Suddenly, Precious Metals and Crypto Make Sense Again

It’s been a while since the media printed headlines about contagion and bank runs. Some investors haven’t been in the game long enough to remember what it felt like when Lehman Brothers and Bear Sterns imploded. Now, they’re getting a taste of what real panic looks and feels like.

The current situation is quite different from the COVID-19 crisis of March 2020. There’s no vaccine for what caused the monetary malaise of 2023: traditional bank mismanagement and a central bank that won’t stop hiking interest rates until something breaks.

Something did break, as Silicon Valley Bank represents the second biggest big-bank failure in U.S. history (only topped by Washington Mutual). Another collapsed bank is Signature Bank, which was known for being cryptocurrency-friendly.

There’s nothing wrong with that, but Signature Bank and Silicon Valley Bank both had large portions of uninsured funds. Plus, Signature Bank had too much of its assets tied up in cryptocurrency while Silicon Valley Bank over-leveraged itself on government bonds.

As Bitcoin fell from $69,000 to $16,000 and government bond prices cratered, questions arose as to whether depositors at Signature Bank and Silicon Valley Bank would be able to withdraw their funds. This started the familiar vicious cycle of everybody trying to withdraw their funds at once – i.e., bank runs, but unlike in 1929, it’s all digital this time.

Who’s ultimately to blame here? Signature Bank went too heavily into crypto, thereby violating a crucial rule: The more volatile the asset, the less you’ll want to allocate toward it. I like Bitcoin for the long term, but I also know that it’s susceptible to 50%-or-greater price crashes from time to time.

Courtesy: Statista

So, don’t be surprised if big banks and regulators are wary of cryptocurrency for a little while. They’ll take the wrong lesson from this, thinking that the culprit was crypto when really it was the lack of responsible custody of depositors’ funds.

As for Silicon Valley Bank, apparently they bought into the idea that government bonds are “risk-free.” There’s always counterparty risk with bonds, and trusting the government and central bankers to behave responsibly is always a grave error.

The other culprit, at least when it comes to Silicon Valley Bank’s failure, is the Federal Reserve. We can debate whether the Fed is to blame here, but there’s no denying the cause-and-effect relationship between relentless interest rate hikes and Silicon Valley Bank’s bottom line.

Turning back to Signature Bank, investors shouldn’t assume that cryptocurrency itself was the problem. A small allocation in one’s portfolio toward Bitcoin shouldn’t cause major problems. If I’m going to buy Bitcoin, I’m willing to accept the risks and the price volatility, so I adjust my position size accordingly.

If anything, people should now see Bitcoin as a favorable alternative to government bonds. Observe what’s happened to the Bitcoin price during this banking crisis: It has recaptured the $26,000 area while bank stocks have left their holders with substantial losses.

Meanwhile, gold and silver are shining brightly as investors suddenly remember what makes them such valuable stores of wealth. There’s no counterparty risk with precious metals, and they won’t let you down even if governments and central bankers will.

Courtesy: Wall Street Journal

And here’s the real kicker: Just 14 days before Silicon Valley Bank went under, an auditor gave the bank a clean bill of financial health. When this happens, one has to wonder whether there’s any real oversight over these banks.

With gold and silver, there’s no audit of what you own; you’re responsible for it, and that’s all there is to it. Cryptocurrency is more complicated than that, but at least it’s decentralized, so crypto values aren’t set by a central bank somewhere.

While banks were tanking, gold recaptured $1,900 and silver surged to $22. There are a number of takeaways here. First, some crisis situations practically require diversification into precious metals. Second, cryptocurrency and especially Bitcoin can hold up well when the traditional banking system is failing.

Additionally, over-allocating into any asset type is a recipe for disaster. Finally, it’s wise to own assets that don’t involve complete trust in political entities. When you entrust them with your finances and your freedom, the results can be catastrophic.