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If gold or silver were do to what nickel did in early March 2022  (see the chart below of March 8th), and if people responded by demanding physical delivery of their gold or silver, many (most?) of the world’s major banks could go defunct almost overnight.

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Why?

For many reasons, one being that banks operate on a gold/silver fractional reserve. That means that nearly every gold/silver bar in their vault has been promised to (and is legally owed to) ten or a hundred or a thousand people (how many exactly, nobody knows, because records are not kept in a way that informs us or even the banks of such information).

So if there’s a bank run and more than one of every ten or more people who are owed physical gold/silver decide to take physical delivery, the banks may not be able to meet their contractual obligations to deliver. They just don’t have enough gold/silver in their vaults to cover all claims, and you can’t get blood from a turnip.

The banks’ only choice in such a scenario would be to breach their contracts and instead offer to settle customers’ claims with the US dollar value of those gold/silver bars.

And the problem with that is, as with Nickel (see the chart above), the dollar value of those gold/silver bars would be mooning in such a scenario. Customers would therefore get paid in dollars that are declining in value relative to the gold/silver they were promised.

But if the dollar price of gold/silver moons high enough (it’s hard to see how it wouldn’t if there were a bank run on the metals), the banks may not be able to cover customer claims even with dollars. This is especially true if ordinary banking customers began withdrawing their money from their checking and savings accounts for fear the banks will be drawn under due an inability to meet their contractual demands for physical gold/silver delivery.

In that case, the banks would run out of money and, absent an enormous bailout, would fail.

Several things would likely happen in a desperate attempt to forestall this. First, as the LME did with nickel, the banks would likely attempt to have many legitimate trades canceled in order to save their own asses.  However, doing this would (or at least should) utterly destroy any remaining credibility the banks have as custodians of physical gold and thereby incentivize even more withdrawals of the physical commodities over time.  

Second, the government would likely declare a “bank holiday” at some point, which is a fancy way of saying that it would close the banks by executive order (it’s done so before) in order to prevent customer gold or cash withdrawals. Banks would close on a Friday (such things usually happen on Fridays) and simply not reopen on Monday. People’s money in the banks would then be frozen for some indefinite period of time, and amounts in excess of FDIC insured limits (and perhaps even amounts below those limits) might be lost forever if the banks fail.

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Third, whether a bank holiday happens or not, the banks would likely (in order to try to save themselves) eventually refuse to settle gold/silver claims even with dollars. Any gold/silver customer who had not then already been paid what they are owed by the bank would likely be forced to sue in order to collect.

But… suing takes lots of time, which is just what the banks would want in such a scenario.  During the three to five years it takes for customers to win in court, the banks would be hoping that gold/silver prices would return to “normal”, the bank run would end, and they’d be saved. In the meantime, their customers would have no or only limited access to their gold and maybe other funds, funds that were likely intended to be available as a hedge in situations like the one the world now faces.

It’s also possible that the US government or the Federal Reserve might rush to the banks’ aid by loaning some of their own gold/silver reserves to the banks to cover redemptions, restore confidence and hopefully end the bank run on gold/silver, but doing so jeopardizes the solvency of the Fed and deprives the US government of one of the world’s most important strategic assets, so it is hard to imagine that they’d go too far with that plan. If a few days of lending physical gold/silver to banks failed to stave off the panic, my guess is that they’d throw in the towel and shoot for a Plan B.

In a worst-case scenario, the government would probably force a “bail-in”. In other words, it would pass a law that converts all or some portion of your gold/silver holdings and bank account balances into stock in the bank, thereby forcing you to become an owner in the bank. This was done in Cypress a few years ago when banks failed there.

A bail-in would deprive you of much of your gold/silver/cash, but it would perhaps make the bank instantly solvent, and it would give you an opportunity to perhaps get some of your lost wealth back if that bank stock performs okay in future decades and if you don’t go bankrupt yourself (due to loss of access to funds) and thereby lose your new bank stock in bankruptcy proceedings.

Why hasn’t a gold/silver bank run happened before? Well, it has, but not in a long, long time. And the reason is that it’s just not practical for most people and corporations to take physical delivery of large quantities of gold or silver. I mean, where are you going to safely store all of those bars if not in a bank vault?

But it is practical for nation-states (and especially those in the nuclear club) to take physical delivery of gold and silver, perhaps even demanding physical delivery of gold/silver in exchange for their much-needed natural resources.  And given the West’s recent freezing of Russia’s foreign currency reserves, nation states taking physical custody of their own gold and silver reserves is likely to become more of “a thing”.  

And if people and companies become panicked enough watching sovereigns take physical possessions of their own gold, the race might be on.  Faced with being the one left holding the bag as physical supplies in vaults around the world are quickly depleted, even many ordinary people may find a way to take physical delivery.  

So, how do we protect ourselves from the above (somewhat remote) possibility? Alas, about the only way is to take physical delivery of your gold and silver now while you still can (easier said than done, I know), and also to get your excess cash (especially amounts in excess of FDIC insured limits) out of banks now while you still can. Why? Because in a bank run that may result in bank insolvency, the first ones out the door are the only ones that get fully paid.

And the sooner one does the above things the better because bankruptcy laws permit banks to “clawback” funds/assets withdrawn within so many days before a bank fails (anyone who survived the Butcher bank failures in East Tennessee knows what I mean).

So, you definitely don’t want to wait until the last minute to orchestrate your withdrawals.  When the financial system comes under stress, it’s far, far better to be early than late.  

But the problem with withdrawing sooner rather than later is that you then inadvertently contribute to the likelihood of the banks failing. In other words, this is a situation where the only way we can protect ourselves from potential disaster is to make the likelihood of that disaster even greater. Unfortunately, that is the game theory dilemma that we all face thanks to fractional reserve banking.