Could This Black Swan Trigger a Gold & Silver Rally?

The Federal Reserve has removed the sentence “The U.S. banking system is sound and resilient” from the FOMC Policy Statement released on January 31st. 

If the Fed was unwilling to make that assertion, the bank crisis from early 2023 is likely rearing its ugly head again. Note that the Fed “stabilized” the banking system back then by printing money, and injecting $400 billion in reserves into the banking system. It also set up the Bank Term Funding Program without a ceiling, with $167.7 billion drawn from it as of January 25th.

US Banking Activity

The removal of that sentence from the policy statement could not be a coincidence. The day before the statement was released, the New York Community Bank (NYCB) announced a massive loan loss reserve provision and slashed its dividend. The stock plunged 37.6% the day the policy statement was released.

The majority of NYCB’s loans are concentrated in commercial real estate (CRE), multi-family housing and office buildings. NYCB’s primary lending market is New York but 48% of the loans in its portfolio are in several other states. The stock has continued to decline. It’s down 60.3% since it released its Q4 earnings report and Moody’s downgraded the bank’s credit rating to Ba2, which is a mid-tier junk rating.

Fed Chairman Jerome Powell was featured on « 60 Minutes » four days after the FOMC meeting and after NYCB blew up. When asked about the possibility of a real estate-driven bank crisis like the one in 2008, Powell asserted (with a straight face) that this was unlikely and assured the audience that the big banks were in good shape. It was strikingly reminiscent of when then-Fed Head, Ben Bernanke, in 2007 assured the country that the raging subprime debt problem was « contained. »  

The relevance of Powell’s appearance on such a prime-time, nationally-televised show making that assertion cannot be overlooked. The next day, one of the larger Japanese banks with heavy exposure to U.S. office building loans, Aozora Bank, announced that it was slashing the book value of its U.S. CRE loan portfolio and it hiked its loan-loss reserve ratio to 18.8% from 9.1%.

Commercial Real Estate Crisis

While everyone was discussing the potential for a commercial real estate debt crisis this year, the NYCB and Aozora earnings reports confirm that it has already begun. $117 billion in CRE office debt needs to be refinanced this year and $1.5 trillion matures or needs to be refinanced before the end of 2025. 

The problem with refinancing this debt is that, based on recent market transactions, many buildings are worth 50% or less of their book values, which means the outstanding loans are worth far less than the original amount of the loan. 

The loan-to-value for many buildings is 100% to 200%, which means some of the loans are close to worthless. Losses of this magnitude will not be confined to just the regional banks – this will blow holes in big bank balance sheets. In addition to this, large public pension funds have heavy exposure to CRE loans.

A Banking Crisis Fomenting

The banking crisis fomenting « below the surface » is likely the continuation of the crisis that hit the U.S. markets in March 2023 – NYCB and Aozora are warning shots. 

This situation is quite similar to the 2008 bank crisis, driven primarily by the collapse of residential real estate mortgages. The crisis was magnified by the massive default of related over-the-counter derivatives.

The Fed was able to defer the onset of a bigger crisis in March 2023 by swiftly printing $400 billion and injecting it into the banking system. In addition, it made available a collateralised loan facility of unlimited size to banks in need of liquidity (the Bank Term Funding Program).  

If the March 2023 crisis is rekindling, this may be why the Fed has increased the Monetary Base (formerly MZM) by 9.5% since the end of February, with the bulk of the increase occurring after July last year. The Monetary Base is composed of currency/coin plus bank reserves. It is the bank reserves that have expanded since February.

Precious Metals Manipulation

Aware of this problem, the Fed, with the assistance of the BIS’ gold holdings, has intensified its efforts to keep the gold price (and silver price) contained – for now. 

If a bigger crisis emerges, the Fed will have no choice but to reverse its quantitative tightening program and crank up the printing press again. Given the expansion of the Monetary Base, a low-grade form of money printing (reserve creation) has already begun. 

Once this « Pandora’s Box » is opened, gold and silver – followed by the mining stocks – are set to go parabolic. 

This would be similar to 2008 when the Fed and bullion banks pushed gold down 30% and silver down 61% between the Bear Stearns ‘blow-up’ in March and the near-collapse of the banking system in October. At that point, quantitative easing was announced and gold started on a 3-year move to a record high, while silver rose 7-fold and GDX more than quadrupled. 

I’m not suggesting that gold and silver will be forced lower by the same magnitude as in 2008 before exploding higher. There is a significantly high global demand for physical gold and silver now. Silver is in a supply deficit, which will support gold and silver prices. 

This latter attribute was not much of a factor in 2008. For example, a record amount of gold was withdrawn from the Shanghai Gold Exchange (271 tonnes) in January, representing roughly 9% of annual gold production globally.  

It’s not a question of « if » the Fed will start printing money again, it’s a question of « when ».