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    ‘Mea Culpa’ on Gold and Silver Prices; Banks in Big Trouble

    Well, what a difference a week makes! Gold and silver took it on the chin again, but this time a bit more than before. I will explain the how and why it happened, and issue a bit of a mea culpa. I mistakenly thought the market would not short the metals again so soon, given the deteriorating fundamentals around the world. BUT we must remember that the prices are set in the derivative market where trader motivations are quite different than those who buy physical bullion.

    It sometimes takes a while for the trading markets to catch up with the fundamentals. Traders are typically looking only 2-3 months in the future on their gold and silver trades, and not down the line at bigger fundamental economic issues until they rear their ugly heads in the markets. Therefore, I tend to be a bit early on my analysis at times.

    Gold and Silver Analysis

    The gold chart is looking more bearish. Remember, this is the paper market price and not necessarily reflective of physical investor demand here in the states. Gold has passed down through its 200-day moving average. Traders will see this as a bearish sign and may begin piling on to the downside in their positions. We shall track those on the COT (commitment of traders) report from the CFTC (market regulator) when it is published. Those reports take about 7-10 days to compile and report to the public.

    The silver chart is similar, although silver recovered a bit already. The potential positive aspect is that silver had already fallen before gold, and the bit of a rebound may indicate that gold will not stay down long. However, that is a wish as this point and we need to see what happens with traders in the next 3-4 weeks before we make any declarations on direction. I will note that gold and silver tend to move up naturally due to market dynamics each fall, so there is that to look forward to.

    Worldwide gold stocks, at least those held in the US and in the UK, have been falling for quite some time as the following chart shows. Where is all that gold going? Well, we know various governments around the world have already approved, or are in the process of discussing, gold backed currencies. To support the emergence of these currencies, governments will need more gold in their coffers. That is where I would start.

    Ditto for world silver stocks, see chart below. Of course, we know silver is an industrial metal, used in nearly every industry in the world. We also know that mine supply has been lagging demand for 4 years in a row, so it makes sense that the remainder has to come from somewhere. And that somewhere is the trading warehouses!

    What I find interesting on both charts is that while the stocks have gone down for about 2 and a half years in each case, the value of the remaining metals held are going up. This reflects the fact that precious metals are still in a bull run even though the recent couple of weeks of price action on the markets has not been as kind.

    The Macro View

    Well, I wish I had great news for the economy this week, but I do not. The one really positive sign is the Philadelphia manufacturing index was up very nicely this past month. This is the first positive print in a year. Marketwatch reports the following:

    “The Philadelphia Federal Reserve said Thursday its gauge of regional business activity rose to 12 in August from negative 13.5 in the prior month. Any reading above zero indicates expanding activity. This is the first positive reading after 11 straight months of contraction.

    The measure on six-month business outlook dropped 25 points in August to 3.9, its lowest level since May.”

    While the numbers were up, economists still expect weaker production in the region for the next six months. That is basically an indication we are headed for a recession. At the same time, the NY State’s factory gauge fell to a negative 19, the worst reading since May of this year. Overall business inventories across the US were even on the month.

    Industrial production was up 1% last month, though that is attributable to peaking energy usage credited to warmer than average weather in the summer requiring more energy for cooling homes across the nation. On the plus side, retail sales were up 1% for the last month which I will take, thank you very much. I wonder how much of that gain would be attributable to back-to-school supply and clothing purchases across the US.

    The most important number, the leading economic index, reflecting a batch of very important indicators relied on my economists, fell 0.4%, which continued the trend of 16 straight months of negative prints. Overall, it does not appear the economy is anywhere close to recovering, which I do not think will surprise our readers at all.

    Story of the Week

    I took some time to look at the health of the banking system this week and developed some charts you may want to take a gander at. I suspect that before all is said and done, we will see a much larger amount of bank failures than we have so far this year as the recession begins in earnest.

    The first chart shows the amount of net loss the banks have recorded so far in 2023, as an industry. All figures are courtesy of the FDIC database.

    While 4% of the commercial banks have a total net loss of $2.7 billion, the remaining 96% of banks captured a healthy profit of $82.5 billion. That sounds reasonable but I did some more digging to put those numbers into context. The following picture shows the net assets held by those banks, including how many are at risk at unprofitable banks and how much appears to be safe now.

    The total assets of those 4% of losing banks around to around $703 billion. That is quite a bit of capital at risk if those banks do not begin to turn a profit. What is the far larger number are the $23 trillion in assets in the rest of the US banking system.

    That amount nearly equals the $25.4 trillion in GDP produced by the US in 2022. To add perspective, if we have another banking system crash, we could see an historic amount of assets at risk which could cause reverberation effects across all US markets, and indeed all US investor portfolios.

    Why would I bother putting together this information? Because the last time we had a recession in 2008-09, the effects on the banking system were quite stark. According to the FDIC website, over a 5-year period between 2008 to 2012, an astounding 465 banks failed which affected over $321 billion in assets.

    This time could be quite a bit bigger, given the deeper debt issues which most of the commercial banks are mired in now versus in 2008. We had 3 bank failures earlier this spring which affected $548.5 billion in assets. For THREE BANKS. If we have another 462 banks fail again during this oncoming recession, what does the total number of economic losses look like in the next few years? Remember, there are over $23 trillion in assets at stake this time.

    Executive Summary

    Gold and silver are in a bit of a swoon, but I still would not panic just yet. While the traders are taking some profits and lowering their near-term price targets on them metals (2-3 months out), the fundamentals of the economy continue to weaken and push us into an inevitable recession. Once that begins, ‘Katie bar the door’ because people are going to file into precious metals just like they did between 2008 and 2011 where gold reached a new all-time high at $1900 per ounce, and silver touched on its previous all-time high of $50 per ounce. But we will stay connected to that market to see what happens next.

    The Macro outlook just looks bad, and I am going to leave it at that. Nothing much good to report here for the past week.

    We discussed the worsening banking situation and how the bank failures have likely just gotten started. Those will ramp up during the next recession. The difference this time is that they hold a much larger number of assets which means the failures this time will have an even bigger effect on the economy than they did during the Great Recession 14 years ago.

    Coin of the Week

    Given the economic situation, I am going to stick with silver deals. At the time of this writing, JM Bullion has 1 oz Zombucks World Kookaburied Silver Rounds on sale. Silver on sale, enough said!

    Disclaimer: All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.

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