Why Bank and Debt Crises are Helping the Gold and Silver Prices

By: Julian_DW_Phillips

Some months back we pointed out that in their present form, banks had become the arteries and veins of the financial worlds with central banks the heart. Unfortunately, banks are driven solely by the profit motive. As they grew into every aspect of people's financial lives, they failed to take on the corresponding social responsibilities that they came with it.

The result is that when their greed went too far and the banking system was threatened with collapse, they had to be bailed out by their customers at the retail level, the taxpayers. Since then, they have recovered but are not vibrantly underpinning the economies in which their customers are based to promote a recovery. Still, their total thrust is for profits, meaning that there is just not enough banking support to invigorate developed world economies. Worse still, the public perception of bankers has been eroded so far, it's common to hear them described as 'banksters.'

The battle begins

The British government has just received a banking report on the reforms needed for its banking industry. In it, they have ring-fenced retail banking to ensure taxpayers will not need to bail out the banks and will avoid the most profitable risks banks take. That investment side will be separated so that should it fail then it will be allowed to collapse without impacting the nation's economy.

But have no doubt that this is not an amicable reform because it limits banks' profit opportunities and ensures they face the risks of their own actions.

But most big banks can move out of the country and minimize their overall adherence to such regulatory reforms. It is in fact a war situation, profits versus responsibilities. If they move, which makes sense from the shareholders point of view, then they will in effect have refused to face their responsibilities. If they accept these changes, they will have been forced to change by government.

Which way will this battle go? We have no doubt that bankers have to seek maximum profits in any legal way they can. It would be anti-shareholder to bow to government regulations if they don't have to. We see this battle becoming global as is the interlinked web of banking. Ireland is what happens when banks chase profits irrespective of the impact of their actions, leaving the Irish taxpayer as collateral damage. In the face of greater regulation and control from government aimed at bringing stability and lowering risks, are the banks cooperating? To date the banks have acted as follows: -

• Germany's biggest lender plans to alter the status of its main U.S. subsidiary in response to capital rules being imposed under a U.S. regulatory overhaul. The restructuring will help the subsidiary, known as Taunus Corp. shed its status as a bank holding company, which would have subjected it to the capital rules. Instead, the firm will move a U.S. banking unit out of Taunus and link it to the Frankfurt-based parent. Deutsche Bank estimated last year it might need to inject almost $20 billion into Taunus to comply with the rules.

• Overseas lenders, including Barclays Plc., are altering their U.S. holding subsidiaries because the Dodd-Frank Act of 2010 would otherwise force the divisions to comply with the same capital rules as domestic banks. Barclays said it de-registered Barclays Group U.S. as a bank-holding company, partly to sidestep the capital requirements. Non-U.S. banks were previously exempt as long as their foreign parents were regulated by a government-recognized watchdog. The U.S. bank unit holds $45.5 billion in assets and $17.7 billion in U.S. deposits. The unit counts the Federal Reserve as its primary regulator, according to the FDIC.

Why does this concern the Gold Forecaster? Because this is yet another fundamental structural reason why the gold price is rising and will continue to rise.

The loss of reputation through greed and dishonesty

But bankers are not simply ducking reformation; by their actions they are ensuring the continuous decay of trust in banking and the banking system. This 'battle' has and will continue to breed distrust in banks as they do not usually work for the advantage of their clients and depositors. The pages of the media have been replete with tales of conflict of interest, settlements out of court, of depositors being taken advantage of by their banks, by making profits out of their own customer's bank-backed ventures even when they failed. The attrition of trust in the banks has alarmed many, who are slowly becoming gold and silver investors and will continue to do so.

In the States, while we have seen a public grilling of leading bank executives, what changes have taken place to ensure it does not happen again? Has the housing market recovered from the games the bank's played with mortgages? [We have persistently said from 2007 onwards that unless the consumer/homeowners is thriving again, there is little prospect of there being a long lasting fundamentally sound recovery in the U.S.] Has the banking industry acted in concert with government to re-invigorate the economy - no! Have they made every effort to find ways to stimulate the housing market to resuscitate the consumer and get the economy back on track? No! So long as banking structures remains solely profit orientated, they will encourage investors to turn to gold and silver.

Have the criminal actions of bankers been prosecuted? Congress has issued a long-awaited report that is in the process of shocking the public and undermining even further the credibility of the banking system. Here are some comments from that report:

Lawmaker Levin, when commenting on the report at its release, accused Goldman Sachs, one of the largest U.S. banks, "of profiting at clients' expense as the mortgage market crashed in 2007. In my judgment, Goldman clearly misled their clients and they misled Congress," he said. Add this to other comments, "Blame for this mess lies everywhere -- from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild and members of Congress who failed to provide oversight. It shows without a doubt the lack of ethics in some of our financial institutions who embraced known conflicts of interest to accomplish wealth for themselves, not caring about the outcome for their customers." The report pulls back the curtain on shoddy, risky, deceptive practices on the part of a lot of major financial institutions," Mr. Levin said. The report also asks federal regulators to examine its findings for violations of laws.

Now here's the shocker that came out last week; The Federal Reserve said it has taken enforcement action against 10 banks over "a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing. These deficiencies represent significant and pervasive compliance failures and unsafe and unsound practices at these institutions." The banks are Bank of America, Citigroup, Ally Financial, the HSBC North America unit of HSBC Holdings, J.P. Morgan Chase, MetLife, PNC Financial Services, SunTrust Banks, U.S. Bancorp and Wells Fargo.

In addition to the actions against the banking organizations, the Federal Reserve announced formal enforcement actions against Lender Processing Services, Inc., a domestic provider of default-management services and other services related to foreclosures, and against MERSCORP, Inc., which provides services related to tracking and registering residential mortgage ownership and servicing, acts as mortgagee of record on behalf of lenders and servicers, and initiates foreclosure actions.

We are of the opinion that there is little chance of bankers moving away from the profit motive or of lawmakers enforcing social responsibility on bankers.

What is remarkable in the last few years has been the increasing visibility of the actions of bankers and the very public loss of reputation. How long will it take for developed world investors to turn away from their financial systems as Indian investors have done for so many decades and use cash and gold and property in an 'alternative' financial system? Or are they too locked-in to escape?

Gold and silver cannot be dishonest

Yes, they are both metals that in so many cases are mined to be put back underground and earn no income, but they are instruments that have avoided the investment warfare that is common in the banking system and monetary system as we are seeing from the Levin report. Let's not say this is just the U.S., --it's global, wherever there is a banking system.

Note what income depositors receive after bank charges and deduct inflation to see 'real' interest rates. The saver is losing hands down, yet the bank can use his money up to sixteen times in ventures of their choosing that will usually make hefty profits. The realization of the paucity of bank deposits as investments has not caught on and banks have ways to ensure that even passing temporary deposits are available for their use. Perhaps Abraham Lincoln was wrong in that you can 'fool all the people, all of the time.' If investors had, had gold, it would be somewhere north of $10,000 by now.

In India, cash and gold yield income in the hands of its owners. Their activities escape corrupt bankers and government officials and corrupt lawmakers. They must laugh when they read reports such as the above and say, 'haven't you learned yet?' Not only does gold provide for private commercial deals of many kinds, it increases in price. Their total return on gold has been nearly 500% in the last 11 years. What's been the return on the broad spectrum of developed world investments, including bank deposits? Who cares that there is no annual income on gold and silver, there's an incredible total return? They would laugh at the concept of getting small 'real interest' returns from their investment in banks.

Most importantly, gold and silver bullion, by itself, are places to escape dishonesty and all the common, unethical, core practices of the financial system. Precious metals don't lie, cannot be unethical, do not have conflicts of interest but are respected by all their investors, whatever the state of these investor's own morality.

So long as this situation persists in the banking world, gold and silver will be bought as long-term money and honest investments.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2011 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.