Why Precious Metals Can’t Truly Be Manipulated

Gold and silver are currently the best investment and wealth hedge compared to stocks, mutual funds, bonds, and cash. In the first 10 years of the 21st century, gold surpassed all other asset classes by a mile! Common sense suggests gold and silver will be the best assets to hold during the inflationary actions that will be taken by the central banks worldwide throughout the 2010s.

stock manipulation, market manipulation, bubble

Stocks and equity markets will continue to have problems for two reasons:

1. Baby boomers are retiring, which means they’re pulling money out of their retirement accounts rather than putting it in. This widespread selling will put downward pressure on the entire equities market.

2. The general public is nervous about a repeat of 2008 and losing their wealth to another crash. After watching 50% of their portfolio vanish in months, their patience is not nearly what it was when they were told to just hang on and wait it out. The next time there’s a crack in the system that leads to a panic, the likelihood is the bottom will fall out and we’ll see an even bigger correction than in 2008.

Derivatives

According to Richard Duncan, noted World Bank economist and author of The Corruption of Capitalism, there are some $700 TRILLION worth of derivatives still in existence worldwide. These things have been called financial weapons of mass destruction.

Derivatives include a wide range of “assets” from a credit default swap or a mortgage to options and futures for everything from soybeans to interest rates. A lot of these derivatives are toxic – i.e., worthless – and yet they’re still held on banks’ financial statements at full value. Eventually, they’ll be exposed for the worthless paper they are, and the losses will have to be absorbed by someone. When that happens, companies will fail, stock values will fall, and markets will be shaken. Just a 1% loss on those derivatives is $7 trillion!

Bonds

Bonds have been in a bubble lately and are poised to collapse. Bond prices had been stable for decades, and people have generally trusted in them and used them to provide cash flow. In the recent past, they even increased in value as interest rates were lowered. The problem today is that interest rates can’t go any lower, since they’re nearly at zero. They have only one place to go, and that is up. When rates go up, which is 100% certain, the price of previously issued bonds will decrease, collapsing that market.

market crash, bubble burst

The inverse relationship between interest rates and bond values is well known, but not being talked about by the Federal Reserve or Wall Street, despite the fact that the policies of the Fed are setting bonds up to collapse in the coming years. Foreign investors are getting increasingly nervous about holding American debt and are starting to cut back. They’re moving to more secure assets like gold and silver. As they do, the government will need to attract new debt holders. Thus, the government will be forced to raise rates, and the bond market will collapse under its own weight.

Real Estate

Many experts, including Robert Schiller and Peter Schiff, predict residential real estate prices will stay low. The price of real estate is highly susceptible to interest rates and government policy. Recent government programs temporarily spurred residential activity, but tough lending standards and the ending of some of these government programs caused activity to slow. As loan rates move up, the exact opposite will happen to prices. The American people are loaded up to their eyeballs in debt and simply cannot afford to pay higher mortgage payments. Since people cannot afford more, their payments must fall – and there’s only two ways for that to happen: lower interest rates or lower house prices. It’s far more likely to be prices that fall than interest rates, which are already historically low.

Along with home prices, commercial property is on the verge of a collapse in many locations. During the go-go 2000s, the easy lending and constant lowering of interest rates pushed development to hysterical levels by speculators. Now there’s a glut of space available and not being filled. The value of commercial buildings is directly related to revenue streams that landlords receive in the form of rent. As those streams dry up, so does the value of the building. Commercial real estate will get pummeled as this correction plays out.

Counterparty Risk & Cash

Precious metals are one of the only assets that don’t carry any type of risk originating or triggered by another party’s actions or inactions. Any asset or investment you own that can be impacted by the action of another party and lose value has counterparty risk.

corzine, mf global, legalized theft

Cash is not safe. As of Fall, 2010, the FDIC has identified more than 100 at-risk banks that it put on its “problem list.” When JP Morgan bought Bear Stearns, they were allowed by the Federal Reserve and FDIC to hide $400 BILLION worth of suspect assets and keep them off the balance sheet. Who’s going to be responsible for the losses when those assets collapse? Taxpayers and holders of U.S. dollars are going to be hit with that responsibility.

Fundamentally, counterparty risk means that you have an investment that relies on some other party to perform an act for you in order for you to receive your investment back or your return. For example, if you’ve got an insurance policy, there is counterparty risk. The counterparty is the insurance company. If they go out of business and your house burns down, you may be out of luck.

Here’s another example that’s very personal for me. In 2011, the financial system saw a criminal example of counterparty risk when MF Global collapsed. This brokerage firm misplaced over a billion dollars of client money that was supposed to be in trust accounts, untouchable by the firm, by law! The CEO, Jon Corzine – a heavily connected former U.S. Senator, Governor of New Jersey, and Goldman Sachs executive – swore under oath to Congress he had no idea where the money went. The clients of MF Global, including me, had cash with them that we used to hedge short-term risks. All the clients relied on the firm holding client money in a separate, secure, untouchable location and not playing games or using it illegally. This type of illegal activity is a clear form of counterparty risk.

Counterparty risk doesn’t exist with gold and silver, because you hold your own physical gold and silver. There’s no other party involved. Nobody can do anything that’s going to impact your actual assets. You’re holding it. It can’t just go away or be stolen by hackers. Gold doesn’t make bad investment choices. Silver will not file for bankruptcy because it made a bad decision. Gold and silver are only affected by the real market of supply and demand.