Money, Metal and Margin Calls

The dreaded event for an investor is getting a margin call from a brokerage. This means he has miscalculated his use of leverage, be it a trade or financial bet. Earlier this year several large banks had a “margin call” because they had too many US Treasury bonds on the balance sheet. The 40% decline in value killed their capital structure and they became insolvent, requiring a government bailout.

Bank solvency has become one of my prime concerns as I structure my personal and family finances. Naturally, this comes up in discussions with clients. Investigating banks leverage, keeping account balances under FDIC coverage limits, and spreading accounts between several institutions are good starts. It is my belief that we will see many more bank failures, and the tool of “bail-ins” will be a feature for “saving” the system. In bail-ins, banks use money from unsecured creditors, which includes DEPOSITORS (like you) and bondholders to restructure their capital. Mechanisms for this practice have been coded in place by the Dodd-Frank legislation from a few years back. 

The bond markets have shown, wit rising interest rates, that risk appetite is waning. This has also shown up in a peaking stock market. This peak optimism allowed unicorn stock bubbles and unlimited fiscal spending, resulting in more money borrowed. Fleeing bad debt and debt payments has given the U.S. Dollar a rally. Get rid of the trash and give me something real is the operative theme now.

Well, did you notice how precious metals rallied? Gold is Money. It isn’t debt. Have you seen who is buying? Central banks are, especially China.

Return now to the banking discussion. We use banks to keep transactional cash to make purchases and pay bills. However, the function of banks providing a holding spot for savings has now become quite risky. Monetary inflation is destroying the purchasing power of our “accounting units,” also known as Dollars or Euros. Debasing the currency leads to owners of paper assets to sell and be ahead of the devaluation. The smart money will leave paper assets for “hard assets,” such as precious metals, land and other physical assets.

Holding precious metals outside of banks will be the simple way to protect against FIAT risk, and I am not talking about the Italian car.

Gold and Silver are talked about all the time in this environment, but I wanted to bring your attention to another interesting metal’s turning point for price. Palladium.

Palladium is rare and considered one of the four main precious metals. Palladium and its brother platinum are also known as industrial metals. Their unique properties as catalysts are essential. They are mined in South Africa, Russia, Zimbabwe, Canada and the USA. You can see the political risk with some suppliers in unstable countries.

I recently surveyed long term price charts for platinum and palladium and was especially struck at how oversold Palladium is. The chart below uses exponential price charting versus arithmetic prices. Long term periods smooth out better this way.

Note : The price range of $800 to $1,000 is a buying opportunity for palladium. Not shown, but I would say for Platinum, $700 – $900 is a buy.

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