This Time, it IS Different

This Time it IS Different

It's Different

It IS Different

The four most dangerous words in the world of finance, often repeated, are “This time it’s different.” During both of the last two major booms and busts, a common belief was that the new internet age was different (2000) and later, that housing was also different (2008).

However, used to describe our current interest rate environment (particularly negative interest rates), the over-worked phrase actually does ring true.

Financial journalist and observer Jim Grant noted at a recent investment conference that research on interest rates shows that over the past 5,000 years of history, there has never been an instance of negative interest rates… until now.

The ever quick-witted Grant remarked, “If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 B.C.?” Perhaps. Or maybe this is just the first time in history where we have central banks active in monetary policy, attempting to drive interest rates as low as possible.

Record Negative-Yield Debt

The current amount of debt sporting a negative yield continues to grow. In early 2016, there was over $5 trillion in negative yielding debt. This grew to nearly $12 trillion by the end of June, and it is now closer to $13.4 trillion!

Not only has more debt become negative in yield, but it is increasingly happening to longer term debt. Yields on 10-year government bonds have become negative for Germany, Switzerland and Japan.  

Remember that bond yields are an inverse to bond prices. As bond prices get bid up, their yields go down.

What makes this unique is that bonds are a relatively simple financial instrument. Bonds do not have the subjective valuation that applies to stocks, and this makes the math and the logic of bonds fairly straightforward.

A person can buy a stock from another person while thinking it still has the potential to go higher, given higher growth prospects for the company. The price is based on one person’s subjective valuation.

On the other hand, bonds are not as subjective. If you buy a bond at a certain price, with a certain coupon payment, then the yield is a mathematical certainty. It is the yield you will receive per year if you hold the bond to maturity, and if it pays the principal in full without defaulting.

What Bond Buyers are Saying

By stark contrast, today’s current bond buyers are purchasing a security where they know they will lose money if it is held to maturity. For example, if you buy a bond today with a negative 0.5% yield, and it has five years until maturity, then after five years, you will be paid back less than what you originally paid for the bond. Even with the coupon payments you received during the life of the bond, the total payout will be equivalent to getting a minus 0.5% return on your money.

Therefore, we must make one of two different assumptions about current buyers of negative yielding debt. One assumption is they could be anticipating the bonds will continue to go up in price and that they will then sell them for a profit. In other words, the negative yields will become even more negative, and they will sell the bonds before maturity.

Unfortunately, this requires the buyer to believe there will always be a ‘greater fool’ out there who is willing to accept a higher price than what the original buyer paid. It it not unlike those who bought houses before 2007 on the premise they would flip them to a higher bidder. Remember that with bonds, someone must be holding these financial instruments at all times.  

The second assumption is that buyers are perfectly fine accepting a negative yield, and are willing to ‘pay for the privilege’ of lending out their money. This goes against all basic laws of finance. It only makes sense insofar as these buyers have no other place to put their money, and are therefore choosing the lesser evil.

But this is a weak explanation, because they could put their money in cash and get at least a zero percent return. Also, this doesn’t seem to make sense for longer maturity debt, as it means these buyers think negative interest rates are here to stay for at least ten years or more.

Both of these scenarios point out how this time, it is very different, and we are living in a twisted financial world, a world only exists because of the manipulations and distortions of central banks.

It is always precarious to try to make predictions, but it seems that there will come a time in the not too distant future when people will look back at this period and say “What were people thinking?”Secure Your Wealth

Like a frog languishing in a slowly heating pot of water, investors have warmed up to the environment of negative interest rates, not realizing how absurd and dangerous the situation has become. But take time now to assess, and be well prepared for the inevitable.

In this zero/negative interest rate environment, it is stunning to consider that since 2000, the DJIA (Dow Jones Industrial Average) has increased in value 63% while silver has increased in value 289% and gold has increased 380%…. an annualized return of 23.75%!

Cash, anyone? Or gold!

Helicopter Money

Helicopter Throwing money from a piggy Bank. Yen versionPost Brexit jitters have faded away and the market has gone on to crack new highs, partly aided by the rumors swirling of ‘helicopter money’ coming to central banker’s toolboxes around the world, but most notably Japan in the near future.

Once thought of as an imaginative or hypothetical example of what central bankers could do to combat deflation and get economies jump-started, helicopter money is now being seriously talked about. This is further evidence of the central banker’s mindset and why it is important now more than ever to make sure investment portfolios are fortified with a certain allocation of physical gold.

So when will money start dropping from the sky?

Surprisingly, the term helicopter money was first most famously used by the free-market economist Milton Friedman as a simple illustration of how money could be injected into an economy.

Former Federal Reserve Chairman Ben Bernanke then repeatedly used this term to additionally mean injecting money into the economy, but he also advocated for it in terms of central bank purchases of bonds and other financial assets, or to help the government finance fiscal stimulus. This earned him the nickname, Helicopter Ben.

It was therefore not lost on market participants when Helicopter Ben visited Japan a number of days ago and spoke with Prime Minister Shinzo Abe, the father of Abenomics – the grand experiment of trying to boost Japan’s economy by aggressive monetary and fiscal stimulus.

Mr. Bernanke did not specifically mention helicopter money in subsequent interviews, but he did note that Japan has more tools at their disposal to continue monetary easing. Ever since the meeting, market participants have continued speculating that some kind of easing will take place, sending the yen lower and stock markets higher.

Call it what you will, the result will be the same

Central bank actions have taken many forms over the past years since the crisis: lower (or even negative) interest rates, quantitative easing, monetary stimulus, and now helicopter money.

While it is not certain what helicopter money will actually look like if implemented, it would likely be some arrangement whereby the central bank directly finances government spending. In its extreme (and most literal) form, it could involve somehow getting newly printed money into the hands of consumers.

These are all slightly different programs and they work in different ways, but they all have the same thing in common: creating (printing) money and credit and then injecting it into the economy in an effort to try to boost spending, depreciate the domestic currency (thereby boosting exports), stoke inflation, or a combination of all three.

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This highlights why it is so important to be holding some physical gold. Bernanke is right in one sense: there is nothing physically holding back central bankers to continue these programs, and central banks will continue them because efforts thus far have proved unsuccessful.

What was once thought unthinkable and merely a thought experiment is becoming a reality. If in doubt, think of all those who thought negative interest rates were a crazy idea that would never be implemented.

Secure Your WealthMonetary easing, in whatever form, will likely continue until there is a severe depreciation or collapse of currency and correspondingly high inflation. Unfortunately, Japan already learned this lesson in the 1930’s and 1940’s when it embarked on a similar program of using the central bank to directly finance government spending, which unsurprisingly resulted in an inflationary surge.

History is repeating, and the chances of central banks admitting their policies do not work, and ceasing them or reversing course, is slim. Therefore, it is especially prudent at this time to allocate a portion of your investments to physical gold, and that is why we recommend a 10-20% allocation.

Brexit Fears Fade, But Gold Does Not

british gold reservesSome of the dust is starting to settle from the Brexit vote when British citizens surprised the world by voting to exit the European Union. The initial uncertainty caused stocks to sell off sharply and the British pound to plummet while gold rose in price.

Stock markets in the United States have now largely rebounded as fears have subsided, but instead of similarly reversing course, gold has stayed high and has even pushed higher. This recent market action highlights the fragility of political constructs, while underscoring the fact that gold does not depend on such political alliances.

United Kingdom withdrawal from the European UnionWhy Brexit Is A Big Deal

In a sense, Britain’s decision to leave the European Union is not such a major disruption. After all, Britain was never part of the Euro currency, so there will be no changes to its currency system. Further, the process will take at least two years or more while the terms are negotiated; - plenty of time for British citizens and the markets to adjust and plan ahead for any changes.

Yet in another way, it is a very big deal. First, it is an important event because Britain is the first nation to exit the relatively youthful European Union. Imagine if a state of the United States were to exit the union. The first U.S. state to leave would constitute a landmark historical event, even if it was a state that has talked about wanting to exit for a while (I’m looking at you, Texas).

Once one nation has shown that it is possible to leave with a peaceful vote, many other E.U. citizens may want to follow suit. This would be especially powerful if it were a country that was not only part of the Euro currency, but one that was financially healthy, such as Germany.

Britain exiting the European Union and sending the markets into turmoil shows the fragility of political institutions and the tenuous nature of alliances made between high-level politicians and political bodies.

There is nothing inherently strong about such alliances because these agreements depend on the word and bond of each country, backed up by the contracts they each sign. These in turn are only as good as the rule of law governing them, which is also a political arrangement.

Government Currencies Are Mere Political Promises

The Brexit vote gave citizens and investors around the world a harsh wake-up call, reminding them that entities like political unions and countries are merely political constructs, devised by politicians.

While these political institutions can be helpful, citizens can also come to feel they are doing more harm than good, and once they recognize this, they may choose to reject them.

Currencies are no different. There is nothing inherently stable about today’s government fiat currencies, because there is nothing backing them beyond the faith, credit and political promises behind those flimsy pieces of paper.

A national currency – or a multi-national currency like the Euro – may provide some benefit to citizens in terms of facilitating trade. But if citizens begin to perceive that the costs of the political monetary system (such as inflation or value instability) start to outweigh the benefits, they will reject them and look for a better alternative.   Composition with 50 gram gold bar, banknotes and coins

Fortunately, gold is an alternative currency to which one can turn. Rather than a metallic commodity, gold should really be considered as another currency or form of money, but with one major difference: it does not depend on political constructs, promises, or faith in a political system in order to work as a currency.

In fact, gold usually functions as the exact opposite, representing a loss of faith in central banks and governments. This is why it is essential to hold a portion of your wealth and investment portfolio in physical gold.

Here at Anthem Vault, we offer solutions to easily acquire and own physical gold, the best way to quickly and securely diversify a portfolio. We believe a reasonable allocation to gold is 10-20% of your investment portfolio, depending on your level of risk acceptance and other factors. Contrary to the opinion of some, and in-line with historical data and modern portfolio theory, this allocation can greatly lower your portfolio’s risk without sacrificing returns.

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Gold’s Role In Today’s Modern Investment Portfolio

What Role Should Gold Play In Today’s Portfolios?

To some people, suggesting that gold should be part of a balanced investment portfolio is like suggesting leeches are a way to cure ailments. Many investment advisors consider gold to Investment Managementbe a ‘barbarous relic’ that has no place in today’s modern portfolio, given our current financial innovations and instruments.

Yet when examined carefully, it is clear that gold is another asset that has the potential to add non-correlated returns to a portfolio. In this manner, it actually fits very well with modern portfolio theory, and gold should be incorporated by all investors and responsible financial advisors.

Why gold gets a bad rap as an investment

One of the biggest misunderstandings about gold as an investment is an unfair comparison to other financial assets. Gold is not an ‘investment’ in the sense that it brings the expectation of a positive return or cash flow, like stocks or bonds that pay interest or dividends.

An ounce of gold in your portfolio today will be an ounce of gold 100 years from now. It will not magically grow, expand or compound. It will not pay anything in return, and will likely cost a very small amount in storage fees or insurance. This is why gold is sometimes referred to as a non-productive financial asset.

As a financial asset, it is also criticized as something that only keeps up with inflation over the long-term, usually underperforming stocks and bonds, while exhibiting price volatility. But this is unfair and a misrepresentation of the essence of gold and the purpose it serves in a portfolio. Gold should never be considered as a stand-alone investment, but always as a part of a portfolio.

How to evaluate gold

Gold EvaluationThe main function of gold is to protect purchasing power, both locally in terms of inflation as well as globally in terms of currency fluctuations, and to mitigate risk. Gold performs well in times of stress or domestic/international crisis, as well as serving as one of the most liquid of all assets and commodities.

In other words, it doesn’t make sense to evaluate something based on criteria that do not apply. After all, you wouldn’t evaluate a bus by how fast it can go and then compare it to a Ferrari. A bus is not designed for speed and high performance, but for transporting a large number of people.

Similarly, some people inappropriately evaluate the nominal returns on gold and compare this to the performance of stocks. But the purpose of holding gold is not capital appreciation, but capital preservation.

Those familiar with modern portfolio theory understand that the holy grail of investing and asset allocation is to obtain more return and less risk. An asset will be added to a portfolio if it can significantly reduce risk without giving up much in terms of return. This is akin to the concept of correlation, or how much two assets move together: either in step with each other (correlated) or out of step (non-correlated).

Physical gold has either very low correlation or even negative correlation to almost all other asset classes, including stocks, bonds, cash, real estate and even other commodities. Therefore, even though gold can be quite volatile in price, those swings are usually going the opposite way of other major asset classes like stocks.

Therefore since gold is such a good diversifier, reducing risk without giving up much reward, the question is: how much of your portfolio should be in gold?Gold Investment

In a white paper, Merk Investments ran a few portfolio simulations that reverse-engineered the proper amount of gold. In other words, the study found what percentage of a portfolio should be invested in physical gold in order to achieve the highest return for a given amount of risk, something financial practitioners refer to as the efficient frontier.

The study found that from 1971 through February of 2014, a whopping 29% allocation to gold would have achieved the best risk-reward profile for a portfolio, compared to 100% in stocks; this, despite gold being more volatile than stocks during this period.

To be clear, the study does not state this as investment advice; it is simply finding the percentage number that fits the historical data. However, the study clearly drives home the point that a surprisingly high percentage allocation to physical gold would actually improve the risk-reward balance of a portfolio.

Of course, portfolios are not merely divided between stocks and gold. Other non-correlated assets can also be added, such as real estate or other commodities. Previous studies over the years have found that a 5-15% allocation to physical gold is therefore reasonable.

Here at Anthem Vault, we believe a reasonable allocation to gold is 10-20% of your investment portfolio, depending on your level of risk acceptance and other factors. Contrary to the opinion of some, and in-line with historical data and modern portfolio theory, this allocation can greatly lower your portfolio’s risk without sacrificing returns.

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Only Gold Lowers Risk, Compared To All Other Financial Assets

risk concept in clamp

Gold clamps credit and counterparty risk down to zero!

When reviewing the benefits of owning gold, one of the factors consistently at the forefront is the fact that gold has no counterparty risk. Counterparty risk is the risk incurred by having one or more other entities (counterparties) involved in a party’s transaction, such that they may be unable to fulfil their financial obligations to the party.

In fact, gold is risk-free in terms of credit and counterparty risk. It’s a concept that is thrown around a lot in the gold community, but few actually know what it means. Although it seems obvious once you understand it, the implications are very serious. Let’s first look at counterparty risk as it relates to gold because this is the most simple example, and then we will compare this to other asset classes or forms of financial wealth.

Gold is… well, Gold!

Gold bars

Gold is the only financial asset with no counterparty or credit risk

Gold is a very dense precious metal that has a physical composition that makes it ‘gold’. If you own an ounce of gold, it is yours, just like you own a pencil. Once you own a piece of gold, nobody else has a claim on it. You probably traded something for it, or bought it with cash. But once you own it, that person with whom you traded no longer owns the gold, has control over it, and will likely forget about it.

This of course may seem all too obvious, but the power of this simple observation will become clear as we compare gold to other financial assets.

EVERY Other Financial Asset Class Has A Counterparty

For example, consider corporate bonds. If you purchase a bond from a company, you own that bond and have rights to it. However, that bond is not just recorded on your personal balance sheet as an asset, it is also concurrently on the balance sheet of the company that issued it, and it is recorded as a liability on their books.

A holder of a bond is not just an owner of the bond, but has entered into a contractual agreement with the bond issuer. Counterparty risk is the risk that the entity on the other side of the contract will not fulfill their obligations; in this case, the risk that they will not repay the bond when it is due or make the required interest payments to you, the holder.

What about government bonds, which are considered risk-free? Government bonds are usually considered risk-free because governments have the power to tax their citizens to make their bond payment obligations. Unfortunately, there are limits to this, just ask Puerto Rico.

Governments that control their own money supply are considered to be even safer, because they can just print money to cover any bond repayment shortfalls. Yet this does not remove the counterparty risk. Holders of bonds will be repaid, but Out Of Stockwith devalued currency.

What about money in banks, such as simple checking and savings accounts? Surely there is no counterparty risk here, as the money is there to be withdrawn at any time, right?

Money deposited in a bank is an asset on your personal balance sheet. But for the bank, it is recorded as a liability, because the bank must be ready to redeem any request for that money, at any time you want to withdraw it.

When a large number of customers want to withdraw their money simultaneously – known as a bank run and usually the result of panic – the bank’s reserves may not be able to cover the withdrawal amounts and the depositors’ money is at risk. Yes, there is FDIC insurance, but this is just another counterparty, and the FDIC in turn receives its money from the U.S. Treasury: another counterparty to add to the list. Furthermore, ask anyone in Cyprus who experienced a ‘bail-in’ if they still believe their deposits are completely safe in a bank!

Finally, what about cold hard cash, withdrawn and stuffed under a mattress? Isn’t this exactly the same as storing an ounce of gold? No. The Federal Reserve issues those notes, hence the words Federal Reserve Note at the top of each the bill. Therefore, the Federal Reserve Notes that are outstanding and in circulation are a line item recorded on the Federal Reserve’s balance sheet as a liability.

Since you cannot redeem a dollar for anything but another dollar, the counterparty risk is that the currency may fail completely or at least be devalued, something we have certainly witnessed consistently over the past hundred years.

Many people believe gold is a very risky financial asset when compared to traditional vehicles like stocks, bonds, savings accounts and even physical cash. Yet all of these possess counterparty risk, while outright ownership of gold has absolutely no counterparty risk. If protection against turbulent financial conditions is one of your goals, gold is the only financial asset in your portfolio that will not carry this very real and significant risk. 

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Florentine Florin: A Symbolic Reminder of Gold’s Global Appeal

Since the dawn of civilization, precious meals like gold and silver
Statue of Michelangelo's David in front of the Palazzo Vecchiohave been used for currency and wealth accumulation, starting with the first coin dating back to around 550 BC.

Italy’s Florence has a storied history concerning money and coinage which spans thousands of years, a trend which started in 1252 with the creation of the Florentine florin (3.5 grams and 54 grains of fine gold), this being the first European gold coin minted in sufficient quantities for European commerce since the 7th Century.

With its name of fleur-de-lys deriving from the flowering iris – the badge of Florence – the florin was destined to make a mark on the international currency market, since many Florentine banks had European branches. Its staying power as a dominant currency of commerce was tied to the outgrowth of the Florentine economy and its major stakeholders, which included money-changers, silk manufacturers, furriers and guilds.

Gold Florin, FlorenceThe weight of the original 1252 florin equaled the value of one lira in the local Florentine money. Interestingly, while the florin’s gold content stayed the same, the lira experienced such inflation that by 1500, the value of one florin was seven lira.

The florin did experience competition from European rivals in terms of its economic presence. Although their coins never attained the success of the florin, the Italian city of Genoa – its most prominent competitor – also began gold coinage in 1252.

The florin’s ascendancy led to wide acceptance across Europe, serving as an engine for international commerce throughout the continent. Its role at the time in fostering global economic growth held great significance; a level of status that no doubt led to its mention in Dante’s Divine Comedy, a perennial classic that was completed in 1320.

In recognition of its growing prominence, the British government released a 2-shilling version of the florin in 1849, valued at 1/10th of a Pound Sterling. This coin remained in circulation in the British currency system until the country’s foray into decimalization in 1971. Additionally, the Dutch florin – known as the guilder – endured until The Netherland’s currency disappeared in 2002 with the advent the Euro. This signaled the end of the florin’s long and illustrious reign as the world’s practical ‘gold standard’ of currency.

Nevertheless, the florin’s endurance throughout the ages is a symbolic reminder of gold’s continuing global appeal and its impact on world economies. 

At Anthem Vault, we have long championed the spirit and staying-power of gold, ensuing from legacy currencies like the florin. Over time, gold has continually demonstrated its dominance as a transactional asset that protects and enhances wealth. This track record underscores our commitment to making gold an easy-to-buy, safe, secure and affordable element of your savings, investment and wealth-protection strategy for you, your family and for future generations.  

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