Gold continued to rally last Friday, climbing 35 dollars to $1,190. Then, a week later it rose to $1,207.60 after China cut interest rates. More interesting developments in the financial news and around the world continue to show that gold is in demand as a valuable financial insurance. Let’s look at some of those events…..
Last weekend the G20 nations formally announced new banking rules that have been in the making for a long time, whereby banks will no longer recognize your deposits as money. These rules make bank deposits part of the banks’ capital structure, on par with paper investment, subjecting account holders to the declines that are experienced from holding a stock or other security when the next financial banking crisis occurs. And all G20 member nations will pass legislation that will fulfill this program. According to Russell Napier of Zero Hedge, depositors with more on account than would be covered by deposit insurance would be “just another creditor fighting to regain their share of the assets of a failed bank.” This will place bank depositors as the primary instrument of the next bailouts when the next crisis occurs, as happened in Cyprus in 2011 (See September 2014 newsletter). Though the rule applies to accounts over $250,000, including business accounts, money market accounts, and any depository investment, FDIC has less than one percent of the huge number of deposits it “insures”. A massive run on the banks would result in insolvency as they could only muster 10 percent of the cash they owe their customers.
Around the world, many of the world’s largest economies are slowing and troubled. Japan, the world’s third largest economy, has entered yet a third recession, with the yen down 1% vs. the dollar on Wednesday. The yen is beginning to hyperinflate. Japanese banks are loaded with Japanese stocks and bonds, the way our banks are loaded with Treasuries, making it difficult for them to survive a yen collapse. It is possible that a Japanese banking system collapse could translate into massive derivative losses and short term funding losses in the U.S. banking and hedge funds, as U.S. banks have massive credit exposure risk to Japanese banks.
China’s giant manufacturing is slowing-from 10.4 percent in 2010 to an estimated 7.5 percent this year. Hence its move to cut interest rates to support economic growth. China has been driving much of the world economy for the past decade, so its slowdown is having ripple effects. China has strong trade links to U. S. and Europe, so weaker growth could hurt the West. The Eurozone, the world’s second-biggest economy, trailing only the U.S., is struggling since it emerged from recession last year, and has expanded by a mere 0.2 percent in the third quarter, thus casting a pall over the global economy. National debt levels are perhaps double what they were before the (2008) crisis,” said John Whittaker, an economist at Lancaster University’s Management School. As a result, the dollar looks strong against these other currencies. However, America’s foreign debts are already larger than those of any Great Power since the corrupt Ottoman Empire a century ago and are accumulating at a rate of more than $1 billion a day.
And tensions reminiscent of the Cold War have been stirred over the past few weeks when Russian military aircraft have been spotted flying near European airspace in an apparent attempt to intimidate European countries and NATO allies.
Did you know that many corporate insiders are dumping their stock shares at a pace not seen since 2000? Warren Buffett is currently sitting on over $50 billion in cash. Buffett’s partner Charlie Munger recently commented that he has not bought a single stock in his personal portfolio in over two years, and Goldman Sachs shorted its stocks on 9/11.
What is one way to buy some financial insurance while these financial storms brew? Invest in gold and silver. In fact, Joe Wickwire, a research analyst and portfolio manager at Fidelity Investments, one of the largest mutual fund and financial services groups in the world, speaking at a conference in Lima, Peru, presented arguments as to why now is the time to buy gold. He stated, “I believe that now is a good time to take advantage of the negative sentiment short-term trading sentiment.” Mr. Wickwire argues that, from an asset allocation standpoint, actual gold market fundamentals are not linked to transitory U.S. stock market volatility or whether or not the dollar moves up or down against the euro or the yen. Those items can be the basis for short-term trading strategies but not for long-term portfolio construction.” He also emphasized that, while precious metals may respond to market volatility in the short term, in the longer term the fundamentals are sound. Mr. Wickwire compared the conditions now behind the surge in gold price from 2001-2008, and concluded that similar dynamics are currently in operation, including negative real interest rates, countries using currency as a policy tool to support nominal growth at the expense of real growth. He also pointed out that supply from the gold industry is starting to come down, as I pointed out in my last blog. So Wickwire recommended owning gold as a form of financial insurance, concluding that, “A little goes a long way. If you had 5-10% allocation in your portfolio from 2000 to 2010, you wouldn’t have suffered a lost decade.”
Fiat currencies come and go. If the dollar and the euro collapsed, what currency of exchange would be left? The one that has stood the test of time for thousands of years- gold. Everyone likes to buy an item when it is on sale, and precious metals are on sale, but the prices won’t stay low for long. Call one of our precious metals experts today and get started on protecting your financial future.
I will be keeping a sharp eye on the market, and I encourage you to do the same!
Listen to my interview this past Friday afternoon with Sinclair Noe at KFNN MoneyRadio 1510 AM Phoenix regarding this topic by clicking the play button below.