Liquidity crunch of some banks fuels gold price rise

The liquidity squeeze that has gripped some banks in the US and Europe (the US banks were bailed out by the Fed with a record $153 billion) continues to spook investors and, on the other hand, is fueling the rise in the price of gold and Bitcoin, which gained 32% on the week.

The crux of the problem stemmed from the fact that banks had huge inflows of deposits, which they were not lending out, but investing in otherwise safe but low-yielding US Treasury bonds. As their price began to plummet (and the required rate of return to rise), there were more and more unrealized losses and realized losses too. Banks in need of liquidity are forced to sell these bonds at a loss. On the other hand, technology companies faced a shortage of funding sources in 2022 and started to use cash deposited with banks for their operations.

We hear the delusions again and again

1) “Inflation is coming down”. Governments talk as if prices are falling, but they are not. Prices are just rising more slowly than last year. For the time being, they are continuing to rise, and there is a likelihood that we will continue to lose purchasing power.
2) ‘Bank deposits are safe’. In the US, despite the Fed’s persistent red flags, the US has recently failed to comply with global banking rules, and at least three US banks with total assets of more than USD 350 billion have recently failed. In the end, the bailouts will keep coming because the US cannot afford a banking panic. However, this encourages recklessness and moral hazard.
3) ‘The Fed will quickly reduce its balance sheet’. The Fed governors have tried their best to convince us that inflation is transitory, that they will get rid of the excess liquidity in the system, and that this is compatible with rising interest rates. None of this has happened. In the last week, USD 300 billion (more than during the great financial crisis of 2008) has been borrowed from the Fed by US banks in cash difficulties. As a result, the Fed’s balance sheet has once again increased sharply, while its credibility continues to decline.

If the banking crisis forces the Fed to continue injecting liquidity, inflation will be even more entrenched, and the authorities will be juggling dangerously with fire. To top it all, the Fed will soon have to resume monetizing US debt.

Source: RTV SLO


Valores Global

Valores Team is a group of advisors who first invest in their financial knowledge and then guide individuals towards their desired goals.

Related articles