The 2008 crisis was a result of multiplying Risks (Model + Concentration + Leverage) by illiquidity, which lead to Counterparty Failure. There were faulty model assumptions behind subprime bonds, which triggered large losses at several key market makers and thus liquidity was gone. All major financial counterparties could not perform and so, the financial system collapsed requiring massive overnight bailouts. In 3 out of 3 broker-dealer bankruptcies, customers’ assets were lost and/or sequestered – Lehman, MF Global, Refco.
Today we are still running on this same model – what are the implications?
- A model-dependent, levered, concentrated system is inherently fragile.
- Systemic failure cannot be hedged within the system.
- Ability of the counterparties to pay depends on the system being sound.
Gold Bullion – Asymmetric Option without Counterparty Risks
Significant advantages over derivatives:
- No margin calls, no counterparty risks, no expiration. Bullion has never been worthless.
- Derivatives track nominal prices; gold tracks confidence and purchasing power.
- Annual costs are attractive versus negative real rates or shorting risks.
Versatile hedge with asymmetric upside:
- Gold has soared during deflation (1930s), inflation (1970s) and systemic instability (2000s).
- Price is levered to confidence – whenever confidence wavers, demand soars and supply dries up.
- Bullion is heavily under-owned in the West; the East is aggressively accumulating.
- Overwhelmingly bearish sentiment creates asymmetry at current levels.
Gold’s intrinsic value – independent, global liquid buying power
- Gold is not tied to any country, financial system or counterparty – it is no-one’s liability.
- Gold is genuinely scarce – annual mining production only adds ~1.5% to the existing stock.
- Gold bullion is the most recognized, readily negotiable asset in the world.
- The only tangible, liquid non-financial asset that is practical to own outside the financial system.
- Bullion is liquid at transparent prices across the world’s financial centres, without exception.
An Effective Bullion Strategy Requires Global Access and Infrastructure
Global reach is needed to access uncorrelated liquidity sources and exit strategies. The ability to execute, especially in a crisis, requires multiple active relationships, which are made more difficult in an ever expanding KYC/AML regulatory environment. Further, growing regulatory risks cause many counterparties to shy away from dealing with non-commercial customers. Lastly, we have the ever growing FATCA to wrap the bow around the KYC, AML, Source of Wealth and Source of Funds factor set.
A True Financial System Hedge Requires Real Gold Ownership Without the Financial Risks
No dependence on financial counterparties or infrastructure, do not use leverage (remove rehypothication risk), avoid derivatives or any other financial instruments claiming title to gold.
Last but not leas, if you plan to own gold in addition to having gold coins at home, be sure you choose fully insured storage within commercial vaults around the globe.
Imagine plugging your house backup electric generator into the electric outlet of the home itself?
Gold is your natural gas or propane. Gold is a hedge, that’s what it is!