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Market Comments from Jerry 09/19/16

Frequently, I’m hearing concerns from clients, both new and old, about the safety of bank deposits and their difficulty in obtaining cash.  Bank employees are being told to ask depositors why they are taking out cash.  If one withdraws more than $3,000, a suspicious activity report is created.  If more than $10,000 is requested, an IRS form must be filed.  You are a potential criminal for just trying to get your own money out of your account.

I have always believed in having some cash on hand for possible emergencies.  Since essentially no interest is being paid on deposit balances, why not put funds where there is at least a chance for appreciation?  Like gold or silver for example.  Both have gained 25-30% this year.  There is no guarantee that performance will repeat, but the trend is clearly established, reversing a 5 year bear market.

We keep seeing predictions for gold to drop to $700 or even $200 per ounce by the year 2020.  There is never a logical explanation provided however, just a recommendation to invest in something other than precious metals or subscribe to a newsletter.

Are we to assume that all price levels will revert to 1978?  Milk at $1.78 per gallon or gas at $0.63 a gallon?  And would this all be caused by a surge of overproduction?

At the other extreme, a $10,000 per ounce gold price can be derived by dividing the outstanding money supply of $4 trillion by the stated U.S. Gold Reserves of 267 million ounces (8,333 tons).  Mathematically feasible, at least, and more credible than a blurb from the amazing Kreskin!

Gold would no doubt be priced higher were it not for the overwhelming supply of “paper gold.”  That is defined by exchange traded funds (ETF’s) futures contracts, allocated accounts and derivatives.  If, in the event of a financial calamity, these claims on real gold were demanded to be redeemed, only a small fraction of the underlying commodity would be available.  The failure of one large bank or brokerage firm could trigger such a scenario.  Prices would skyrocket and defaults would be massive.  Physical gold might not be obtained at any price.  AMRO, the large Dutch bank, did this 2 years ago.  Gold account holders received a check and a letter explaining that the bank had NO gold, therefore their accounts were being liquidated at current prices.

Our entire global financial system is based on nothing but trust and faith.  Those emotions can vanish in a heartbeat.  It has happened many times before – 1929, 1987, and 2008 are recent examples.

Trust in institutions is at the lowest level in my lifetime of 75 years.  Think of the meaningless adjectives attributed to those institutions…financial “privacy”, “free” markets, “strong” dollar, social “security”, “fair” elections, “honest” reporting, “safe” deposit boxes and “insured” deposits.

Faith and hope are necessary for mental health, but a poor strategy for survival.  Think outside the box because we are all on our own.  Follow your instincts.

gold bar with chart