massive liabilities primarily centered in Commercial Real Estate (CRE). However, the insolvency is far worse when you consider the FDIC note at the end of first quarter 2024:
“Unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter. Higher unrealized losses on residential mortgage-backed securities (RMBS), resulting from higher mortgage rates in the first quarter, drove the overall increase. This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022. " - FDIC Notice: 1st Quarter 2024
The entire banking industry is awash in toxic assets from CRE and USTs to RMBS. Worse, bank loans currently labeled “assets” are fast becoming liabilities because delinquencies are on the rise (see below). The question becomes what happens when these losses finally break the banks?
In all likelihood, there will be a mad rush into the safest collateral the world has to offer - gold and silver. For thousands of years, money has been gold and silver, and for over half the world it remains so. However, the Western half has virtually institutionalized the dangerous idea that “money” is whatever Central Bankers or the USG say it is.
Money is not a digit on a computer screen, it is not a made up number or fairytale, and thinking it is wrecks markets, economies, currencies, and ultimately destroys society as witnessed throughout history, and increasingly visible today.
As before, Western governments will desperately turn to gold and silver just as FDR did a century ago; only this time there will not be enough to go around because it has been shipped East or arbitraged away by bankers who believe money is whatever they decree. The bullion banks, JP Morgan Chase and members of the New York Fed, and eventually the Central Banks themselves will be margin called.
Then what? CBDC? or something else? We will explore that question in part 2.
Stay liquid, stay alert.