Category: Personal Finance

Interview with Anthem Hayek Blanchard on AnthemGold

What is AnthemGold?AnthemGoldLogo

AnthemGold is a cryptocurrency company focused primarily on making gold easy to own and, ultimately, to become a preferred currency. Each ANTHEM (AGLD) is backed by one gram of physical gold, securely vaulted with a nonbank operator and fully insured.

But looking at the bigger picture, our goal is to bring gold and cryptocurrency together to create the world’s most stable form of money… to become a Gold Standard, if you will, in verifying supply chain management when it comes to the transfer and storage of physical, fungible items of value such as precious metals.

Do you see AnthemGold as a service to be primarily used by people to transact in gold, or as a way for people to easily buy gold as a store of wealth?

Ultimately, I think it will be more of the latter – storing gold as a form of wealth – but I believe the reason people will want to buy our form, AnthemGold, is that it will be a superior way of owning gold, allowing digital transferability via peer-to-peer, decentralized networks.

How does an AnthemGold transaction compare to a traditional bank transaction?

A transaction using AnthemGold can be performed for mere cents and executed in seconds, compared to significant dollars and several days of delay for traditional bank transactions. For example, I recently sent several thousand dollars via the traditional banking system. It cost over a hundred dollars in fees and it took several days.

In stark contrast to a bank, AnthemGold provides a fully gold-backed cryptocurrency that is transferable across the Ethereum global computer network. The one gram of physical gold that backs each ANTHEM is securely vaulted at a nonbank vault and is also fully insured. What this means is that not only is each ANTHEM fully backed with gold – the world’s ultimate store of value for 5,000 years – but they are also fully protected from confiscation and from company failure.   

What are the implications of AnthemGold for the banking industry?

The current state of affairs in banking is bizarre due to excessive government control,  regulations and compliance. When you look at the countless hours that financial service companies spend on compliance, it is absurd, and it is getting worse. People who work in financial service companies will confirm this. For example, I know an investment banker who spent the first 7 months of his first job learning all the compliance rules, instead of focusing on strategies to build wealth and value for the company’s clients.

Unfortunately this is the reality, but it is something people don’t understand when they look at cryptocurrencies and marvel at how they are gaining in value. If you add up the cost of banking fees and calculate all the time wasted waiting for bank transactions and banks following compliance rules, then you begin to see the value of a decentralized and low-cost cryptocurrency. Sadly, we have become used to the current archaic government-controlled system, thinking it normal that every bank is directed and constrained by an increasingly authoritarian centralized system.

45 minutes is the average time I have to spend, when I am dealing with a bank, and I probably interact with a bank or financial service institution 25 to 30 times a year. So when you add this up, I am wasting two waking days of my life each year.

But a decentralized cryptocurrency like AnthemGold’s eliminates the need for a lot of this wasteful and time-consuming management. A cryptocurrency is so much more efficient than the current hierarchical structure. It is comparable to what innovative tech companies have done to disrupt their industries with decentralization. Think of Airbnb and Uber.

What could a decentralized cryptocurrency like AnthemGold mean for the future of banking and financial services?

Ethereum cripto currency vector logoThe current model means that almost all payment systems must clear through the centralized banking system. Banks have this special privilege for a host of reasons such as legal tender laws, bank charter laws, the Fed wire system, etc.

Fast forward to the present, and there is no denying that we are well into the digital age, and are now at the dawn of the decentralized age. Bitcoin made it possible for trust to be established in a decentralized world, and that very innovation itself has allowed us to look beyond the current Bitcoin model.

The future is in decentralization and voluntary groups, rather than involuntary compliance and a dominant centralized system. This has major implications. For example, a government today can put a lien or a freeze on an account, but in a decentralized world this couldn’t happen. It completely changes the relationships, enhancing trust, efficiency and security. In short, it changes the whole nature of the game.

Banks traditionally make money through payment services and lending, supported by protectionist government regulations that make it extremely difficult, even impossible, for any other business to duplicate a bank’s services. But although the payment system is still largely controlled by the banks, cryptocurrencies are now offering another option. Once cryptocurrencies start taking the payment business away from banks, the only big advantage that banks will have is their ability to supply credit and their access to tap into the government to monetize debt.

What is the potential market for cryptocurrencies?

The amount of gold above ground is estimated to be around $7 trillion in value, whereas Bitcoin, currently the largest cryptocurrency, is only $30 billion. So it is still early in the day, and there is so much opportunity facing us. There is easily 100x left in the space, maybe even 300x or 400x. In ten years time, the cryptocurrency market could easily be worth a trillion dollars.

Look at it another way. The gold market trades at around $22 trillion a year, which is more than the Dow Jones Industrial Index, the S&P 500 and most of the world’s currencies combined.

What are the implications of negative interest rates on cryptocurrencies?

A great question. Not only do the numbers support the market potential for cryptocurrencies, but the reasoning is there as well in our current environment of negative interest rates. As banks continue to pump out easy money and credit, this creates the demand for more cryptocurrencies because people want a currency that is not continually being debased. So it’s a feedback loop.

Once interest rates go meaningfully below zero, then it is cheaper to keep cash in a vault than to hold cash as excess funds at the central bank. The question then becomes, “How much does the central bank trust the commercial banks?” The central bank might start to enforce penalties for keeping cash reserves in a bank vault rather than with the central bank. As you can imagine, once the central bank starts to demand this cash, the system will start to fall apart. Quickly.

Another way to address this is to limit or even ban cash, a trend we are seeing in other countries. As long as governments can force central banks and financial institutions to hold cash on their ledgers, they can easily apply negative interest rates or taxes. Correct?

Exactly. That’s a big part of it. Restricting or banning cash puts more money into the banking system, to create higher excess reserves.

Many people, especially Americans, are accustomed to pricing everything in U.S. Dollars, seeing the dollar as a reliable measuring stick for valuing goods and services. But where or when do you see the tipping point when people wake up and realize that the dollar – and other fiat currencies – are not the ultimate measuring stick and that alternatives do exist?

When you look at places like Venezuela or Ukraine, the people have already woken up. In Venezuela, you hear of people setting up Bitcoin mining equipment and having to transact in Bitcoin because there is no other way to exchange goods and services, except for simple barter. Ukraine has a lot of Bitcoin activity, even a network of Bitcoin ATMs, which is fascinating given that Ukraine is a relatively undeveloped country, still struggling to break free from the crippling institutions of the Soviet era.

Cryptocurrencies make good sense when you understand how they allow people to transact globally, securely, at high speed and with low costs, and to hold assets safely and independent of government interference.

Since AnthemGold is backed by gold, do you expect the price of ANTHEMs to be more stable than other cryptocurrencies, and do you expect them to track the price of gold?

Yes and Yes. We expect ANTHEMs to track the price of gold, similar to how a one gram ingot tracks the price of gold, with a small premium being attached to it due to its form factor. For example, a one gram ingot would have more utility than a one kilogram bar because it is easier to spend a one gram ingot, due to its small size and divisibility.

What do you hope to achieve with AnthemGold?Virtual Currency Icons Set Flat Style

My hope, and our team’s goal, is to play a material part in protecting people’s wealth and their individual store of value and in particular, guarding against a scenario of civil unrest, such as will occur if inflation takes off. We hope to do this by building up the cryptocurrency infrastructure as quickly as we possibly can. At the end of the day – and without wishing to sound dramatic here – this is a matter of survival because human beings must have ways to transact. But this is still very early days, and the coding language needs to be further developed. After all, Bitcoin is not even ten years old. Like anything in our developing world, it takes a while for technology to advance and then for people to adopt something new until it soon becomes quite commonplace.

Is there anything else you can add?

A brief history lesson, if I may, but an important one concerning gold and the future of money.

My entire career has been spent in the precious metals business, and my father, James U. Blanchard III, spearheaded the movement for Americans to legally own gold once again, a right we lost in 1933 and thankfully regained in 1975, in large part due to my father’s incessant lobbying for legalization.

My parents created James U. Blanchard & Company in 1975, a precious metals and rare coin company that at one time was the world’s largest. Following in their footsteps, even my own three names reflect my aspirations and my heartfelt mission: Anthem (the freedom-seeking hero of Ayn Rand’s novella), Hayek (the Nobel prize-winning economist and philosopher Friedrich Hayek) and Blanchard (continuing the family tradition).  

In conclusion, the coming marriage of gold and cryptocurrency is my heritage, my expertise, my vision and my passion, and it is something that I take very seriously. AnthemGold’s experienced team has created an innovative gold-backed cryptocurrency that simply and securely allows you to acquire, store and spend gold worldwide, with silver and other precious metals soon to be added. This, if I may be so bold, is the future of money.

Where can people find out more about AnthemGold?

One of the best places to go is our AnthemGold page on an online investment platform.


How High Will The Stock Market Go?

How High?

Cartoon RollercoasterIt’s no secret that we and other value-conscious investors have been warning that the stock market is getting increasingly expensive. In fact, the current valuation level of the S&P 500 is at the 96th percentile. This means the market has been relatively more expensive just 4% of the time in its history since 1870.

Furthermore, the S&P 500 would have to decline somewhere between 40% and 60% to revert back to a reasonable valuation average. Unfortunately, these are not timing indicators, and good investors always need to consider the alternative scenario to make sure they are positioned for any outcome. It’s therefore valuable to ask, “How much further could this market run?” and “Am I correctly positioned for this scenario?”

Is a Market Correction Due?

The current bull market in stocks has now eclipsed its eighth anniversary from the lows reached in March of 2009. It is now the second longest-running bull market in history (in terms of days), bested only by the run that lasted from 1987 to 2000.  

But as one market saying goes, “Pregnant women are due, library books are due, but market corrections are never due.” Just because a market may be long-running or overvalued, doesn’t mean it cannot run longer or become even more overvalued.

As unlikely as it may seem from this vantage point, the stock market could still have room to run. As a thought experiment, Doug Ramsey of the Leuthold Group noted in a recent interview that the S&P 500 could go all the way up to 3,400 (up over 40% from current levels), if valuations were to revert to the all-time high levels of March of 2000. While not likely, it shows what is possible, based on what has happened before.

In addition, valuing stocks is far from a precise science. There is no one measure of value in the stock market, and each valuation tool has its own caveats. While the price-to-earnings ratio for the S&P 500 is near all-time historical highs, others have noted that our current era of low interest rates and low inflation could be helping to sustain those high valuations. Another factor that could be pulling valuation ratios higher is the collapse in oil prices, and therefore oil profits.

The other alternative scenario is that business and economic conditions could improve, making currently expensive stocks seem more reasonable as their profits and sales increase. Things like tax reform, decreased regulation, or even a breakthrough in technology and productivity could all contribute to higher profit margins.

Personal Investing is Like Golf

But just because all of these things are possible, what is the individual investor supposed to do? Just like golf, the best course to is to avoid expensive errors. I am a terrible golfer, well north of 100 strokes for a round of golf. If I wanted to be a pro golfer, I would have to practice endlessly until I could sink puts from over 20 yards away, and be able to drive the ball over 250 yards every time.

But what if I wanted to be a better amateur golfer? Then the game is not so much about perfection. Instead, to realize a dramatic improvement in my score, the best thing I can do is not make huge mistakes. It is the big errors that get you into the rough, the sand traps, and which cause penalty strokes. It would be far better to hit the ball consistently straight and keep it on the fairway, even it it means it doesn’t go as far, rather than try to “crush it” and end up slicing the ball deep into the woods.

Investing is in many regards the same. We are bombarded with financial media and news that warns us about missing out on the next rally. Our friends and family gloat about “crushing it” with the latest hot stock or asset class, and we constantly compare our portfolio to some magical benchmark that we always fail to beat.

How Long Do You Have?

But investing and trying to preserve your life savings is not a game of golf. The best plan is to try and avoid the big errors: the 40% – 60% declines that can ruin your portfolio for years to come. What does this mean for our current environment? Based on our limited knowledge and current valuation data, it looks likely the stock market will produce low, single-digit annual returns over the next 10 to 12 year period.

There are a couple of ways to approach this reality. The first conservative action to take is to realize and accept that this will in all probability happen. If you or your pension fund needs a 7% annual return over the next decade in order for you to retire, you will fall short, and about the only way to get around this mathematical reality is to push back your retirement age or increase your savings rate.

If you are currently sticking to a buy-and-hold strategy, then you will likely be able to ride it out, but ONLY if you have at the very minimum twenty years (and preferably thirty or more years) to retirement. More time will greatly increase your chances because the market has always gone up over time, but there have been a few 20-year runs that have seen brief periods of low or even slightly negative returns.

The better approach is to stick to a consistent asset allocation plan, with regular (at least annual) rebalancing. Your risk tolerance and the time until you need to use your savings will determine how much you allocate to stocks.

For example, we have reviewed the Permanent Portfolio in the past, which allocates one-quarter of a portfolio each to stocks, bonds, cash and precious metals. The smaller stock portion will keep you invested and allow some exposure to a market rally that may indeed continue, while the allocation to cash and gold will dramatically reduce your risk without sacrificing too much return.

An Under-Appreciated Asset Class

Finally, investors looking for an asset class that has not yet ballooned to all-Isolated gold egg balanced on a finger. Balanced investment portfolio.time highs should seriously consider gold and silver. Both are below their all-time highs. Gold could go up over 50% before it reaches its all-time high, while silver could soar over 230%! This is in addition to the fact that precious metals stabilize portfolios because they tend to be negatively correlated to stocks.

Investing is not a game, and your portfolio performance is your own personal scorecard, something you work on to meet your life goals, not to try to beat others or benchmarks. In a world of extreme monetary policies and overvalued stock markets, a precious metals ‘balancing’ strategy is the golf equivalent of laying up in front of the pond, rather than trying to reach the green in one stroke and risking a very costly penalty.

Is Passive Investing a No-Brainer?

Passive - Active signpost drawn on a blackboardPassive Investing 101

The tsunami of money flowing out of actively managed mutual funds and into passively managed funds continues. It seems everyone has finally realized the simple facts: active money managers struggle to beat their benchmark, and passively managed money carries much lower fees.

But before you throw all of your money into an S&P 500 index ETF or something similar, please understand that the benefits of passive-over-active may not be quite that simple.

Active versus Passive Investing

Part of the active-versus-passive debate is in the semantics. Usually when people use these two terms, they are referring to passive money management as a ‘rules’ or ‘index based’ methodology to determine which stocks to buy or sell. If you invest in an S&P 500 index fund, the fund will buy everything in the index and seek to replicate the performance and makeup as closely as possible.

In other words, there is no manager at the fund who is making discretionary buy or sell decisions based on their own research, which is classically called active management. Active managers seek to use their skill to actually beat a market index over time.

Fees and Performance

What goes hand-in-hand with this distinction is that active managers usually charge a higher fee, given the research and resources they are employing. The average annual fee for an actively managed mutual fund is 0.77% (and it can be much higher), versus 0.10% for passively managed funds.

Combine this with the fact that only 20% or less of actively managed funds beat their benchmark over various time horizons, and you can see the appeal of passive: lower cost and better performance!

I won’t argue with lower costs – it is about time that actively managed money firms face some competition and encounter pressure on their high fees, especially for mediocre performance.

But this isn’t the entire equation. First, the whole active-versus-passive debate is a bit of a misnomer. Any kind of investment undertaking is an active decision, and if you are investing in an index fund, most indexes are constructed on a market-weighted basis.

This means you are buying more stock in larger companies rather than in smaller ones. It may be a rule and a non-discretionary way of managing money, but it is still an active bet on larger companies versus smaller ones.

Further, managers may be labeled as active because they are trying to beat a benchmark, but that doesn’t mean they could still use a rules-based methodology in their investment process, similar to an index.

Finally, while costs are traditionally higher for active and lower for passive, this doesn’t necessarily have to be true, and it may now be undergoing some changes.

The Downside of Passive

Robo-advisors have become increasingly popular, amassing a large amount of assets under management as many people flock to efficient and low-cost portfolio management using passive ETFs. This in itself is a great thing, and something that many people should consider, especially if they are just starting out in their career and have a long time to invest until retirement.

However, while the past eight years of the bull market have made passive investing seem like an obvious choice, the question will be whether investors can stick with it through the next bear market.

Bear Market Blues

The best thing about passive investing is that it tracks an index closely, but in a bear market this could be the worst thing because there is no built-in risk management. For example, if your entire portfolio is invested in a broad stock market index, such as the S&P 500, then when the market goes up 200%, you won’t lag the market by much. But when the market goes down, perhaps by 40% to 60% – which is not out of the question for stocks – you will also go down by the same amount!

This may seem obvious, and investors are hopefully well aware of these warnings. There is also much literature available that shows that even with these massive drawdowns, if you just buy-and-hold, you will continue to see steady gains, averaged out over time.  

Morningstar and Dalbar

Unfortunately, while investors think they know this in theory, their behavior indicates otherwise. Each year, Morningstar computes the actual investor return versus the fund return, and they have found that investors give up over 1% per year over 10 years due to pulling money out of funds when a fund goes down and putting it back in at the top once a fund has gone up.

Dalbar’s research reveals even worse results, with investors only getting about half (or even less) of the performance of the stock market! Investor psychology is the primary driver of this underperformance, as humans continue to buy high and sell low.

What Can an Investor Do?PassiveIncome

Let me be clear, there is nothing wrong with passive investing, and I believe most investors should use it as one of their core portfolio components. But in order for it to work, you need to be aware of the risk and be prepared not only to buy, but to actually hold. Sticking to the process is what makes it work.

Investors also need to know themselves well enough to realize that if they can’t handle a certain drop in the value of their portfolio, then they need to give up some future performance for the added peace and ability to withstand the pressure in the future.

This should come primarily from diversifying away from stocks and bonds and into cash and tangible assets such as gold and silver. Then when the next bear market comes, your portfolio will be much less volatile, and you will be much more likely to stick to the “hold” part of the equation!

2017 War on Cash

US dollars and troops2017 War on Cash

Overshadowed by colossal events such as Brexit, the U.S. election and the Dow nudging 20,000, investors may not have noticed an escalating war over the past year: the sinister War on Cash.

We have previously covered the ongoing “currency wars” of central banks that continually try to depreciate their currencies with lower interest rates and quantitative easing. But this goes even further because it is a war on actual, physical, paper cash.

Unprecedented Strikes Against Cash

2016 saw prominent academics and politicians shamelessly writing about the benefits of reducing or even outlawing cash. Former Secretary of the Treasury, Lawrence Summers, called for the U.S. to get rid of the $100 bill.

Former Chief Economist for the IMF and Harvard Professor, Ken Rogoff, published a book entitled The Curse of Cash, followed by numerous op-eds and endorsements by the New York Times and Financial Times endorsing a ban on cash. Australia is currently reviewing whether it will ban its $100 note.

India’s Prime Minister, Narenda Modi, announced without warning on November 8 that all 500 and 1,000 rupee notes would cease to be legal tender. Although claiming these were “high-denomination” notes, they actually equate to approximately US$7.50 and US$15 respectively, and they constitute 86% of the country’s cash currently in circulation!

Banning Cash: Rationale versus Reality

One of the biggest reasons cited for banning cash is to cut down on crime. While it is true that criminals prefer cash for the anonymity and the ease of transactions, there is no reason to believe enterprising criminals will stop their activity because transaction costs will be higher.

Criminals will easily substitute other forms of payment: lower denomination bills, other valuables like silver or gold bullion, diamonds, bitcoin, etc. Even Tide detergent has been found used as a common currency for drug trades.

The popular press surmised Tide was used by drug users because it could be stolen easily and traded for a quick fix. Yet this misses the point of why drug dealers would accept Tide as a currency at all.

The reason Tide became a currency was because it fit most of the properties of what makes a currency viable. It is recognizable (given the brand name), homogenous, easily divisible, and it has a (relatively) high value-to-weight ratio, making it portable. Bottom line: criminals are enterprising enough to surmount all kinds of obstacles inherent in illicit trade, so banning cash will not turn them into law-abiding citizens.

The next reason for banning cash is a little closer to the truth; to curb black and grey market transactions and collect all of the taxes the government is currently missing out on. India’s actions are squarely aimed at this because most Indians make virtually all daily business transactions in cash.

Further, the government will be receiving a report on any Indian citizen who deposits more than 250,000 rupees as a result of trying to rid themselves of the now illegal notes. The intention will then be to assess a tax and penalty on any of this money, if viewed by the government as unreported income.

While this may give a little boost to government coffers in the short-run, it is likely to backfire because the overall effect will be to tamp down economic activity in general, leading to even less wealth creation and less tax revenue.

The Real Reason for a Ban on Cash

The biggest reason for banning cash, especially in developed countries, is for governments to have the ability to enact even more extreme negative interest rates. Rogoff and others are actually quite transparent about this, recognizing that if banks charge an ever larger negative interest rate on deposits, savers have the option of withdrawing their money in cash and stuffing it under a mattress or in a vault, costing them less in relative terms than paying the bank to hold their money.

This highlights the ludicrous position in which central banks have put themselves, yet it is obviously the next logical step in their fallacious reasoning. To a central banker, if zero interest rates have not sufficiently spurred an economic boost with increased borrowing and spending, then the next step is to make interest rates negative, something we are already witnessing on a smaller scale.

But if minimally negative interest rates do not work, then their logic is to remove the next barrier to make interest rates even more negative. Thus the wrong intervention of the first action necessitates further interventions that distort the regular function of banks and interest rates even more.

Savers and Investors

The biggest surprise of the recent currency bans and proposals to ban currency in developed countries has been the lack of protest from citizens. Most people already use credit and debit cards for many transactions anyway and don’t seem to see the problem.Many coin bank of yellow and white metal. Cash closeup.

However, if negative interest rates are imposed on regular bank accounts, and savers have no way to withdraw their money, they will likely become more a lot more interested in what is really going on here. Fortunately, many alternatives exist to regular currency, and while governments may try to curb an exodus to these alternatives, it will likely be hard for them to do so, given the myriad of substitutes available.

For example, gold and silver will remain popular substitutes, as well as other alternative assets like other commodities and real estate; perhaps Tide detergent will even become more widespread as a common currency! Technology will also enable the ownership of these assets to be transferred and verified more readily.

In any case, investors and savers need to stay properly diversified and remain informed…..

Time For Holiday Rebalancing

Ho Ho Ho or Ho-Hum?

Stock market investors are looking to have a rollicking Christmas this year, while holders of bonds and precious metals may feel like they are getting a lump of coal. Yet taking a closer look at what has developed in the markets since the U.S. Presidential election reveals that not all may be merry and bright. In short, it is time for rebalancing your portfolio.Work life balance concept

What’s driving the stock market

Since November 8, the S&P 500 is up nearly 6%, while the Dow has catapulted 8% and is looking to break 20,000 by year’s end, leading many to call this the Trump Rally.

The first thing to keep in mind is that the stock market typically rallies in an election year, and most new Presidents enjoy a “honeymoon rally” after the election, as chief economist David Rosenberg has noted. Markets hate uncertainty, so a close election that didn’t end in a tie and drag on for months gave the stock market a sigh of relief as the ambiguity ended.

Second, also as Rosenberg has ably pointed out, the S&P is largely being driven by two sectors the market perceives to benefit from the new administration: energy and financials. These two sectors are only 20% of the S&P 500 but they have accounted for nearly all of the gains; the other sectors have remained virtually flat.

Take a step back

There is nothing inherently wrong with this because sectors do go in and out of favor; but it is telling that this is not a broad-based rally. It also adds more political risk because market participants believe these sectors will benefit from deregulation. This probably could not happen due to the political games played in Washington, but even if it does occur, it will take a very long time to work through the political process.

Finally, the S&P 500 is now at the third most expensive valuation level ever, exceeded only by the dot-com bubble and a very brief point right before the Great Depression (as measured by the CAPE ratio). This is not a timing device or even a prediction that markets are set to crash, but it does mean that over the next 10 to 12 years, investors should expect low single-digit annual returns or worse on average.

The Fed is not the cause of bond yields rising

Many have attributed the spike in bond yields and interest rates to the anticipation, and the subsequent action, of the Federal Reserve raising interest rates. This is only partly true.

Remember that the Fed can only set interest rate targets on the rate that banks lend to one another. This certainly influences the attitudes of other bond buyers, but it is a relatively small market. And with the Fed out of the QE game for now, they are not directly intervening in the larger bond market.

What is a much larger force in the bond market is China, which has been furiously dumping U.S. Treasury Bonds. China has gotten rid of so many U.S. bonds that they have now given the title of largest holder of U.S. debt to Japan!

China is likely doing this to try to prop up their falling currency, the yuan, as they battle a credit crisis of their own. Although it hasn’t received a lot of mainstream press, things are getting so bad that China briefly suspended the bond futures market, and has been injecting emergency loans into the banking system.

China’s woes are an article for another day, but the bottom line is – watch out for China!

Low-priced gold and silver – exactly what you want right now

Gold and silver bugs are probably feeling more like the Grinch this season as they have watched gold tumble 11% and silver almost 13% since November 8. Yet this is exactly what you should expect and want.

Remember the purpose of precious metals in a portfolio; not to produce lots of juicy returns or return on capital, but to preserve capital. Indeed, year-to-date, gold is still up 7%.

So if precious metals are expected to hold value or even appreciate in times of inflation or when stocks fall, then they should conversely be expected to fall in times of dollar strength and stock market rallies.

This negative correlation to stocks is exactly what makes gold and silver so valuable and important as a stabilizer and insurance policy in a portfolio. It is also why we consistently recommend a 10% to 15% Hand writing the text: Where to Invest?allocation.

Rebalance your portfolio now

The slump in precious metals combined with the sharp rally in stocks at the end of the year signifies the perfect time for most individual investors to rebalance their portfolios.

Rebalancing to your target weightings automatically allocates money away from expensive assets (like stocks) to assets that are likely undervalued such as gold and silver. So this holiday, take cheer in knowing you can take some money off the table and sleep soundly at night with a well-balanced portfolio that is primed and ready for whatever 2017 may bring….

Why are Interest Rates so Low?

Higher Interest RatesWhy are interest rates so low?

Ask most people on the street why interest rates are so low, and they will reply that central banks are
responsible. Okay, perhaps most people have no idea about interest rates or central banks and would likely shrug their shoulders, but regular blog readers are certainly aware of all of the central bank actions to try to keep rates low!

However, academics and economists are increasingly opposing this commonly held notion, countering that interest rates are affected by more powerful market and economic forces than central banks, contending that the decline in productivity is causing rates to be low. Therefore, which theory is correct? The answer may be both – and linked to the same cause.

The ‘natural’ versus ‘market’ rate of interest

To understand what may be going on, we need to go back to the 19th century economist Knut Wicksell, who differentiated between the ‘natural’ rate of interest and the ‘market’ rate.

Interest rates are a type of pricing and, like prices, they signal the relative supply and demand for something; in this case, the supply and demand for loanable funds. The natural rate of interest is the equilibrium rate that balances the amount of money to be loaned and borrowed, or the level of savings and investment. This natural rate therefore coordinates economic activity much like prices coordinate activity.

Like other prices, the equilibrium or natural interest rate that correctly balances economic activity cannot be known by someone. Only the market process can bring it about, and it is constantly changing and adapting to different conditions.

The natural rate of interest is affected by real economic forces; people changing their preference for saving versus taking on debt, or consuming now versus later. But the market rate is the rate that is the prevailing interest rate, influenced by central bank actions as they target various rates to be lower.

Central banks claim they want to set the market rate at where they believe the natural rate to be, in order to bring about a balanced economy. But this is an impossible task. Just as no central planner knows the correct price of steel or milk, so the Federal Reserve does not know the correct interest rate to set in order to coordinate economic activity.

It is this very attempt at setting rates that causes so much economic upheaval. If the Federal Reserve sets rates too low (or too high), misallocation of resources will occur, typically in the form of inflation, bubbles and then subsequent crashes.

Is the Federal Reserve the perpetrator of low rates?

A main criticism to this theory is that interest rates have been low now for quite a long time, and therefore there is something else going on besides the Federal Reserve and other central banks keeping rates low.

In other words, such critics believe the natural rate of interest is actually very low and has been declining, therefore the Federal Reserve is merely setting market rates to be consistent with this low natural rate level.   

One of the reasons cited for the decline in the natural rate is the decline in productivity of American workers and the general sluggishness of the economy. However, this may actually be a symptom of the previous boom and bust caused by erroneous central bank actions, rather than an unrelated factor.

The Fed set rates too low

The Federal Reserve fueled the unsustainable boom prior to 2008, and we are still feeling the negative effects today, such as  lower productivity. Because the Fed set market rates below the natural rate, misallocation of resources occurred. Instead of allowing those resources to reallocate themselves to better uses (such as out of housing and banking), the Fed was intent on keeping the status quo and avoid liquidations and bankruptcies.

The Bank of International Settlements (BIS) suggested this possibility in their recent annual report, noting that low interest rates could actually cause a cycle of lower productivity:

“Alternatively, persistently low yields could end up having pernicious effects on the economy and become to some extent self-validating… They may also distort financial and real economic decisions more generally, for instance by encouraging unproductive firms to maintain capacity or by inflating asset prices, thereby weakening productivity.”

We see this when we examine so-called zombie banks that continue to hold bad loans on their books in order to avoid the charge-offs. We also see factories and retail stores that continue to operate because the Fed has incentivized consumers to continue to spend, rather than cut back on spending, repay debt and save.

Central banks should stop meddlingRate Hike Calculator Words Increased Interest Cost Borrow Money

In conclusion, there are certainly other factors and forces that determine interest rates, besides the central banks. But lower productivity may actually be a logical outcome of previous low rates set by central banks. This is precisely why central banks should get out of the business of trying to set the correct interest rate, just as Soviet central planners had no business trying to set the price of eggs.

What does this all mean for your investment portfolio? As long as central banks try to guess at what interest rates “should be”, they will fail. This will cause continued misallocation of resources, and therefore investors need to be aware of continued instability such as inflation, bubbles and crashes.