Category: Banking

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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Only Gold Lowers Risk, Compared To All Other Financial Assets

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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!

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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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Bank Cash Withdrawals Raise Suspicion

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Imagine walking into a bank to withdraw funds to buy a used car from a private party, or withdrawing emergency cash for a friend who becomes unemployed and has no bank account. Suspicious? Do you know that if that amount is $5,000, your trusted bank teller is under a legal requirement to file a report to the Feds on what is deemed ‘suspected criminal activity’?

In what many see as an acceleration of statist control of U.S. citizens, the Justice Department has called on bank employees to report customers whose financial transactions appear to be suspicious or unusual. Known as a Suspicious Activity Report (SAR), this federal requirement has surprised many bank patrons who have discovered that their benign intentions have run afoul of The Feds.

Because banks are required to complete a SAR for questionable transactions (typically $5,000 or more for banks; $2,000 or more for money services businesses), unsuspecting customers are subjected to scrutiny for perfectly legal actions, such as merely withdrawing cash. Banks often file SARs even for smaller amounts due to regulatory fear, in what could be deemed a ‘defensive filing’ approach.

Tragically, this action against an innocent customer could result in a larger enforcement action such as a thorough investigation or even the seizure of their cash. And it could land one on a terrorist watchlist that could result in travel and other restrictions.

Beyond these requirements for brick-and-mortar entities, new legislation aimed at greater cybersecurity transparency between the Feds and financial institutions has taken root with the Cybersecurity Information Sharing Act. Now, these financial institutions are required to be extra vigilant in terms of monitoring and including online information in their suspicious activity reporting. 

The Lebenskϋnstler Lifestyle

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“I put my talent into my work, but my genius into my life.”

Oscar Wilde

Some of my friends characterize me as a dictionary fanatic, an opinion that was recently reinforced when I became intrigued by a new word I stumbled across: Lebenskϋnstler.

The word evokes an archetype that to this day continues to have an influence on the German ethos, particularly as it relates to Berlin culture and nightlife. It connotes a person who, though not actually an artist, pursues life with the same zeal as a passionate artist, making life magical in myriad ways, putting a positive spin on everything and taking delight in the little things that others overlook. Such a person could best be described as a Life Artist.

This echoes today’s evolving millennial mindset; one where ripe opportunities are recognized and seized in an attempt to make the most out of our lives. It’s a life course that’s deliberate, yet fraught with profound risk. For these folks, it’s the deep path of life that holds importance, rather than a static destination.

Lebenskϋnstlers are fiercely independent, individualists who see themselves as architects of their own freedom. In this way, they reflect the core values of Hank Reardon, the hero highlighted in Ayn Rand’s perennial best-selling book, Atlas Shrugged. They care little about their next deal or the Big Win. Instead, only the present moment matters, and how they can create meaning right now.

These individuals are also susceptible to what I affectionately call Career Polyamory. Instead of being faithful to one career, they have dalliances with multiple jobs, designed to meet their psychic needs and/or pay the bills. They are the proverbial freelancers who – in contrarian fashion – abhor rules, bosses, suits, small talk and even formal offices.

Practicing Sound Money: Can the UnBanked Participate?

IMG_4608It’s shocking when you hear of someone functioning day-to-day without a bank account. But according to the Federal Deposit Insurance Corporation, this trend is not all that uncommon.

The FDIC reports that nearly 17 million Americans are unbanked, limiting them in their ability to execute financial transactions and accumulate wealth-building assets. Moreover, 51 million are referred to as underbanked, meaning that they may have to rely on options like check-cashing services and high-interest lending, just to make ends meet.

There are myriad reasons behind this lack of engagement with traditional banking systems. For starters, a growing number of Americans, particularly African-Americans, have grown leery of banks due to predatory lending and excessive fees. Others are simply unable to obtain even a basic checking or savings account, due to a tarnished financial history.

One Pew study found that a third of all households that closed their bank accounts did so because of unexpected or unexplained fees.

Then there is the case of growing numbers of young Americans who have voluntarily chosen to self-select out of financial institutions. FDIC data shows that a surprising 50% of those between the ages of 18 to 24 are unbanked or underbanked.

America’s Growing Qualms About Banks

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“I will lose my vehicle if I don’t get my money. My car note is past due.”

“They (Rushcard) make 94 cents every time a direct deposit hits, $2.50 every time you withdraw money and $1.00 every time you use the card.”

“No access to my money. Been waiting since Oct. 9th”

“This card only preys on poor folks who have messed up their credit and can’t get a regular bank account.”

These are among the comments posted on social media in response to technical issues facing RushCard, a prepaid debit card program founded by iconic hip-hop mogul Russell Simmons. This highly popular alternative to traditional banking has recently faced major criticism among its members due to paychecks and direct deposits failing to appear in their accounts. It also raises questions about whether services such as those offered by RushCard take advantage of people who, due to myriad reasons, may be unable or unwilling to secure a traditional bank account. “