Most of us have heard the phrase, “You can bank on it,” which implies that banks are secure institutions to deal with. Perhaps not so much anymore. In the last couple of months, 16 banks have been downgraded by the ratings agencies, with upwards of 87 more being considered for downgrade.
Whether S&P Global, Fitch, or Moody’s, the raters are concerned about the banking industry, and maybe we should be too. A record amount of funds ($870 billion) have been pulled out of banks recently, with $23 trillion remaining. The FDIC has $124.5 billion on hand and a credit line with the US Treasury for an additional $100 billion, for a total of $224.5 billion - to protect bank assets of $23 trillion. Feeling safe yet?
So what gives? After a long period (over a decade) of easy access to low-cost funding, times have changed. It is more difficult for banks to access capital these days, and more expensive. Banks are also holding large amounts of under-water assets, including government bonds issued when interest rates were low. A bond paying 1-2% is now worth 30-40% less than when it was purchased, making the balance sheets of many banks illiquid. The only way to avoid the loss is to hold the bonds to maturity, which is unattractive when inflation of 3-5% erodes the capital.
Then there’s the issue of spread income - the difference between the interest banks pay on deposits from the interest they collect on loans. Higher deposit rates have shrunk the income spreads at a time when few can afford to borrow more.
Let us not forget the impact of a commercial real estate sector expected to deteriorate for another year or so, as balloon payments come due at a time when companies cannot afford to refinance. The number of employees working from home means many offices are largely vacant, leaving owners without receiving rental income and lenders without receiving loan payments. This will lead to distressed property sales, which negatively impacts the collateral on bank balance sheets. One factor impacting bank funding, liquidity, income, and loan collateral has been rising interest rates. Rates have risen at the fastest rate in history for the last 18 months, which has been a severe shock to the entire banking industry. Higher interest rates make it more expensive for banks to borrow, decrease the value of their existing capital, lower the profit they make on bank deposits, and put further lending out of reach of many consumers.
Protecting Existence vs. Protecting Value
The economy as a whole is also suffering, which often provides a headwind to banks. S&P downgraded the credit of the United States in 2011, and many economists believe we are in worse shape today than we were then.
Those with $250,000 or less in the bank can be confident about the existence of their funds, as no FDIC-insured funds have been lost since the creation of the FDIC in 1933. But a valid concern for all of us, whether the FDIC stays solvent or not, is the value of those funds. The FDIC ensures their existence but does not guarantee their value or purchasing power. As the attached graph illustrates, since the founding of the FDIC in 1933, the purchasing power of the dollar has decreased by nearly 99% since then. That is, today, it takes nearly $100 of today’s dollars to purchase what $1 could purchased in 1933.
Meanwhile, an ounce of gold purchased for $20 in 1933 requires $1,900 in today’s dollars. In order to protect both the existence and purchasing power of our money requires something more than the FDIC. It requires gold. Some would say that stocks can also fulfill that role, but I would disagree. As we showed in this article from 2017, not even a rising stock market can protect us against a falling dollar. When you compound a falling dollar with a falling stock market, you have double trouble.
Ask yourself this: if the “safe and secure” banking industry is being deemed to be unsafe, what does that say about other sectors of the economy and industry? And what might that mean for the stock market in the months ahead?
As the above-referenced article indicates, gold can often protect the existence and value of our assets better than both the FDIC and/or the stock market.
Perhaps everyone should have some funds readily available in a bank account while being careful not to store more than the insured amount. But the process of finding a stable bank to deal with just got more difficult. Even if the existence of your funds is protected, none of us wants the hassle of having to change banks or of dealing with a shuttered bank while the FDIC steps in to sort out the problem. By storing some of your assets in gold, you gain the peace of mind of knowing your assets are safe from both the mismanagement of others and the ravages of inflation. The general guidance used to be to bank at a small bank. But today, the raters have found problems at the nation’s largest banks, regional banks, and small banks as well.
Bullion vs Banks
Governments around the world are liquidating Treasuries at a record pace and replacing them with tangible assets like gold. Depositors are pulling assets out of the banking system at a record pace as well, in search of better performance. Even though the FDIC can protect the existence of insured dollars, the public is becoming wise to the fact that they are losing purchasing power while sitting in FDIC-insured accounts. Some are trading FDIC insurance for uninsured money market funds, paying 2% more interest.
Perhaps a better choice would be to consider putting a portion of your savings into physical gold, which can protect both the existence and purchasing power of your assets. Gold has proven to be a better inflation hedge than COLA adjustments over time and offers more security than most uninsured funds available today.
Benefits of Owning Gold
Gold bullion bars and coins are the checking and savings accounts of the precious metals world in that they are very liquid and secure. For those willing to tie up funds for a longer time, rare gold coins of historical significance or investment-grade proof coins are the 5-year CDs of the precious metals world. It is slightly less liquid but potentially growing more than bullion products over time.
Now is not the time to be interest-rate-wise but inflation-proof foolish. Now is the time to own gold.