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It could get to be interesting as we
move into the end of the month. The Volcker Rule which limits
banks’ speculative investments (including gold) goes into effect April
1, 2014. There has probably already been quite a bit of adjustment to
bank portfolios, but those who have held out will need to make their moves
before the deadline.
In conjunction with the implementation
of the Rule, there has been an exodus of talent from the banks. The
latest heavyweight departure came yesterday when Jamie Dimon’s
closest aide, James Cavanaugh, left JP Morgan for the Carlyle Group, a
private equity firm. Cavanaugh was considered Dimon’s
heir apparent. Says this morning’s NYTimes,
“Mr. Cavanagh’s decision to give up a chance at eventually
running JPMorgan signals how running a large bank has become less attractive,
considering the regulatory hurdles and heightened scrutiny that have dogged
Wall Street since the aftermath of the financial crisis.”
Financial Times reports this morning
that the big banks have been hit with nearly $100 billion in costs and
settlements related to the lending scandals. Those costs come before
the banks face the even bigger potential problems associated with various
market manipulations, including the forex markets, interest rates and gold.
All of this could accrue as a big
positive for the gold market as we move into the second quarter of the year,
and we will be monitoring events here at the USAGOLD Blog if you would like
to stay informed.
The big trading banks traditionally
have occupied the short side of the paper gold market. Some feel those
positions will be handed off to the hedge fund business so things won’t
change much. On the other hand, hedge funds are not considered too big
to fail, thus their bets could be placed more evenly on either side of the
market.
Presumably, hedging activities offered
by the banks as brokers are still allowable under the Volcker Rule, and it
will be up to regulators to determine whether or not a trade is speculative
or a hedge placed in behalf of a client. That might be easier to do than some
think in that regulators might look closely at the net position of banks by
the end of any given trading day. The position of the bank should be
flat — and provably so.
All of this makes the upcoming April
Fools’ Day 2014 something of a watershed for Wall Street and trading
business. Whether or not the banks truly give up the speculative
activity remains to be seen, but the wholesale exit of traders to the hedge
funds and private equity firms might provide a clue as to what is going on
behind the scenes and what the big guns are thinking. (Cavanaugh is just one
example.)
Once again, the important factor is
that the hedge funds will pay their losses out of pocket without the benefit
of the government and Federal Reserve’s safety net — at least
that’s the intent of the Rule. We will see how that aspect of the
plan works out the next time the financial sector toes the cliff, but between
now and then we could see a slow evolution of a more balanced approach to the
gold market than many expect.
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– USAGOLD’s Review & Outlook, edited by Michael J. Kosares, the author of the preceding post, the founder of
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