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.