Gold, Silver Rise on Stress Test Failure

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Includes: DBS, DGL, GLD, GOLD, IAU, KBE, SLV, XLF
by: Peter Cooper

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?

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