Why Precious Metals may be Safer than these “Secure” Investments
We’re all looking for safety in life. In fact, outside of meeting the five basic needs of human survival, including food, water, clothing, shelter, and sleep, the next most important thing is safety. We want to make sure that our family is safe, which is why we have alarm systems and buy houses in the safest areas we can afford. We’re always concerned about the safety of our children, especially when we have teenagers and are waiting for them to come home. And of course, we want safety in our finances, savings and secure investments. We have all heard stories of people losing their life’s savings and can’t imagine what it would be like to be in their situation.
On the ride home from a road trip with the girls the other day, my wife shared with a few of her friends our philosophy on investing in precious metals and mentioned that we have a portion of our savings in gold and silver. Her friends thought we were crazy, probably for more reason than one, and suggested that having your money in the bank or invested in a 401(k) was a much safer and secure way to protect your savings.
This got me to thinking that this is probably the opinion of 98% of the public and that there are some fallacies out there with respect to perceived safe and secure investments. In my experience, most people haven’t considered the potential downside risks with their savings and investments.
In this piece, we’re going to highlight some of these risks to see if precious metals are truly riskier than these more traditional ways of saving and investing your money.
Money in the Bank
We’ve all heard the phrase, that’s “money in the bank.” This is meant to illicit thoughts of safety and security, but is money in the bank really one of the safest ways to maintain your savings?
We all tend to have short memories, but if you’ll recall following the Great Recession, the Dodd Frank Act of 2010 was passed. There are many aspects of the bill that we won’t get into, but the overall intent was to protect the public and help prevent future financial crises. One component of the bill that didn’t make headlines at the time, but has since seen the light of day, is that banks are legally allowed a “bail in” when the next banking crisis inevitably occurs.
If you’ll recall following the 2008 – 2009 crisis, the government deemed some industries and banks too big to fail and bailed them out with taxpayer’s money to the tune of $700 billion.
The program under which this was authorized was the Troubled Asset Relief Program (TARP). Had Congress not passed the bill, many of the largest banks in the United States would have collapsed. The government spent hundreds of billions of dollars propping up these banks, when on paper, they were essentially worthless, especially if they were forced to “mark to market” the mortgages on their books. Marking to market involves writing down the value of loans to reflect the true value of the homes and mortgages as opposed to using artificially inflated figures.
As we alluded to above, the Dodd Frank Act permits a “bail in” when the next financial crisis occurs, which allows the bank to use their customer’s deposits or savings account balances to stabilize the bank. They are permitted to do this by converting your bank balance into stock. I don’t know about you, but I would much rather have my money out of the bank than to have it swapped out with worthless bank stock.
If this idea sounds farfetched, it’s not. In fact, there’s precedence of a bail-in. In 2012 – 2013 there was a financial crisis in Cyprus. This financial crisis was driven by the Cypriot banks being overleveraged in the property sector, which saw similar losses to the U.S. property market in 2008 – 2009.
Rather than the government bailing out the banks, they permitted a “bail in.” While the first $100,000 in deposits wasn’t affected, nearly 50% of deposits above this amount were seized.
Of note, nearly one-third or $1 billion of Rossiya Bank’s assets, a Russian-owned bank, were frozen during the financial crisis.
Does this mean that you’re safe as long as you don’t have money than $100,000 in the bank? Not necessarily.
While the bank will likely leave small checking or deposit accounts alone, they may choose to seize all savings accounts or checking account deposits above a certain threshold. We don’t share this information to stoke fear or panic, nor are we advocating a bank run. We simply want to share with our readers the potential risk of having a substantial amount of money tied up in the bank.
Federal Deposit Insurance Corporation (FDIC)
We’ve all heard the term FDIC-insured, but do we really know what this entails and how the program works? To provide bit of history, the Federal Deposit Insurance Corporation (FDIC) was established in 1933 following the Great Depression. Up until the Great Depression, deposits weren’t insured, so if the bank went under, so did the client’s funds.
In October 2008, during the Great Recession, the Emergency Economic Stabilization Act (EESA) authorized a temporary increase in insured funds from $100,000 to $250,000, which subsequently became permanent. This was intended to provide the public with confidence that their “money in the bank” was safe up to this limit. Fortunately, the limits of this program haven’t been tested, as to date, none of the major banks have failed.
At the time of this writing, which is sure to change by the time you read this article, the banks that are FDIC-insured have combined deposits of roughly $18 trillion, but a significant portion of the deposits are in excess of $250,000, which puts the total estimated insured deposits at roughly $10 trillion. Considering the liability, you would expect for the FDIC to have assets close to the amount of their exposure in the event of a banking system collapse. As Lee Corso from ESPN College Football Gameday is famous for saying, “not so fast, my friend.”
It turns out that the FDIC is woefully underfunded, much like most government pension plans, with assets of only $124 billion as of March of 2023. This means that the amount of insurance available is only sufficient to cover .0124 cents of every dollar that is eligible for FDIC insurance. While the FDIC should have sufficient assets to cover failures of smaller financial institutions, the collapse of any of the four largest banks, namely Bank of America, Wells Fargo, Citigroup, and JP Morgan would bankrupt the program.
If you’re concerned that the FDIC’s lackluster limits will only pay pennies on the dollar, you should be. You may want to reevaluate your banking risk. At the very least, consider credit unions or community banks that have stricter underwriting criteria and that may be less susceptible to shocks to the banking and financial system.
Central Bank Digital Currencies (CBDC)
At the time of this writing, a couple countries have adopted Central Bank Digital Currencies (CBDC), while others are in various phases of testing and/or rolling it out. This website, which is regularly updated, tracks the progress of CBDC’s by country. To date, Jamaica and the Bahamas have officially launched CBDC’s, but it appears inevitable that it will eventually be rolled out worldwide.
Rather than trying to define CBDC’s, we’ll share with you language directly from the Federal Reserve’s website. It reads as follows: “(l)ike existing forms of money, a CBDC would enable the general public to make digital payments. As a liability of the Federal Reserve, however, a CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.”
Basically, the idea is to simplify and streamline our financial system by promoting the use of digital payments. Citizens would have accounts directly with the Federal Reserve, which would allow the central bank to credit accounts when issuing stimulus checks, debit accounts, when taxes are due, and more easily implement a Universal Basic Income (UBI) if it so chooses.
It would also eliminate the need for an intermediary, which would make many banks obsolete. On the surface, this all sounds great, but it’s fraught with potential issues.
Many of us have heard about China’s social scores and the ability for the government to control their spending. In other words, they rank their citizens based on arbitrary metrics and give more financial freedom to those with higher scores and restrict spending for those that have lower scores. This means that their citizens are almost forced to comply with whatever standards the government implements, whether or not they’re in agreement with that criteria.
An obvious concern is that certain people may no longer be able to purchase items that they have in the past or may have limitations or restrictions on their spending.
At the time of this writing, climate change (previously known as global warming) is one of the major initiatives adopted by most governments. As a result, they’re trying to limit or eliminate fossil fuels, such as oil, coal and natural gas and adopt “green” energy policies with the use of solar, electric vehicles, windmills, etc. This means that gasoline purchases may be limited, which will restrict traveling and freedom of movement.
Furthermore, the battle against greenhouse emissions is limiting farmers’ ability to use fertilizers and in some cases, is forcing them to cull their herds to meet arbitrary standards established by the government. At the same time, lab grown “meat” and insects are being introduced as alternatives to traditional protein sources. With a CBDC, it would be simple enough for the government to restrict the purchase of anything that it deems to be contrary to their policies and initiatives. In other words, adios Big Macs!
Another potential issue with CBDC’s is that the government can assign expiration dates to your currency forcing you to use it if they choose. One challenge the government currently experiences is that most folks tend to tighten their belts during a recession or when people are concerned about the future, thus limiting spending and reducing GDP. That will no longer be an issue with CBDC’s, as you may be forced to use it or lose it.
When given the option, people will choose to use it, which could contribute to higher inflation rates, especially in a situation where citizens receive a UBI. The issue being is that there’s an increased amount of money produced without a corresponding increase in production. More money chasing a fixed amount of goods and services nearly always results in price inflation.
We share all this information to let you know that your current bank balances could be converted to CBDC’s. This will inadvertently force you into the system and potentially limit the use of your money. Furthermore, it may prohibit your ability to live or travel overseas, especially if foreign countries don’t accept the Federal Reserve’s version of a CBDC. Additionally, it will remove all privacy from your life, as all your purchases and spending habits will be on display on the Federal Reserve’s ledger.
Below is a video where Neel Kashkari, President and CEO of the Federal Reserve Bank of Minneapolis, makes surprising statements on the Federal Reserve and CBDC within the United States.
Following a conversion to CBDC’s, having some cash on hand may work for a little while, but in relatively short time, it will likely be deemed by the Federal Reserve to be obsolete and no longer valid. Of course, precious metals will never be obsolete, as they have been used as money for thousands of years and are in demand both domestically and internationally. Following the adoption of CBDC’s, an informal market may develop with sellers of items only willing to accept hard assets, such as gold and silver, as is currently the case in many parts of Venezuela. Reportedly, many business owners will no longer accept the Bolivar as a form of payment.
As a bit of a background, defined benefit plans were the norm for decades until the introduction of defined contribution plans in 1978. A defined benefit plan is more or less a pension plan. In other words, it’s a company or government-sponsored plan which puts the financial responsibility on the entity sponsoring the plan to properly fund it. A defined contribution plan, such as a 401(k) plan, is funded in part if not completely by the employee. Many companies will match an employee’s contribution up to a certain percentage, but they’re not necessarily required to do so.
According to the ICI, an estimated $6.3 trillion in assets were held in 401(k) plans as of September 2022, which accounts for roughly one-fifth of the estimated $32 trillion invested in retirement plans. This is a substantial amount of money and is a potential revenue source for a cash-strapped government.
In the past, members of Congress have proposed replacing pension funds or 401(k) funds with government bonds at a guaranteed rate of return. This is a similar concept to a UBI.
The idea is that most Americans aren’t savvy enough to invest on their own, so rather than allowing people to be responsible for their own decisions, the government can step in and make those decisions for them. This issue tends to come up following a sharp sell-off in the stock market, so don’t be surprised if the topic comes up following the next financial crisis.
Does this sound farfetched?
Well, as is the case with the bail-in in Cyprus, there’s precedence of this type of proposal being implemented.
In Argentina, the government nationalized private pension funds by replacing stock holdings with government bonds. This was done under the guise of protecting the public, but the reality is that the government saw these assets as a source of funding. Historically, Argentina bonds have been risky due to high levels of government debt and a debt to GDP ratio in excess of 100%, so bondholders could be stuck with underperforming or non-performing bonds. If the bonds subsequently default, holders of the bonds may only receive pennies on the dollar.
Performance of 401(k)s
While confiscation of 401(k) plans may seem unlikely to most of our readers, they’re still far from risk-free. We’ve all sat through presentations from our company’s 401(k) provider and have read through their glossy marketing materials full of charts and graphs. We’ve been told that a simple investment of “X” amount per paycheck beginning at the age of 25 will guarantee that you’ll retire as a millionaire by the age of 65.
There are some glaring issues with 401(k) plans, but the most important issue that most people in the industry fail to bring up is that hardly anyone earns the reported compounded returns published in the in the company’s fact sheet or prospectus.
While it’s true the stock market on average has returned 8% – 10% per year, the problem is that this is an average and doesn’t reflect investors’ returns.
Based on reports that we’ve read in the past, the average investor earns closer to 3% annually.
This is due in part to investors panicking during crashes, thereby selling low and at the worst possible time. On the flip side, they tend to increase their stock holdings after a big run-up in the market, known as a “bull market,” and add to their stock holdings when the market is highly valued. Buying in a highly valued market almost guarantees that future returns will underperform.
Another issue is that average returns aren’t the same as compounded returns. For example, the S&P 500 had a negative return of 20% in 2022. On the surface, it appears as though you would break even after a 20% increase the following year, but that’s not the case. For simplicity purposes, let’s say that the S&P 500 is at 4,000. If it loses 20% this year, the index will be at 3,200, but if it gains 20% the following year, it will only be at 3,840, a full 160 points below its previous level. Rather, a gain of 25% is needed to bring the stock market index back up to 4,000. On the surface, a 5% difference may not sound like much, but it certainly adds up over time.
Furthermore, the option to diversify in a 401(k) plan can be challenging. Most wealth managers recommend a 60/40 stock to bond split in an attempt to reduce volatility and potential losses. How did that turn out in 2022? Well, the S&P 500 lost 20% and the aggregate bond market lost 13%. A 13% bond loss was actually a good return relative to some notes and bonds, which lost upwards of 40%. A quick calculation shows that your combined return with a 60/40 split would have been -17% – not exactly a blistering performance. Gold and silver fared much better, as we addressed in a previous article.
Valuation of 401(k) Investment Options
Last, but not least, is the value or valuation of the stock market when you begin investing.
For example, if you started in 1982 during Ronald Reagan’s presidency and were lucky enough to exit the market in 1999, you would have seen incredible returns in your stock portfolio. This was in part due to the extremely low price to earnings (PE) ratio of 7.73 at the beginning of 1982. Considering that the historical average is 13 – 15, it was a safe bet that there was limited downside risk and substantial upside potential at these levels.
At the beginning of 2023, the PE ratio was 21. This means by most metrics that the stock market is over or at least highly valued. Considering the structural weakness in the economy, a record high national debt approaching $32 trillion, annual deficits of over $1 trillion for as far as the eye can see, continued supply chain issues, inflation at near 40 year highs, an expensive war that we’re funding in Ukraine, multi-year high mortgage rates, a softening in the real estate market and the beginning of company-announced layoffs, including tens of thousands in the tech sector, this doesn’t bode well for the economy and stock market in 2023.
Recent college grads entering the job market for the first time and following the advice of their 401k administrators are likely to start off their investing careers in the red.
While disappointing, it’s potentially devasting for folks near retirement who can’t afford to lose money at this point in their lives. We’ve heard horror story after horror story of retirees having to return to work following the Great Recession of 2008 – 2009.
It’s troubling that there’s seemingly no one in the industry who is willing to provide educational resources to investors to help them to avoid costly mistakes.
Again, the big takeaway is that 401(k)s aren’t as safe and secure as you might think. On the contrary, they may be the riskiest and most costly financial decision that you can make.
In conclusion, we’ve talked about the perceived safety and security of keeping money in the bank and investing in 401(k) plans and why these may in fact be fallacies.
Not only does the value of your money in the bank erode due to inflation, but you also run the risk of a bail-in when and/or if there is another financial crisis. Depending on your total balance, you may be at risk of confiscation or having the bank convert your holdings to worthless bank stock. Another obvious issue is the underfunded FDIC program, whose assets are but a small fraction of the total deposit exposure.
Furthermore, when CBDC’s are eventually introduced, your checking and savings account balances will likely be converted to digital currency. At this time, it’s impossible to know if this will happen overnight or if there will be advance notice. More than likely, the conversion will occur over a holiday weekend when banks are closed on a Monday.
The issue of confiscation or conversion isn’t limited to just your checking and savings accounts.
Not only does this reduce your freedoms, but also puts you at risk of being stuck with “junk bonds” that have little to no liquidity. Most foreign central banks are liquidating U.S. government bonds as opposed to adding to their positions, which may limit the number of potential buyers of these bonds in the future.
Lastly, 401(k) plans aren’t what they seem on the surface. The issues are many, including limited options, lack of diversification, unacceptable educational resources, published versus actual returns, and the difference between average annual returns and compounded returns. Unless you happened to begin your investing career at just the right time, the earnings in your 401(k) plan will fall well short of your retirement goals.
While gold and silver aren’t necessarily the “silver bullet” so to speak, they do provide individuals with a certain level of financial freedom, as they have been used as money for thousands of years, are recognized and accepted worldwide, and possibly most importantly, don’t include counterparty risk. Whether you’re a seasoned investor or brand new to the precious metals sector, Atlanta Gold & Coin Buyers can assist.
We have decades of experience in the industry and help thousands of people annually reach their financial goals.