Banking and Checkmate Chart - What’s Next for Gold and Silver?

While some were feeling relieved for a day last week that the banking crises seemed to have been alleviated, there remains plenty to be concerned about. Treasury Secretary Janet Yellen has offered repeated assurances that the banks and bank deposits are safe, while the FED has opened up a $2 Trillion backstop measure to support the banks. One question that comes to mind, is why the need for a $2T backstop if the banks are healthy and safe? Perhaps they know something we don’t; maybe they know 2 trillion things we don’t know and don’t want to know. In any event, what we do know is somewhat alarming. The banks that recently failed and were rescued here in the US (Signature and SVP Bank), recently passed a bank audit with flying colors.  What does this suggest about all the other banks that have also passed their audits?  Hence the $2T backstop, and the 6% rise in the price of gold in the space of a week.

We’ve seen some of these types of things before, where companies were deemed to be financially strong and solvent, just before they became insolvent. In the GFC it was the ratings agencies largely at fault, classifying bonds as AAA quality while on the verge of bankruptcy. In this case ,it was the auditing/accounting firm (KPMG) wthatgave both banks a clean bill of health within 2 weeks of their failure. If we can’t trust the auditors verifying the books, whom can we trust?  It appears we can trust gold and silver, which both performed handsomely as the crises unfolded. The ripples in the banking sector point to more systemic issues in the economy as a whole that in the past have caused markets to move lower and precious metals to move higher.

Over the weekend, additional problems have developed both abroad and overseas, with a deal to save Credit Suisse requiring additional intervention from more players, both inside and outside of Europe. It remains to be seen how it all plays out. In addition, a new report estimates that there are 200 additional banks across the US with the same type of risks associated with SVB.  The reports also suggest that conditions are such that it could be difficult even for depositors within the limits of FDIC insurance to withdraw their deposits in a timely manner.  While this changes the nature of the fragility of the financial system, it does help explain the urgency of actions currently being taken globally to try and buttress the system.

Assuming the efforts to rescue the banking system turn out to be sufficient and effective (which is a questionable assumption at this juncture), there are other markers indicative of trouble on the horizon.  Data is forming creates what some hedge fund managers and economists refer to as the “Checkmate Chart”, as discussed here by Edward Dowd. Since 1868, there have been 4 other times when the M2 money supply has turned negative from the previous year. In each period, a market panic developed that saw financial markets turn lower.  We are seeing similar conditions today, in terms of money supplies. It remains to be seen whether the response to the banking crisis will increase M2 fast enough to avoid a similar response in financial markets to the panics experienced in 1873, 1893, 1921, and 1929.

There are 3 triggers identified by Mr Dowd that define the “Checkmate Chart.”  Two of these triggers have already occurred, with the third trigger currently in play. The first trigger was when stocks peaked in January of 2022.  We warned our readers of this possibility the month before, in December of 2021. The second trigger occurred when commodities peaked in June of 2022.  The final trigger is when short-term interest rates peak, which appears to be close to fruition if it hasn’t happened already.  As a reminder, what historically happens following the 3rd and final indicator of the “Checkmate Chart” is a significant downturn in the stock market.  While that might be only one of several unpleasant occurrences, it is one that has been seen fairly consistently, though it might not happen overnight.  In the audio interview referenced in the above paragraph, Mr. Dowd explains that sometimes the market grinds lower over a period of time; what he defines as a “slow panic.” He believes that could be what we see this time.

Regardless of how the banking/financial crises play out, or how the results of the “Checkmate Chart” manifest, it appears that the owners of precious metals will be protected.  With gold setting records in foreign currencies and hovering near $2,000 here in the US, its status as a safe-haven asset appears affirmed.  With technical support levels for gold near $1,850/oz, and all-in mining costs for silver approaching $20/oz, I believe the downside risks for precious metals are less than the risks facing unbacked currencies or struggling stock markets around the world.  Even holders of bonds supporting the banking sector have been nearly wiped out in the current crisis; how many of those investors would have benefitted from owning silver or gold instead?  Nearly all, in my view.

While I have never been an advocate of putting all of our eggs in the same basket, I believe it does make sense to make sure some of the baskets we use are indestructible. Bitcoin has risen lately, but it is more a store of volatility than a store of value when compared to gold. There are financial products available that are nearly indestructible, such as short-term treasuries and certain types of fixed and immediate annuities. While these types of products can be useful in protecting the existence of our money, they don’t always protect the value of the dollars that exist. Precious metals have a 5000+ year track record of protecting not only the existence of purchasing power, but also the value of that purchasing power, especially during times of crisis.  This is why we own vaulted precious metals and recommend the same to our clients. These vaults are as secure as the gold and silver they contain.