Gold, Silver Rise on Stress Test Failure

Gold jumped as high as $915 an ounce, and silver surged higher to $13.57 yesterday as news leaked out of Washington that 10 of the 19 largest US banks have failed the government stress test and will have to raise more capital.

Precious metals are seen as a safe haven in any financial crisis and their prices tend to respond immediately. And any further fund raising by banks is a negative indicator for financial markets which will have to find the new money somewhere.

Precious metal prices

However, yesterday the price of gold and silver quickly slipped back with markets apparently awaiting official news before getting too carried away. There is also strong manipulation of precious metal markets that probably came into play.

But investors are not that stupid. They can see a trend emerging and sense the inevitability of the advance in the price of gold and silver.

The idea that the nation’s banks have somehow miraculously recovered from the global financial collapse of last autumn is far less credible, and yet that is the nonsense Wall Street has been peddling to the gullible.

How could all the US banks be saved and returned to good health in such a short period while the rest of the economy dived into the worst recession since the Second World War? Americans are famous for their optimism but have surely just been playing a market rally.

Nobody can really believe the banks are in good shape and the stress tests are apparently going to demonstrate just that.

For after a financial crisis there just have to be winners and losers. In any market economy the losers fail and the winners clear up the mess and go on to create new prosperity.

Bad banks

Propping up the bad banks comes at the cost of the good banks whose business will be smaller and whose recovery will be less sure. It is time the US pulled the plug on the bad banks or at least nationalized them and then took them apart.

Perhaps then, more than anything the bank stress tests are a reminder that the US banking crisis has only entered Act One and that several more are to follow.

If this rolls out over several years, as seemingly looks inevitable, then the sky may be the limit for gold and silver prices, and stocking up at today’s low price levels will in retrospect seem to have been the obvious move. Why not take it?

Comments

[DONE_SONZ:]

I can see gold rising on either outcome.

May 06 09:04 AM

[Sakata:]

I am slowly coming to the conclusion that I like the way the economy is going. These phantom rallies, these market manipulations, these bad banks: all are playing into the hands of those who have solid positions in the mining and metals sector, A prolonged secular bull market in gold and silver is the inevitable result and those of us who can afford to sit it out are laughing all the way to the vault. (I'd normally say laughing all the way to the bank, but that seems somewhat inappropriate here.)

Of course, I realize that not everyone is as well positiioned as most readers of this article will be. Many will suffer because of the crooked manipulations. But sometimes it is hard to take a altruistic viewpoint when you know that you have made the right decisions at an early stage. I just wish I had got in back in 2000 instead of delaying for a few years.

May 06 09:11 AM

[doubleguns:]

Freya, I understand the Libor rate but who can QUALIFY for the new relaxed credit and more importantly what consumer wants more debt. Consumer is 70% of our economy and that still concerns me.

Sakata I like your attitude.

May 06 09:40 AM

[Mutual Fund...:]

Good informative precious metals article Peter. As posted weekly at www.mutualfundwealth.com/ precious metals equities have been one of the top performance sectors of the global market place. Global sm/med cap equities, real estate equities and even financial services have also been leading the way to recovery. As economic conditions change going forward, the leading sectors will change I'm sure. Keep informed and on top of the situation, they will be posted.

May 06 09:52 AM

[Missing_Link:]

I think there are several drivers for gold and silver besides jewelry and industrial uses: international buying (China especially), concerns over simultaneous inflation of all the world's major fiat currencies, and fear of another major stock market decline.

The first two drivers will be in place regardless of the reaction to the stress test results and are very likely to drive gold and silver gradually upward in the long run (with high volatility).

The third driver is likely to cause gold and silver to skyrocket if it actually happens.

I'm not a "gold bug" and I'd never touch the stuff in good times but I've put 25% of my portfolio into GLD and SLV. I think they're indispensable at this point.

May 06 07:37 PM

[Missing_Link:]

On May 06 09:05 AM Freya wrote:
> In an economy based on Credit, A Credit Collapse triggered a recession.
> No more, no less.

Wait, what?

Subprime housing had nothing to do with it?

Excessive consumer credit abuse had nothing to do with it?

Excessive federal borrowing had nothing to do with it?

A long-running stock-market bubble caused mainly by too many years of deregulation and loose credit had nothing to do with it?

> They will also reveal that most of these 19 Banks will not need additional
> funds to function even in a worst case scenario.

That would be nice if the stress tests actually tested the worst-case scenario.

As it stands, the parameters of the "worst case" used for the stress test describe the actual CURRENT STATE of the economy. Check the numbers -- it describes what has already happened.

The stress tests won't tell us what happens if things continue to get worse from here.

May 06 07:42 PM

[Missing_Link:]

On May 06 02:21 PM Freya wrote:
> It will not happen overnight. Inbetween now and then, there will
> still be a lot of pain But, the future has just begun. To see it,
> you have to look around that Big Tree in front, or cut it down.

Please allow me to quote Jack Nicholson:

"Sell crazy someplace else. We're all stocked up here."

www.youtube.com/watch?...

May 06 07:47 PM

[capt Brian:]

better late than never,

On May 06 09:11 AM Sakata wrote:

> I am slowly coming to the conclusion that I like the way the economy
> is going. These phantom rallies, these market manipulations, these
> bad banks: all are playing into the hands of those who have solid
> positions in the mining and metals sector, A prolonged secular bull
> market in gold and silver is the inevitable result and those of us
> who can afford to sit it out are laughing all the way to the vault.
> (I'd normally say laughing all the way to the bank, but that seems
> somewhat inappropriate here.)
>
> Of course, I realize that not everyone is as well positiioned as
> most readers of this article will be. Many will suffer because of
> the crooked manipulations. But sometimes it is hard to take a altruistic
> viewpoint when you know that you have made the right decisions at
> an early stage. I just wish I had got in back in 2000 instead of
> delaying for a few years.

May 07 01:03 PM

[capt Brian:]

I hope you have just escaped from an insane asylum, I hope you are an idiot. I hope you have got more loose screws then my lawn mower.

But, I am afraid, I escaped from the same lunitic asylum. I hope we are totally wrong, but 2 years ago, [at least] I sold all my stocks and I mean ALL.. step one okay, 18 years ago, seeing this BS coming, I began go buy physical metals. I have lost another $5000 trying out FOREX, (Disaster central), and now I JUST made money shorting the mkt with QID (in a bull market). I am in FAZ, and holding, I this thing is gonna fall backwards on itself like a guy with a ladder at the wrong angle 'cause he was too lazy and in too much of a hurry to put it up correctly.

"Honey, I shrunk the market"!

The Capt.

May 07 01:13 PM