Added 3/29/14:
As it turns out, and unbeknownst to me when I wrote the post below (which
has now been edited), the Federal Reserve has extended the term for full
compliance with the Volcker Rule to July 21, 2015 with an effective date of
April 1, 2014. I hope my readers will forgive the oversight on my part.
Though the sense of urgency conveyed in the original post is removed courtesy
of the extended compliance period, my conclusion remains the same: I
view the combination of the Volcker Rule and investigations into bank’s
trading activity with respect to the gold market as major positives for gold
going forward.
For the record, the first link below goes to the OCC’s announcement to
banks summarizing the final regulations for the Volcker Rule published March
25, 2014. The second link goes to the full text of the Volcker Rule as
published in the Federal Register – all 271 pages of it.
• Office
of the Comptroller of the Currency Bulletin 2014-9: Final description Volcker
Ruleker
• Prohibitions
and Restrictions on Proprietary Trading and Certain Interests in, and
Relationships With, Hedge Funds and Private Equity Funds
______________
by Michael J. Kosares
In conjunction with the implementation of the Volcker Rule (effective
April 1, 2014 with full compliance now scheduled by July 21, 2015) 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.
If you are looking for a gold-based analysis of the financial markets and
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