April Fools’ drop dead date for the Volcker Rule – what it might mean for Gold

By: Michael_J_Kosares

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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By Michael J. Kosares
Michael J. Kosares , founder and president
USAGOLD - Centennial Precious Metals, Denver

Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business.  He is also the editor of Review & Outlook, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion.  If you would like to register for an e-mail alert when the next issue is published, please visit this link. 

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