The Next Major Banking Crisis As Gold & Silver Surge

Turk: “Gold has now risen two weeks in a row, Eric, and with the strong showing today, maybe it will end this week by scoring three in a row.  That would be a very positive development.  The really important point is that gold and silver are steadily moving further away from the low made on Monday, May 20th, as evidenced by their short-term moving averages.

You will recall that both precious metals opened lower that day and sold off badly before putting in a remarkable upside reversal as the day wore on.  That day had all the earmarks of a selling climax in both gold and silver, so it could prove to be an important turning point and if so, the end of this long correction in the precious metals which would be a welcomed relief….

A selling climax occurs when the last hold-outs throw in the towel and sentiment is at rock-bottom.  That clearly was the case two weeks ago, yet sentiment remains low, which is bullish.  Few people are watching the action of the precious metals, except the buyers of physical bullion.

Last week a lot of the traders in paper gold exited their trading positions, as evidenced by the big drop in Comex open interest the past several days.  Then, you also have the fear factor playing a big part which is only natural given what happened to the metals over the past couple of months.

As an example, the weak close in the precious metals this past Friday naturally made a lot of people fearful that today would be a repeat of what happened two Mondays ago.  Instead, both precious metals have been strong all day, catching a lot of traders and shorts on the wrong foot.  A lot of shorts covered last week, so those who did not were probably in there buying today.

No one of course knows whether or not the bottom is in place, but the odds that it has been made are definitely improving, and will continue to improve as the precious metals work their way higher.  The next big hurdles to watch are $1420 and $23. A jump above those prices will start bringing in the momentum players.

The big increase in volatility is another sign that often occurs at important bottoms.  Look at what happened last week with its big price swings.  There were only 4 trading days last week because of the holiday, but two of those days had $20 moves.  It is noteworthy that the shorts pounded the precious metals lower on Friday, but gold and silver are reluctant to decline any further as evidenced by today, which was another $20 jump in price.”

When asked what is driving the metal higher, Turk responded, “It’s hard to say for sure, Eric, but clearly the dollar is a big factor.  It is getting whacked, and this drop has put some fire under most commodities pretty much across the board.

Also, it is clear that the physical buyers are still driving the precious metals market.  Even though the buying frenzy in April and May has somewhat dissipated, the refiners are still working hard to eliminate backlogs.  There is a lot of metal still being shipped from the West where it is under appreciated, to the East where it is more highly valued.

But here is what I am watching very carefully:  The yield on the 10-year T-note is above 2% and has touched levels rarely seen over the past few years while QE has been under way.  The Fed’s debt purchases have kept interest rates low until now, but consider what has happened over the past several weeks.

Even though the Fed has bought over $160 billion of debt instruments since mid-April, the yield on the T-note climbed from under 1.7% to present levels around 2.1%, which is a huge move.  One could probably even call it a collapse in the price of these instruments when looking on a percentage basis.  This jump in yield flies in the face of past QE results, which I think is significant.

The bond market is clearly rebelling, Eric.  It is starting to focus on the dark-side of QE.  Regardless whether or not QE saved the financial system – and this point won’t be known for years – all of this monetization from QE is not preventing rising unemployment and an economic free-fall in the US, UK and continental Europe.  And we can probably add Japan to that list.

But here’s the important point, as economies head into the tank, more loans in the banking system will become impaired, and many banks around the world remain over-leveraged with weak balance sheets.  As interest rates rise, the long-term interest rates banks have locked into in on their loan books will mean the value of those assets will be declining, further adding to bank woes.

Even the Fed’s and other central bank balance sheets are not immune to the loss in value of the fixed-rate paper they own when yields climb.  In other words, the next big banking crisis may be just around the corner, and the best way to prepare for it is to own physical gold and silver.”