In my postcode of Darien, Connecticut, US, it’s not unusual to bump into a billionaire every now and then.
When I ask what they own, they’ll start to list stocks and bonds of various types. At that point in the conversation, I’ll interrupt and say, ‘You don’t own stocks; you own electrons.’
Most wealth today is in digital form, recorded on hard drives and transferred through routers and servers in dispersed locations. What if those servers were hacked and your electronic wealth were erased? Where would you go to get it back?
If you think this can’t happen, guess again.
SWIFT is a ‘secure’ global messaging network used by banks and other financial institutions to send payment instructions. It’s become a vital part of the global payments system, serving 11,000 banks.
And it’s been hacked, as has the ‘safest’ bank in the world, the New York Federal Reserve.
So the most secure financial message traffic system in the world and the safest bank in the world were both hacked, and US$81 million disappeared into thin air.
If it can happen to them, it can happen to you. The solution is to own physical gold. It’s one asset that can’t be hacked, erased or made to disappear.
That’s not to say you should call up your broker and tell him to sell all your stocks. Not at all. Stocks form an important part of a well-balanced portfolio.
But you should also have physical gold as insurance.
Below, I show you why gold might be the best form of insurance you can buy.
Your wealth is far more vulnerable than you think. How vulnerable? Read on…
I recently returned from Switzerland, where I met with the head of the world’s largest gold refinery.
A refinery takes gold in one form, processes it and sells it in a different form, usually a more pure form.
He told me he has a waiting list of customers. Those customers want to buy more gold than he can produce. He’s working at three shifts, twenty-four hours a day, to produce gold and he still has a waiting list for customers.
His problem is he can’t find enough gold, whether it comes from miners or existing gold bars that aren’t quite the quality the buyers want. And my contact is a very senior veteran of the gold market who’s been in the business for 35 years. My talk with him showed that the physical shortage of gold is already showing up.
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China is certainly contributing to that shortage. China’s holding US$2 trillion of US Treasuries and other debt. But the dollar has no greater friend — China wants a strong dollar. It wants a strong dollar because it’s holding US$2 trillion worth of securities, and it doesn’t want them to lose value.
But China doesn’t trust the United States, and it shouldn’t. It knows the United States historically has devalued the currency through inflation to get out from under the debt. So China is highly vulnerable to inflation because it owns so many US dollar-denominated securities.
Why doesn’t China simply dump them? The answer is that it can’t dump them. The US Treasury market is not that deep. It’s not very liquid. China can’t dump that quantity of Treasury securities even in the market we have. And the President could actually stop them if they tried to do it.
So the Chinese are stuck holding that paper. They want a strong dollar but fear that we’re going to inflate the dollar. And they’re probably right about that. And since they can’t dump the US Treasuries, they’re buying gold as a hedge. If the US dollar is steady, the securities retain their value. The gold may not increase much.
But if we inflate the dollar and it loses value, they’ll lose on the paper side. But they’ll make it up on the gold they own. The price of gold is going to soar. So they’re creating a hedge position. Again, they prefer a strong dollar. But with their gold purchases, they’re ready for a weak US dollar.
If it’s good enough for China, it’s also good enough for you.
If you want to understand gold, it’s fairly simple.
If the US dollar’s going to get stronger, you might not want gold. But if the US dollar’s going to weaken, you definitely want gold. We’ve had a strong US dollar since 2011. It’s been a drag on the US economy, harmed exports and imported deflation from around the world.
It’s defeating the Fed’s efforts to create inflation. These are all the consequences of a strong dollar. We couldn’t have a strong dollar for much longer. And it looks like we’re in for a weaker dollar…
The trigger for a weaker dollar took place in late February in Shanghai, China. The global financial elites devised a plan to weaken the yuan without having China officially devalue its currency.
Surprise devaluations by Beijing rocked global markets last August and this January. To avoid that outcome, it was decided the dollar had to be weakened. That lets China maintain its unofficial dollar peg, while also creating a cheaper yuan to boost its economy.
Essentially, the world’s monetary authorities decided the US and China can devalue relative to Europe and Japan. This could play out over years.
My outlook going forward is therefore for a weaker dollar, and that means a higher dollar price of gold. That’s one of the reasons gold has been performing so well this year. It’s the best performing asset class in 2016, and also the best performing asset class in the 21st century. Since 2000, gold has greatly outperformed every other asset you can think of, including major stock indexes and bonds.
In that sense, gold performs an important insurance function. It’s comparable to fire insurance on a house. Nobody wants their house to burn down. But if it does burn down and you have fire insurance, having that fire insurance was invaluable.
It’s the same with gold…
If you have a 10% gold allocation, it’s like owning fire insurance. If the stock market goes to new all-time highs, and gold goes nowhere, that 10% allocation won’t hurt you. But if the markets collapse, which I do expect, and the price of gold skyrockets, that 10% allocation will increase by multiples.
That profit will protect you against losses in the rest of your portfolio. So gold has that insurance function. And that can’t be downplayed.
There’s another reason to own gold, which is actually fairly new. That’s because there are new threats, especially cyber financial warfare. Vladimir Putin has a 6,000-member cyber brigade working day and night to hack, destroy, disrupt, and delete digital systems, whether it be banks, exchanges, payment systems, etc.
In 2010, the FBI and Department of Homeland Security located an attack virus planted by Russian security services inside the Nasdaq stock market system. There have been several unexplained stock market outages and flash crashes in recent years. Some of these events may have been self-inflicted damage by the exchanges themselves in the course of software upgrades.
But others are highly suspicious and the exact causes have never been disclosed by exchange officials.
During one financial war game exercise I took part in at the Pentagon, I recommended that the SEC and New York Stock Exchange buy a warehouse in New York and equip it with copper wire hard-line phones, hand-held battery powered calculators and other pre-Internet equipment.
This facility would serve as a non-digital stock exchange with trading posts.
The SEC would assign 30 major stocks each to the 20 largest broker-dealers, who would be designated specialists in those stocks. This would provide market making on the 600 largest stocks, covering over 90% of all trading on a typical day.
Orders would be phoned in on the hardwire analogue phone system and put up for bids and offers by the specialists to a crowd of live brokers. This is exactly how stocks were traded until recently.
Computerised and algorithmic trading would be banned as nonessential. Only real investor interest would be represented in this non-digital venue.
In the event of a shutdown of the New York Stock Exchange by digital attack, the non-digital exchange would be activated.
The US would let China and Russia know this facility existed as a deterrent to a digital attack in the first place. If our rivals knew we had a robust non-digital Plan B, they might not bother to conduct a digital attack in the first place.
Bottom line: You may think you have wealth because you own stocks and bonds. But you really don’t. What you have are electrons. Your so-called wealth is actually digital wealth. And if those stock exchanges and account records are wiped out you have nothing.
And I wish you luck trying to re-establish it. Much of your wealth, including money in the bank, is in digital form and the Russians — or any decent hacker — are perfectly capable of wiping that out.
One of the things I like about gold is that it’s physical. It’s tangible, so it can’t be hacked, erased or deleted. So if your digital wealth is no different than an email and Putin hits the delete button, your email is going to disappear. Your wealth is going to disappear. Most people don’t think it can happen to them.
But recently, the country of Bangladesh, one of the poorest countries in the world, lost US$100 million.
US$100 million simply disappeared. But it wasn’t in a no-name bank in Bangladesh. That money was on deposit at the Federal Reserve Bank in New York. The Federal Reserve Bank in New York is arguably the safest bank in the world. It’s the main regional office of the central bank of the United States.
Here is one of the poorest countries in the world, with US$100 million on deposit at the central bank of the United States called the Federal Reserve, and the money disappears.
If they had had that money in gold, they’d still have it. And this type of incident is happening with increasing regularity.
You can’t assume your digital wealth is secure.
Strategist, Strategic Intelligence
Editorial note: You can find out more about Jim Rickards’ investment strategies, and how they could apply to your wealth here in Australia, here.
PS: This article was originally published in Money Morning.