Most safety nets have holes. Usually, these holes are too small for those landing in the net to pass through. Today, there are large holes developing in the safety nets of our financial system. A few openings are so great that they may not be able to break the fall of some of the largest financial institutions. Famed investor Warren Buffet, known for having positions in Goldman Sachs and JP Morgan, has recently sold most of those holdings. His company, Berkshire Hathaway, is sitting on a cash pile of $137 Billion - a new record. Why would he now sell banking stocks that he purchased at the height of the Great Financial Crisis in 2008? Apparently he believes they have further to drop, after dropping 30% in the first quarter. He says we should not give up on the American economy or American stocks, but his actions are currently speaking louder than his words.
Indicators Flashing Red
If history is any guide, the “Bloomberg Consumer Comfort Index” indicates we may see stocks enter into a bear market for several quarters (see graph below).
Mind you, I do believe Mr Buffet is making the right decision, and am sure he will at some point redeploy some of that cash back into the markets. But for now, I think he sees tough times ahead, even for the big investment banks that were previously thought “Too Big To Fail”. Which brings us to the point of this article. If banks considered Too Big To Fail are at risk of at least a precipitous drop, and apparently no other industry appears safe enough to invest in currently, where can the average person safely deploy their savings?
In the same place that individuals and governments have been for thousands of years. Gold (and to some extent Silver) are dense enough to provide a secure safety net, with holes too small for their owner to fall through even in the worst of times.
But why Gold? Why would an individual or government want to hold Gold as a safety net for troubled times? You cannot eat Gold, in the same way you cannot eat currency, nor a stack of Treasury Bills. But Gold can help make sure you can eat later. Or in the case of government, can help ensure you can purchase whatever goods and services your populace may need later. While more volatile than Gold, Silver can also help in this role. An ounce of Silver in 200 BC, could be exchanged for a similar amount of grain today as it could back then. Meanwhile, there is not a man made currency from that time that still exists, to try to purchase grain with.
A more recent example might prove more relevant. Minimum wage in 1964 was $1.25, when quarters were last made of Silver. The cost of everything has gone up since 1964, in Dollar terms. Using the government’s inflation measurements, $1.25 in 1964 equals $10.40 in 2020 Dollars. But those 5 Silver quarters which were worth $1.25 in 1964, are worth $21.00 today - based on the value of the Silver content alone. While many are clamoring for a $15/hour minimum wage, we would actually be better off with $1.25/hour, paid with Silver quarters.
What Can We Do With Dollars?
But what can be done for those of us that are not paid with Gold or Silver? Most people worldwide are paid in their local currency. Most transactions between governments, or between corporations, are conducted with a national currency. But the safety net of many nations and individuals worldwide, and of an increasing number of Americans, is woven with Gold and/or Silver. Gold has been on the books of the American republic since the days of our founding. As the issuers of the World Reserve Currency, we hold the largest official Gold reserves of any nation, totaling over 8,000 tons. Citizens of India and China have maintained Gold and Silver as important personal assets for thousands of years. Russia has been selling US Treasury bonds, while purchasing Gold for their reserves.
Why do individuals and nations want to hold a shiny metal they cannot eat, that is rarely used to complete transactions in?
Because in times of financial or economic upheaval or catastrophe, the cost of agricultural products, raw materials, and finished goods tends to rise or become unattainable in local or national currency terms. When global supply chains break down, as they seem to be now, paper currencies often do not provide confidence, or an accurate measurement of value. This is when Gold and Silver step in, providing a safety net underneath the personal or national assets of the owners or holders thereof.
Back to our original example of Warren Buffet and the sale of Goldman Sachs, what is different this time? Back in 2008, the Federal Reserve implicitly committed to placing a “safety net” under the banking industry, and have kept it there ever since. FED Chairman Jerome Powell recently said on a 60 Minutes interview that the FED will create as much digital currency as is needed, to keep the financial system running smoothly. They have already in 2020 created more currency than was created in the TARP bailout during the Great Financial Crisis of 2008. Why does Mr Buffet not trust the safety net this time, and what does this mean for the rest of us?
Golden Safety Net
There are huge holes in the safety net developed by the Federal Reserve, and Warren senses it. Even though there seems to be an implicit Federal Reserve safety net under Wall Street, the damage to the currency itself may outweigh the effects of any market gains. Mr Buffet obtained a net gain of $3 billion on Goldman Sachs, from an investment of $5 billion. That is a 60% return, on a 12-year investment that was largely backstopped by government guarantees. What if he would have bought Gold instead, which has no government-provided safety net? The same $5 billion investment would have purchased 5,649,717 ounces of Gold on this day in 2008. Sold today, this would be a gain of $ 5.412 billion, or 108%!
In other words, a 12-year investment in Gold (with no safety net) outperformed an investment in one of the most storied investment banks (with government-provided safety net). The Federal Reserve has told us repeatedly in the last couple of months that they can provide a nearly unlimited amount of currency, to help the economy and financial markets through this crisis. They have even begun to purchase corporate bonds, and bond ETF’s, to keep that sector from imploding. With all this currency providing a “safety net” for investors, why are some of the most successful investors exiting the markets? Perhaps because they sense a greater market decline is near, or that any gains achieved will be offset by a greater loss in the purchasing power of the currency used to keep track of those gains.
As has been true many times before, so it is again. Turns out that one of the most effective financial safety nets for individuals and nations alike, is made of Gold. Thankfully for us all, Gold and Silver are still available for purchase here in these United States.