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Confessions of a Gold Analyst: Fear Mongering About Our Banking System – Part 2

How does Dodd/Frank affect your bank deposits?

First, let’s review what happened in Cyprus so we have a basis from which we can work when we look at the situation in the United States.

When the financial crisis hit the Cypriot banks, which were already in a poor fiscal position after the conversion to the Euro, there was no bail out being offered, much of the reasons for which seem to have been political in nature.  As a result, two of the largest banks were on the verge of closing.  Ultimately, Laiki Bank had to be wound down, and the depositors of that bank lost most of their uninsured savings.  However, the Bank of Cyprus, rather than wind down as well, entered into a restructuring, and utilized the cash held from depositors for the funds needed to effectuate the restructuring. The depositors were issued shares in the newly restructured bank in return for their deposits which were used for the restructuring.

Since that time, I have seen way too many articles that have suggested that the Dodd-Frank Act, passed in 2010, “codifies” the “bail-in” we witnessed in Cyprus within our US statutes.  Let’s ignore the fact that the Cyprus reorganizations occurred in 2013, whereas this legislation was written and passed well before this occurred. 

As a lawyer, I have reviewed the sections to which these articles point to support their propositions, but what they claim is simply not true.  In fact, the sections of the Act to which they point to support their proposition only reiterate sections of the current Bankruptcy Code which provide for the orderly winding down of a bank should the bank have to file bankruptcy. 

Now, I am not a legal expert in Bankruptcy law, although I have been published in Law Reviews regarding various tax issues within bankruptcies.  But, my expertise is clearly limited in that arena.  Furthermore, I will not claim to be an expert on the Dodd/Frank Act, as it is a massive piece of legislation and I have not been able to review the entire document. 

I do want to add, though, that I have reached out to my contacts in the legal world who may be interested in writing a law review article with me discussing this very issue.  I will notify you if we ever publish such an article.

However, I have reviewed the sections to which the mainstream authors point when they make their above noted assertions that the Dodd/Frank Act codifies the “bail-in” restructuring.  And, based upon such review, I do not feel those assertions are supportable.  When I have challenged several of the authors that suggest otherwise, none of them have responded to me with anything to support their assertions.  So, if someone reading this article can present me with evidence that Dodd/Frank codifies a “bail-in” restructuring of banks, I would be more than happy to review it.

Ultimately, after reading many articles about how Dodd/Frank “codifies” bail-in’s, I find no such reasonable evidence to support that assertion.  Rather, it seems to just be reiterating current bankruptcy law, which has been on the books for quite a long time, and certainly well before we experienced the 2008/09 financial debacle. 

While I have just given you my thoughts regarding Dodd/Frank, I want to stress that I think this was an entirely academic exercise. We are still a far cry from my being able to claim that you will be made whole should we see another systemic break down, and the FDIC is unable to backstop all the funds at risk.

Remember, depositors will be left in the cold should we see even worse systemic failures than witnessed in 2008/09, especially if the FDIC will not be able to backstop those losses if they become more overwhelmed than they did in 2008/09.  So, whether or not Dodd/Frank provides for a “bail-in” is more of an academic exercise. 

In fact, as a former lawyer with a significant amount of mergers and acquisitions experience, I would even argue that the depositors may prefer a “bail-in” in such a scenario.   Under such extreme circumstances, a “bail-in” at least preserves the “good” assets of the banks, and gives them future hope of being able to recover more of their losses than they would have otherwise been recognizing.  The alternatives truly leave them nothing in their unsecured status, so providing a restructuring using a “bail-in” type of deal places them in a better position than as a standard unsecured creditor.

What does gold have to do with all this?

Now we move to the crux of the issue as it relates to gold.  Many believe that during times of fiscal stress, gold will skyrocket.  But, I have to say that their perspective is not based upon historical data.  In fact, the historical data completely contradicts this perspective.

Back in 2008, the folks at Elliott Wave International published a study that showed that in 10 out of 11 recessionary periods since 1945 gold experienced a negative total return.  And, if we look at the period of time between May 2008-March 2009 (during a major decline in the equity market due to turmoil in the banking industry), we witnessed the metals also experienced a significant decline. In fact, gold lost a little more than 30% during that time. So, when one is presented with these facts, can you really believe that metals are the "safe haven" everyone claims they are during times of financial crisis?

Well, based upon history, the answer is clearly “no.”  But, from a sentiment standpoint, I don’t believe the metals were in a position to “benefit” from the turmoil in the financial markets.  But, I am actually going to dare and state that next time may actually be different. 

You see, the metals are now completing a very large correction, which, if I am correct, is setting them up for a multi-decade rally.  Does that mean I am expecting the end of civilization around the corner?  Absolutely not.  In fact, I think it is going to still be a number of years until we see the type of stress we witnessed on the banking sector in 2008/09.  But, we may be setting ourselves up for a period of time where all risk assets – including the precious metals – will rise together.  And, when the equity markets hit the next major bump in the road, the metals may simply continue on higher.

If you want to discuss these matters further, feel free to take a free trial and join us in our Trading Room at

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By Avi Gilburt



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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