During my tenure as Director of the United States Mint (2006–2011), I witnessed the largest single bank collapse in U.S. history when Washington Mutual shut down in 2008 in the midst of the Financial Crisis of 2007–2008. I also saw how many Americans reacted during this time of uncertainty and the proceeding Great Recession, as during my tenure, gold demand increased 700%, and silver demand rose almost 500%.
Now we’re seeing the fallout from the second largest bank closure in U.S. history with the collapse of Silicon Valley Bank. While this may not be the next Financial Crisis, there may still be cause for reevaluating your asset mix and diversification strategy.
There are important differences to recognize between this closure and those closures that took place during the 2007–2008 Financial Crisis.
One aspect that makes this bank collapse more unique is that Silicon Valley Bank, or SVB, was a niche regional bank specializing in Silicon Valley tech. For these reasons, it didn’t qualify as a “too big to fail” bank for the Federal Reserve despite the size of its deposits. This is also why it might not have been on the Fed’s radar as much as it could have been.
Another factor to consider is SVB’s business model, which was to offer higher interest on their deposits than other institutions in an attempt to attract more business from the tech sector and venture capitalists. Their core customers were mainly venture capitalists and private equity firms needing somewhere to park their cash and tech companies looking to get a better return on unspent capital that they had received from those venture capitalists and private equity firms.
To provide a higher interest rate to their customers, SVB was borrowing money short-term at low rates, then putting the money into long-term government bonds that paid higher rates. The problem started two years ago when the Federal Reserve began increasing short-term rates. SVB was then borrowing money short-term at high rates and putting that money into long-term bonds that paid relatively lower rates. This mismatch was not sustainable—especially once the bank’s depositors showed up looking to withdraw their cash.
While I don’t believe we’re seeing another Financial Crisis, there are consequences of this shutdown that will take time to sort through.
It’s still too early to tell, but I think it’s unlikely that this will turn into a financial contagion like the 2008 collapse of Lehman Brothers or Bear Stearns (which I experienced firsthand). While some level of systemic risk may exist currently, the broader banking system, referred to as “the Big 9,” is much better capitalized, with a greater diversity of clientele and less risk in their portfolios than the banking system in 2007–2008.
However, I still expect a lot of volatility in financial markets this week—perhaps longer—as markets work to digest the impact of the SVB closure and the federal government actions. So while this is nowhere near as bad as the earlier Financial Crisis, it may take a few weeks or months for everything to be sorted out. And until then, we may see volatility and uncertainty, which is often considered a good situation to diversify, especially away from cash, stocks, and bonds and into assets like gold.
One thing I’m certain of is that we’re in uncertain times—which is why I recommend to my friends that they diversify their portfolios with physical precious metals both in and out of their retirement portfolios.
When faced with uncertain times—whether caused by geopolitical stress, war, a systemic collapse, or a global pandemic—many people like to be able to physically put their hands on their wealth or know that enough of their wealth is comprised of physical, tangible assets. And one of the easiest ways to do that is to own physical precious metals like gold and silver.
Knowing that a portion of your portfolio is diversified into physical precious metals, whether at home, in a safe deposit box, or in a gold- and silver-backed precious metals IRA, helps bring both peace of mind and an important level of protection against factors like market uncertainty.
Historically, as stocks, bonds, and the U.S. dollar go down, gold, silver, and other precious metals go up (just as they have in the past few days). So if you haven’t explored the benefits of adding physical precious metals to your portfolio or opening a precious metals IRA, now may be the time to consider doing so and enjoy a little peace of mind.
