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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!

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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Is Technology Killing Human Connection?

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I have been reading a book of late called Reclaiming Conversation: The Power of Talk in the Digital Age. Frankly, it has prompted me to not only question my interactions with the world around me but also to make some changes.

Written by media scholar and M.I.T professor Sherry Turkle, the book examines how the all-consuming digital world in which we live has been an affront to face-to-face conversations, leading to a breakdown in relationships, creativity, and productivity. Having studied the role of digital technology’s impact on society for over thirty years, Turkle notes that the proliferation of texts, emails and social media chat and other forms of electronic communication have given us permission to dismiss much deeper forms of engagement; and the consequences ensuing from this, she says, are profound.

It’s for this reason that I was an early naysayer of email and other digital forms of communications back in the 80’s when the Internet was still in its initial ascendancy. Phone and face-to-face conversations had been pivotal in my life, and thus I saw no reason to migrate away from what had been working so well.

Fast forward to today, and I’m a huge advocate of digital communication. At the same time, I find myself conflicted by what I see as a lack of deep connection in human interactions these days. Much of this is undoubtedly attributed to the 24/7 access that our desktop and mobile devices afford to us on a daily basis. Symbolic of Linus’ ways in the Peanuts comic strip series, technology has become our security blanket.

In response to this trend, Turkle believes that we should reconnect with the importance of in-person encounters in our daily lives, versus turning away from it. Here, her book is replete with tons of suggestions on this front – from keeping one’s cell phone turned off and visibly out of sight during conversations with others, to invoking a device-free mandate for family dinners.

No Bunnies & Elephants with Negative Interest Rates

BunnyThe idea of negative interest rates has been given renewed attention with the Bank of Japan being the latest central bank to actually implement negative rates on some deposits. Recently, Bloomberg Business published a cute cartoon featuring Janet Yellen and bunnies to explain the theory of how negative interest rates are supposed to work. Unfortunately, this theory is fatally flawed and a more apt cartoon illustration would be Dr. Seuss’s The Cat in the Hat Comes Back.

The Theory
We covered negative interest rates a year ago when European bonds started trading at yields below 0%; so for a crash course or refresher on what negative interest rates are and how they work, check out our previous article first.

Bloomberg’s cartoon starts with the fact central bankers want negative interest rates to incentivize spending and borrowing and to deter people from hoarding money. People are not dumb, and if they are charged money on their savings in a bank, they will take it out and stick it under a mattress rather than pay for it to sit in a bank.

Central banks, the theory goes, should instead focus on the big players: the banks. Since they have so much money and need to keep some of it in electronic form with the Federal Reserve, they won’t be able to ‘stick it under a mattress’. If central banks charge them on the margin (in other words, a portion of deposits, but not necessarily all of their deposits), then it should incentivize the big banks to hand out more loans.

More loans will spur businesses to invest, grow and hire more people. In addition, negative rates will drive down the value of the dollar, making exports cheaper, which will also fuel growth. Sounds like cute bunnies and sunshine right? Not quite.

The Reality: The Cat in the Hat Comes Back
The foundational flaw to this entire approach is the Keynesian idea of jump-starting the economy by trying to increase aggregate demand: borrowing and spending is the ultimate goal for central bankers. But sustainable spending can only come after savings, production and wealth creation.

A Tweet, a Link and a Zap: 5 Keys to Building Connections Online

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 Whether building a book of business, pursuing a new job, or searching for love, we all have a fundamental need to connect. Now with the Internet being the primary tool for interacting with others, face-to-face interactions have largely given way to online exchanges. Given this reality, you may be discovering that navigating through a sea of social media can be challenging. At times, it can feel like a perfunctory, rote exercise, void of true meaning and significance. Unlike in-person networking, mastering the art of online connection requires some deft skills and savvy.

I’m not going to lie; as a 52-year-old who has been a freelancer since 1993, adapting to this new normal of connectivity has been an exercise in futility at times. Traditionally, my world had involved networking at events. Those of you around my age remember the days of slick sales pitches and folks with a repository of business cards to hand out. While these in-person pantomimes still occur, they have largely taken a backseat to the online competition.

The good news is that I have developed a framework that uniquely works for me within this new normal; one that has yielded a number of personal and professional connections over the years, as well as scores of business opportunities.

My 3 Lanes on the Connection Highway

Given the vast nature of the online social landscape, one can quickly get lost in a morass of places to build connections. So like entering the on-ramp to a highway, it’s important to quickly assess which of the three lanes you are going to use – and when.

Twitter: Laugh if you must, but Twitter is great for lazy-ass networkers like me. And I have generated a ton of business over the years from this networking platform. Because today’s rapport is often snatched in soundbites (think texts and messaging), the 140 character tweet limit is usually all I need to fuel a new connection. Just look at it as a squirt of lighter fluid, designed to ignite a conversation that you can then nurture.

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.

2016: Take charge and #BeResponsible

fotolia_98074017It’s always a mind-numbing task to review the year that just passed, trying to piece together the puzzle of events – and 2015 was no different. From the investment side, precious metals had a slow and low year. Technology took some massive steps forward with the release of driverless car prototypes, ubiquitous Uber, a wide variety of drone applications, robots, 3D printers… the list goes on.

While technology has been punching away at the world’s troubles, ‘government’ has provided the endless background hum as we approach the 2016 elections. I won’t bore you with the details but amid heated talk of the war against ISIS, it is regulations and taxation that have continued their insidious influence, growing in reach akin to the way the money supply grows in such a speedy and unethical fashion. No, we aren’t here to remind you of the grim realities of the world; just to send some motivation and energy into your day-to-day life, and to ensure you are seizing each day and making it count!

We bring you the #BeResponsible campaign for 2016!