“The Ultimate Protection“ in Just About Any Crisis

“It is absolutely critical to buy gold and silver now before investors panic”

Bullion.Directory precious metals analysis 03 April, 2023
By Peter Reagan
Financial Market Strategist at Birch Gold Group

This column opens with a paradox:

Sadly, gold is now on its way to heights which are unthinkable for most people.

To all the people who have asked me over the years why gold doesn’t go up, I have replied: “Don’t wish for gold to go up substantially for when it does, your quality of life will deteriorate remarkably.”

And we are now at the point in the world when this is likely to happen.

Long story short, von Greyerz predicts an imminent collapse of the global debt and asset bubble. “All assets are priced at the margin,“ he cautions – meaning current prices reflect only the most hyper-optimistic scenarios. Unicorns and rainbows forever. Realistic? No – but comforting to those whose wealth is entirely invested in overvalued assets.

How could the prices of stocks, bonds and property fall between 75% to 100%? As von Greyerz explains, all it takes for an asset to go to zero is for it to have one seller and zero buyers.

He thinks the coming rush for liquidity could be much worse. Asset holders will panic to get some liquidity, turning financial assets into cash. But even if they obtain currencies, they won’t want to hold cash. Inflation, remember? von Greyerz believes that, in a combination liquidity crunch and high inflation environment, investors will disdain cash in favor of tangible, inflation-resistant assets. Physical precious metals.

And if gold and silver bullion are already selling out worldwide today, when the liquidity crisis becomes, simple supply and demand forecast a rapid surge in price. It’s basically the opposite of the scenario above — in order for an asset’s price to skyrocket, all that’s needed is one buyer and no sellers…

Let’s take a step back from this scenario and ask how likely it is.

What data do we have backing up these claims? There is currently around $2 quadrillion of debt and derivative liabilities globally that von Greyerz finds beyond rescue. A quadrillion is 1,000 trillion, and it looks like this:

$1,000,000,000,000,000

 
(Let us remember, it was strange to hear the word trillion just a few years back.)

So, against $2 quadrillion in liabilities, what are our assets?

Total central bank assets amount to $25 trillion. That’s less than 10% of global debt even before we consider derivatives.

That sounds absurd, doesn’t it? In a sense, it’s a lot like the Federal Deposit Insurance Corporation (FDIC) that insures the $18 trillion of deposits in U.S. banks with $128 billion of capital. That’s right – your bank deposits are “secured“ by less than a penny of collateral per insured dollar.

That’s astonishing.

Now, the FDIC can get more money – it just bills its member banks. And banks pass on the fee to its customers. (Somehow, you and I always end up footing the bill for financial malpractice, don’t we?)

von Greyerz wraps the column rather ominously:

In the next few years the financial system will crash under its own weight in spite of and also due to the coming biggest money printing avalanche that the world has ever experienced.

What should we do about it? He has an answer for that, too:

Physical gold and silver held outside the banking system is the ultimate protection just as in any crisis.

It is absolutely critical to buy gold and silver now before investors panic into these metals…

So my very strong advice is not to wait for the herd since you then are likely to be left with no silver or gold and no protection.

Owning physical gold and silver outside the banking system makes sense to me, not so much because I’m concerned about the imminent collapse of the global financial system. Because it’s smart protection. I have a fire extinguisher in my kitchen, but not because I think the oven is about to burst into flames.

I pay for life insurance, but not because I think I’m about to die.

In other words, I don’t think it matters whether von Greyerz is right or wrong about “the death of money.“ The prudent will establish smart financial protection for themselves and their families. That protection will work whether von Greyerz’s debtpocalypse sweeps the world or not.

Let’s hope for the best while we prepare for the worst.

Gold reaffirms its safe haven reputation

At Newsweek, Zain Jaffer asks a question with a rather obvious answer: “Has gold lost its allure as an investment?“

I think we all know what the answer is, but let’s stick with him for a moment…

Jaffer lists the economic red flags facing the U.S. today: the debt ceiling. The Social Security crisis. Inflation. The Federal Reserve’s $8.4 trillion balance sheet. The possibility, however unlikely, of U.S. debt default.

As if we weren’t already well aware of the challenges!

He continues:

Experienced investors have been looking for other investment classes to flee to.

Over the past few years, stocks and crypto have been the high flyers because of high liquidity brought about by low global central bank interest rates near or close to zero. Cheap debt, cheap materials and cheap energy fueled strong economic growth for many years. That situation appears to be no longer true now. Hence investors are looking for safer investment classes. One of those is gold.

Jaffer is fairly even-handed in his treatment of gold as a financial asset. Compared to von Greyerz, Jaffer comes off as a level-headed, pros-and-cons kind of guy.

What about the typical anti-gold argument, that it pays no dividends? That it doesn’t skyrocket like an IPO stock? Jaffer says:

While it may not reach as high as risk-on investment classes like stocks and crypto, gold has a long history as a store of value. It may not be the investment that gives you the highest return, but it will almost always be considered precious.

That’s an important point.

We should remember, as William Bernstein instructed us, in investing, risk and return are joined at the hip. “Volatility“ is another word we use to describe risk. Bigger moves in price, up or down, are associated with higher returns. Gold’s lack of volatility is what we might call a feature, not a bug.

Has gold lost its allure as an investment?

Absolutely not. Right now, gold has rarely, if ever, seemed more alluring.

“Gold will continue to be the biggest winner” as global dollar dependency dwindles

One point von Greyerz made above that I didn’t address: the Russian invasion of Ukraine, subsequent sanctions and their impact on U.S. dollar dominance.

He says a Russian triumph in Ukraine would be, in a sense, a NATO loss. Here’s where it gets interesting: the West primarily used financial weapons (specifically the U.S. dollar) to wage this war.

If a weapon fails to stop its target, how powerful is it? Can it even be called a weapon?

The primary effect of this economic war against Russia was an acceleration in global de-dollarization. We’ve discussed this quite a bit recently. Recently, Neils Christensen rounded up perspectives from a number of analysts on this situation. A BRICS currency is going to cause trouble for a U.S. dollar that’s already dealing with a number of home-grown problems.

By this point, it’s clear that any weakness displayed by the issuers of the U.S. dollar or the currency itself plays right into the hands of BRICS. While there is no common currency yet, China settled the first liquid natural gas trade while signing a deal with Brazil to effectively eliminate the U.S. dollar from future trades.

Note: Why were China and Brazil trading LNG in dollars anyway? That’s what a “global reserve currency“ is. Whenever two nations who don’t share a currency buy and sell, they transact in dollars. The dollar has been, since the end of World War II, the de facto unit of exchange for international transactions. In the last year alone, global trading partners have been increasingly enthusiastic about making what used to be dollar-based transactions in anything else, yuan or dirhams or rupees. That means, worldwide, fewer people want dollars – which is a major challenge for the federal government long grown reliant on a steady source of overseas demand for its dollar-denominated debt.

The world is moving, by fits and starts, toward a “multipolar currency system.“ Dollar demand will continue to decline – and with demand, its purchasing power.

Everyone knows they don’t want dollars anymore – but so far, despite China’s aggressive economic treaties, there’s no clear successor to the global reserve currency throne. Central banks don’t want to stock up on an also-ran currency… So what are they doing instead? Christensen tells us:

…many analysts have said gold will continue to be the biggest winner as the world diversifies away from the U.S. dollar. We have already seen proof of this.

In 2022, central banks primarily bought a record 1,136 tonnes of gold to diversify their foreign reserve holdings. While this year might not set another record, analysts expect central banks to continue buying gold en masse.

The French too-big-to-fail Bank Société Générale tells us, “it is maintaining its long gold position in its multi-asset portfolio because of expectations of a weaker U.S. dollar.”

Interestingly, SocGen analysts mentioned the Russia-Ukraine war specifically:

The longer the Russia-Ukraine conflict endures, the faster countries not aligned with the west will be willing to isolate themselves from the USD. This will encourage central banks to continue their strong gold purchases.

Willem Middelkoop, chief investment officer and founder of Commodity Discovery Fund speculates that gold itself may eventually emerge as the global reserve currency of choice:

When the central bankers start to flee towards gold, that’s a very powerful sign that there’s a major distrust in the heart of the financial system.

I can’t tell you what the future holds. No one can.

I can tell you what the past holds, though… Centuries of tradition and precedent that always choose gold as a safe haven in times of distrust, uncertainty and especially crisis.

I don’t know which currency will replace the U.S. dollar as the world’s global reserve currency. I don’t know who’s going to win. I strongly believe that, regardless, gold won’t lose.

This article was originally published here

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