Market News

Why Hedge With Gold This Year? Central Banks Are On Board

Economic times are changing, and gold is playing a substantial role for investors and central banks. Due to recent massive purchases from China and Russia, gold sales have reached a six-year high according to the World Gold Council, a leading authority on gold.

Central banks are in a diversification mode away from the US dollar, with gold reserves surging over 145 tons in the past 3-5 months. This figure is a 68% increase from the previous year. The Council also notes increased gold purchasing activities by other countries
such as Columbia, Qatar, and Ecuador. With this overall rise in central bank purchases, gold prices are steadily going up. Ironically, as the central banks accumulate more, retail investors are complacent.

In the meantime, this activity sets up a foolproof scenario for financial institutions and large private investors to accumulate precious metals that smaller retail investors are leaving behind. Effective small investor diversification strategies are instead benefitting central banks and big investors. So, why hedge with gold this year? As the central banks migrate away from the US dollar to hedge against a vastly uncertain global economy, investors should recognize their intelligence. The central banks are well aware of the current movement in gold supply and the fact that small mining companies manage nearly one- quarter of gold production. As well, investors often turn to gold when the economy is uncertain or unstable. Gold is a form of sound money, unlike the speculative form of paper money. There are several other reasons besides central bank actions to consider hedging with gold this year:

1 Stock Market Enthusiasm To Recession. While stock market enthusiasm is at an all- time high given recent trends, so comes the opinion that America is due for a downturn. We felt it in December, but the market made a rapid recovery in early 2019. Historical data shows a slowdown or recession likely every ten years. Many investors find this time, when the party is soon to end, the best time to diversify in precious metals, especially gold and silver. Some call it recession-proofing.

2 Political Landscape Drives Gold. A US presidential election drives gold, regardless of your party preferences. Gold prices tend to rise along with demand in the pre- and post-election months. It is often a time when the gold standard is promoted in lieu of whatever political outcomes please or displease the general American public.

3 The Federal Reserve Failing Us. The Federal Reserve made attempts to normalize interest rates last year, but the Federal Reserve balance remains high, and the cost of living is continually going up. When (not if) a recession strikes, we may not be able to count on the Fed. This drives investors to consider gold as a safe hedge again, the inevitable.

4 The Global Outlook. The World Economic Forum articles indicate that our worldwide geopolitical situation is at more risk

than ever before, with economics and foreign trade tensions some of the prevailing concerns. Potential uprisings between nations lead to monetary repercussions, and that drives the demand for gold for many countries (as seen in the recent central bank actions).

5 The Weakening US Dollar. The US dollar as a world currency is becoming more controversial as countries’ economies fluctuate and international trade agreements waver. Wolf Street states, “The US dollar’s role as the global reserve currency is defined by the amounts of US dollar- denominated assets – US Treasury securities, corporate bonds, etc. – that central banks other than the Fed are holding in their foreign exchange reserves.” They go on to say,
“To diminish the dollar’s role as a global reserve currency, these central banks would have to dump the dollar.” The fact
is, central bank holdings are as low as they have been since 2013. This fact drives the desire to hedge with gold, as it rises and the dollar depreciates.

6 Living Expenses on the Rise. As the cost of living continues to rise in many cities, some middle-class Americans feel the pain. Many families find it challenging to withstand everyday living expenses, and yet wages rarely change to keep up with inflation. These are times when gold inspires small investors as a safe haven asset and long-term strategy.

7 Historically, Gold is Safe Money. Interestingly, gold has surpassed the test of time, while many alternative forms of currency have come and gone. According to J.P. Morgan, “Gold is money. Everything else is credit.” The central banks own significant amounts of gold; why wouldn’t the small investor get on board before the prices skyrocket. In fact, in 2019 alone, the central banks acquired up to 651 tons of gold. While the overall goals of central banks may not be the same as they are for small and large investors, everyone shares a common philosophy: hedging with gold in the case of economic and geopolitical uncertainties is a responsible move.

Keep in mind; the Federal Reserve still holds the largest gold reserves in the entire world. The adage that states “you want what you can’t have” is not yet the case. The reality is, gold supply is on a slow decline while gold production is decreasing; this, in turn, is leading to increasing gold prices. The reasons banks and investors turn to gold are not always obvious or expected. There is no wrong time to invest in precious metals. Whether we face an economic boom or bust, gold is still a proven investment. Hedging with gold is fast becoming a popular solution for uncertain economic times, but the time to invest might be this year.

Market News

Does the Dodd-Frank Act Contribute to Legalizing Banks’ Confiscation of Funds?

With recent news predictions of another upcoming banking crisis like the last one (in 2008), remedies are in place to prevent taxpayers from having to bail out the banks again. Unfortunately, though, large banks on Wall Street can use depositor funds to bail themselves out internally. This bail-in approach is in part due to the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act was put in place in response to the 2008 financial crisis, passed in 2010 by the Obama administration. It includes provisions such that if you hold money in checking or savings accounts at a particular bank that happens to collapse, your funds may legally be frozen and confiscated to retain the bank’s financial solvency.

In other words, rather than rely on taxpayer money to prevent bankruptcy, the bank can depend on your accounts for stability. Then, as compensation, the bank exchanges your money for company shares in the same value. This may not seem ethical, but in fact, THIS IS NOW LEGAL! Consider a banking institution that takes on too many risks and faces bankruptcy. If the economy takes a nose-dive, the simple truth is this bank now can confiscate your funds to save itself. This may not seem like an ethical process, but the Dodd-Frank Act legalizes what is called the Orderly Liquidation Authority (OLA). See Dodd-Frank: Title II – Orderly Liquidation Authority.

When you establish checking and savings accounts, your deposits to fund these accounts is money that mostly belongs to the bank legally. You may be asking, “Who owns my money?” The answer is that you own an IOU issued in the bank’s name. The bank considers your money as an unsecured debt, and Dodd-Frank language says your derivatives, or high-leverage assets, are more important than your income accounts when they need to pay off their debts.

Your deposits are essentially secondary to counter-parties for these derivatives. It is possible the Federal Deposit Insurance Corporation (FDIC) may be able to help you, but their billions in assets are overshadowed by outstanding derivative values in the trillions. Deposits are generally protected via insurance limits as high as $250,000, but this is only in the case that the FDIC has the funds to cover all their account holders’ deposit claims. This could be huge.

Take some of the major banks that have integrated financial securities (derivatives) with deposits. Many of these institutions have deposits that go over one trillion dollars. With outstanding derivatives of vast amounts in a situation where the banks become insolvent, bail-ins would be imminent. With the Dodd-Frank Act in place, the banking system is allowed to freeze funds and take up to 50% or more or your direct funds as was the case in the Republic of Cyprus financial crisis of 2012. This was an effort to save the bank.

The fact is, any money you store in a banking institution now becomes an unsecured debt, and you become an unsecured creditor that is called on to share in the burden of a bank loss. You have little- to-no legal recourse.

You may have invested with a secure institution in which you’ve been guaranteed the survival of the bank even in financial crisis, but banks are likely to help pay for the recuperation of other failing banks. It is highly likely that banks will not absorb associated costs but rather pass them to customers. Consider that the low and middle class will likely be affected the most by the Orderly Liquidation Authority. Since the wealthy hold most of their money in debt securities, precious metals, equities, and real estate, the impact may not be as high. Low and middle class tend to hold their money in checking and savings accounts, placing them in a vulnerable position. Even a bank safety deposit box is not secure. The Dodd-Frank
Act gives the right for banks to confiscate those funds in and use them as needed. Retirees who receive a pension are subject to this confiscation of funds as well. As a pension-receiving retiree depending on checking and savings account funds, you could find yourself in a vulnerable position.

One asset that banks cannot touch includes your reserve of precious metals, generally in the form of gold or silver. One advantage of precious metals is they are safe havens against economic crises and inflation. You would need to store these assets privately, so they are not subject to confiscation and/or conversion. In the event of a banking crisis similar to that of 2008, you can protect some of your assets if you convert them to gold and silver in a private storage scenario. A tangible asset you can touch may provide peace of mind over the money you never actually see.