Dr. Marc Faber joins FRA Co-founder Gordon T. Long in an exciting discussion of monetary malpractice, negative interest rates, the influence of current geopolitical risk and much more. Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics.

Between 1970 and 1978, Dr Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED which acts as an investment advisor and fund manager.

Dr Faber publishes a widely read monthly investment newsletter “The Gloom Boom & Doom Report” report which highlights unusual investment opportunities, and is the author of several books including “ TOMORROW’S GOLD – Asia’s Age of Discovery” which was first published in 2002 and highlights future investment opportunities around the world. “ TOMORROW’S GOLD ” was for several weeks on Amazon’s best seller list and is being translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is also a regular contributor to several leading financial publications around the world. A regular speaker at various investment seminars, Dr Faber is well known for his “contrarian” investment approach. He is also associated with a variety of funds and is a member of the Board of Directors of numerous companies.

JAPANESE NEGATIVE INTEREST RATES AND THEIR GLOBAL IMPLICATIONS

“It’s an experiment by few mad professors that occupy senior positions in central banks.”

Over the last 5000 years of recorded human history, interest rates have never been as low as they are now. The time value of money is the natural state. It is the markets way of pricing today’s money and the future’s money.  The higher the uncertainty of future money is, the higher the rate of interest will be. What central banks are doing at the present is incomprehensible to me, unless it means an expropriation of money.

The central banks in their madness believe this will result in economic growth. But in reality it will force people to become insecure. For example if you received 6% on your money, and then rates become zero and in this case become negative which in other words you’re being penalized for your deposit. Does that rate make you save more or spend more? One thing I will never understand is despite us having democracies, somewhere, somehow, the system has given so much power to a bunch of well understood, unelected academics and most of them have never worked for the private sector for a day. The Fed, Bank of Japan, ECB are all likeminded people; they all believe money printing boosts economic activity and tight money is negative.

“They will bankrupt the world.”

We do not know how badly it will end, but an interesting thing to note is if you look at the 2008 financial crisis, which sector got the most bailout money? It was the banks and the fund managers. Then you look at the performance of their stocks, it is a disaster. Bailout money and money printing doesn’t help at all. In fact it has made matters worse for the average American. I side with Americans who support Bernie Sanders because he is expressing the views of ordinary people that the Wall Street guys and the banking lunatics have essentially cheated the people.

“In every instance where they have negative interest rates, the exact opposite of the objective occurs.”

This view of central banks to distort the free market and capitalist system is a view of the paternalist; some people that think they know better.  They think they can steer the economy like how you would drive a car.

FED RAISING RATES

“As a working man it is hard to believe the world has handed so much power to a bunch of ignorant and arrogant people.”

Firstly Janet Yellen was the president of the San Francisco Federal Reserve which is in charge of California, Arizona, Nevada and another state. In her district we had the biggest real estate bubbles ever. Now she is the Fed chairman and slashed interest rates. We have had eight years of zero interest rates, and now she increases it by a quarter of a percent which is meaningless. She should have increased rates when there was a strong recovery in 2010 and 2011 but she waited. She waited right until the world is entering a very deep recession. She will go down and have a front portrait in a museum as a central bank failure.

IMPLICATIONS OF MONETARY MALPRACTICE 

“There are reasons to believe that central banks will go bust.”

Systemically I think they have allowed the debt level to expand, particularly they have allowed government credit to expand as a percentage of the economy. You have to understand that when you try to supress individual risks in a system, eventually you end up with systemic risk. We will eventually have a huge crisis and investor will not know how to deal with it.

People like Bernie Sanders are not blaming the Fed, they are blaming Wall Street. In other words they are blaming rich people for the hardship or ordinary people. The Fed essentially threw money at Wall Street and naturally they kept it for themselves. Yes, there is a trickle-down effect which makes them give their waiter a slightly larger tip; it is insignificant.

ISSUES OF CURRENT GEOPOLITICAL RISK

“Everything the US touched in the Middle East and Central Asia, from Afghanistan to Iraq, Syria, Egypt and Lebanon, it all turned into a complete disaster.”

The Neocons had this brilliant idea to start making trouble in Ukraine, not understanding it is Russian territory and historically until the early 20^th century Ukraine was part of Russia. Also not understanding that Crimea is of huge strategic importance to Russia, just like what California is to the US. Russia will never give up Crimea, I can promise you that. This is because it is a warm water port and they need it to have the access to the Mediterranean, without it they are at the mercy of America.

The Europeans are equally as incompetent. Angela Merkel just follows the US without understanding she is hurting the business interest of Germany. Russia and Germany were historically, culturally and politically very close. The interventions are very poorly thought out.

In the case of China, it is the second largest economy in the world with a population of 1.3 billion people. It is a highly advanced economy, especially in defense technology. A pivot to Asia by the US is seen by the Chinese as an aggression. It is a threat to the sovereignty and security of China  which has created another set of geopolitical tensions.

FEAR OF A COLLAPSING PETRODOLLAR

Under Mr. Greenspan the central bank enjoyed a lot of prestige. He had done better than his predecessors; his only major mistake was deliberately creating the NASDAQ bubble.

“However, Bernanke and Yellen are complete chaos. I don’t actually believe that they make the decisions; they are told by someone what they should do.”

It is difficult to tell what people think but if you look into the Japanese negative interest rates, the intention was to weaken the Yen. Not that the weak currency helps anyone, but by slashing interest rates and having them below zero 10yr Japanese bond will cause you to lose money unless the Yen appreciates. The idea was to have negative interest rates cause the Yen weaken but it actually strengthened.

INVESTMENT OPPORTUNITIES IN ASIA 

The area of Indochina is a boomtown. Not Thailand but Cambodia exports are rising at about 20%/annum. Vietnam has huge inflow of foreign direct investment, partly because the Taiwanese, Koreans and Japanese can invest in Vietnam and produce goods there.

There are a lot of investments coming from China and South East Asia. The US is afraid of China gaining too much influence in that part of the world so they waste money there by trying to displace the Chinese.  The Chinese will go to Cambodian government and say they are going to make a road or a bridge and in 6 months it will be built. Whereas the US will send a team of useless characters to go check out the scenery then come back in 3 months to check out more scenery and 5 years later nothing will have been done. All the while in this time the Chinese will have built roads, bridges, tunnels and all kinds of infrastructure.

ADVICE FOR INVESTORS

“My advice is to have a diversified portfolio. You have to have some equities, some bonds, real estate and precious metals.”

In my view it will not end well. This era of artificially low and market distorting interest rate structure will end terribly. There is a popular notion now of ‘sell everything’ but this is a flawed idea. You sell everything and you have all this money now, what will you do? Deposit it in banks? What happens when the bank goes bankrupt? In practise it is very dangerous to have all your money with one bank.

Abstract written by, Karan Singh

Karan1.singh@ryerson.ca

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

ZERO HEDGE  Tyler Durden  02/18/2016

Dale Dorsey isn’t happy.

After working 33 years, he’s facing a 55% cut to his pension benefits, a blow which he says will “cripple” his family and imperil the livelihood of his two children, one of whom is in the fourth grade and one of whom is just entering high school.

Dorsey attended a town hall meeting in Kansas City on Tuesday where retirees turned out for a discussion on “massive” pension cuts proposed by the Central States Pension Fund, which covers 400,000 participants, and which will almost certainly go broke within the next decade.

“A controversial 2014 law allowed the pension to propose [deep] cuts, many of them by half or more, as a way to perhaps save the fund,” The Kansas City Star wrote earlier this week adding that “two much smaller pensions also have sought similar relief under the law, and still more pensions are significantly underfunded.”

“What’s happening to us is a microcosm of what’s going to happen to the rest of the pensions in the United States,” said Jay Perry, a longtime Teamsters member.

Jay is probably correct.

Public sector pension funds are grossly underfunded in places like Chicago and Houston, while private sector funds are struggling to deal with rock bottom interest rates, which put pressure on expected returns and thus drive the present value of funds’ liabilities higher.

Illinois’ pension burden has brought the state to its knees financially speaking and in November, Springfield was forced to miss a $560 million payment to its retirement fund. In the private sector, GM said on Thursday that it will sell 20- and 30-year bonds in order to meet its pension obligations.

“At the end of last year GM’s U.S. hourly pension plan was underfunded by $10.4 billion,” The New York Times writes. “About $61 billion of the obligations were funded for the plan’s roughly 360,000 pensioners.” Maybe it’s time for tax payers to bail themselves out.

Speaking of GM, Kenneth Feinberg – the man who oversaw the distribution of cash compensation to victims who were involved in accidents tied to faulty ignition switches – is now tasked with deciding whether the Central States Pension Fund’s proposal to cut benefits passes legal muster. “Central States’ proposal would allow the retirees to work and still collect their reduced benefits. But some are no longer able to work, and the idea didn’t seem plausible to others,” the Star goes on to note.

“You know anybody hiring a 73-year-old mechanic?” Rod Heelan asked Feinberg. “I’m available.”

“I’ll have to go find a job. I don’t know. I’m 68,” Gary Meyer of Concordia, Mo said. “It would probably be a minimum-wage job.”

To be sure, retirees’ frustrations are justified. That said, the fund is simply running out of money. “We simply can’t stay afloat if we continue to pay out $3.46 in pension benefits for every $1 paid in from contributing employers,” a letter to retirees reads.

The fund is projected to go broke by 2026. Without the proposed cuts, no benefits at all will be paid from that point forward.

According to letters shared with The Star, cuts range from around 40% to 61%. “[The] average pension loss was more than $1,400 a month,” the paper says.

As for what will become of those who depend upon their benefits to survive, the above quoted Gary Meyer summed it up best: “I guess food stamps. Hopefully not. It would be a last resort.”

Don’t worry Gary, you aren’t alone…

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Cumberland Advisors’ David Kotok points out that negative interest rate policy (NIRP) is spreading throughout the world, though he thinks that the Federal Reserve will do everything they can to not have to use it as a tool .. “The implications of lower and deepening NIRP policies are enormous. First, they ensure that interest rates will be at a zero or lower level for the rest of the decade in those jurisdictions. Imagine that we are seeing commitments now for the next two years, as publicly declared by the central banks. Think about how difficult it will be to ‘taper’ back up to zero from a NIRP. Our best guess is that these countries and those who join them are locked in a NIRP policy regime for the rest of the decade. At Cumberland, we are using an expanding NIRP as a policy assumption for our investment decision making .. The second implication of a spreading NIRP is that NIRP anywhere suppresses interest rates everywhere. The more NIRP we see, the more downward pressure on rates there will be in jurisdictions that are not under NIRP. We see that in the United States, where bond rates are positive numbers but are continually pressured to lower and lower levels. Those investors who do not understand NIRP have missed a huge rally in bonds. At Cumberland, we have invested in that rally. Only now are we beginning (and we stress the word beginning) to take some of that profit and redeploy it .. The third implication of NIRP is that it changes a key characteristic of money. Money is still a unit of measure. Money is still a facilitator of commercial exchange. But NIRP alters behaviors when it comes to money’s being a ‘store of value.’  .. The fourth implication of NIRP plays out in the borrowing arena. When a borrower can finance at near zero and when that borrower is assuming that NIRP will continue for a prolonged period, that borrower changes the way debt is viewed. Essentially the use of money becomes free or nearly free. ..  The fifth and a huge implication of NIRP is its impact on asset prices. Remember, NIRP assures that the riskless rate will be zero or lower for years to come. With that assumption in place, the prices of assets rise and rise. The longer the duration of those assets, the higher the prices can rise .. NIRP is bullish for asset prices. It is repressive for traditional savers.”

LINK HERE to the article

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

“It is now just a matter of time before the U.S. central bank follows the central banks of Japan, the EU, Denmark, Sweden and Switzerland in setting negative rates on reserve deposits. The goal of such rates is to force banks to lend their excess reserves. The assumption is that such lending will boost aggregate demand and help struggling economies recover. Using the same central bank logic as in the financial crisis, the solution to a debt problem is to add on more debt. Yet, there is an old adage: you can bring a horse to water but you cannot make him drink! With the world economy sinking into recession, few banks have credit-worthy customers and many banks are having difficulties collecting on existing loans .. Central bank policies have also driven government bond yields into negative territory. Nearly $7 trillion of government bonds are currently trading at negative rates .. The more you interfere with interest rates, the more you create a misalignment between demand and supply across time, and the greater will be the adjustment to realign output with demand to return the economy to sustainable economic growth with rising standards of living (see here and here). Negative rates will only ensure an ever greater misalignment between output and demand .. Meanwhile, a goal of some of the attendees at Davos and others has been to push the world toward a cashless society since an increase in cash holdings would limit the effectiveness of negative rates. They know that if they eliminate cash, central banks will have greater control over the money supply and the ability to guide the economy toward their macroeconomic goals  .. The best monetary policy, however, is no monetary policy at all, and central bankers should take an extended holiday so that the world economy can finally heal itself.

– Austrian School Economist Frank Hollenbeck

LINK HERE to the article

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

In today’s environment of financial repression, characterized by near 0 or even negative interest rates, and low yields on investments & savings, how can you derive an income sufficient enough to retire? What about if you have only limited savings or if you don’t have any savings? We have some options for you. Fill out our form to subscribe to our free retirement information service – we will provide you some current recommendations which may be of interest to you, and we will keep you informed of new recommendations as we they become available in the future.

1. Retire on a budget between USD 1000 to 2000 per month
2. All inclusive assisted care services – including 3 meals a day, doctor visits and maid services
3. Sunny warm climates
4. Local or international options
5. Social interaction and intellectual challenge

Reader Comments:

From Derek, who leads a hybrid life, working part of the year in California and living the rest of the time in Thailand: I have spent several months each year since 2002 in Thailand. I read your posting about the hybrid lifestyle and I agree with everything you have written. I go to Thailand mostly for family; the cost of living is just a bonus. But it is a huge bonus… I had two hernia operations (2007, 2009) in Phitsanulok, by a surgeon trained in Chicago, using Western medicine methods and equipment, each for a total price (including private, air-conditioned room for two nights) of USD$675.

From Iris R., a working professional (MS in Engineering): I am grateful that you have expanded your blog to include links to your SE Asian potential retirement destinations. Our age cohort has many problems in common. I am so grateful that you focused some of your attention on the challenges we all will face – namely, aging with dignity and affordable, high-quality health care. In particular, I appreciate your discussion about aging in a society that has respect for old people.

From Peter, who has been retired and living independently in Thailand for 10+ years: The language barriers (and related cultural barriers) here are massive. I have to deal with that every day. But in a retirement resort, you’d be comfortably insulated from all of it. It is a major factor in favor of a retirement resort.

Check out our dedicated website for solutions

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

IMF paper on the current thinking by the IMF relating to the imposition of capital controls .. they are trying to “downplay” the name “capital controls” .. they distinguish between restrictions on inflows versus outflows .. this paper gives an insightful view on where & how the IMF is going to recommend, suggest or implement capital controls around the world.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Our international taxation services partner The Nestmann Group can facilitate and process applications to get second citizenships to countries in Europe and in the Caribbean – in particular Dominica. Some examples:

Mark Nestmann on Europe: In Europe alone, Austria, Bulgaria, Cyprus, Hungary, Ireland, Malta, Portugal, and the UK all offer cash-for-residence incentive .. For instance, if you have £10 million (US$15.6 million) available, you can acquire residence in the UK as a ‘non-domiciled resident.’ Simply invest the £10 million in UK government bonds or in active and trading UK companies. After just two years, you’ll qualify for UK citizenship and passport .. It’s even easier – and less expensive – in Malta. Legislation passed in 2013 created an Individual Investor Programme (IIP) that grants residence, and eventual citizenship and passport to foreigners who – Make a contribution of €650,000 (US$705,000) or more to the government; Purchase €150,000 in Maltese government bonds or other approved investment; Buy a personal residence in Malta with a value of at least €350,000. Alternatively, you can lease a residence with an annual rental value of at least €16,000.

Contact Mark Nestmann & make reference to “Financial Repression Authority” for any applicable discounts.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Our international taxation partner John Richardson was recently on CTV:

Here is our other international taxation partner Mark Nestmann:

LINK HERE to our International Taxation Services website

Jim Jatras is an attorney and a Washington based government and media specialist who was previously a U.S. diplomat and U.S. Senate staffer .. a discussion on FATCA:

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

This Is The NIRP “Doom Loop” That Threatens To Wipe-out Banks And The Global Economy

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

A Financial Repression Authority (FRA) Brief:

What Is The Risk-Mitigated Way To Invest In Gold?

Is it going on the stock market and buying a gold ETF like GLD? Is it buying gold mining stocks? Is it buying some gold coins and burying them in your back yard? Is it buying into a limited partnership where the gold is stored offshore? Is it buying gold coins and gold bullion bars and storing them in a safety deposit box at your bank?

The answer to all of the above is no from a risk-based perspective. What does a risk-based perspective mean and why is it important to invest in gold using a risk-based perspective?

Courtesy of Matterhorn Asset Management GoldSwitzerland

In this brief, we will answer those questions by assessing 15 different risks encompassing market risk, credit risk and operational risk. These risks are tabled below. These risks do not take into account certain risks such as the imposition of a windfall profits tax which may be taken by desperate indebted governments in certain jurisdictions.  Our organization, the Financial Repression Authority (FRA), has assessed how well these risks are mitigated by a wide variety of provider firms buying, selling and storing gold.

But before we get into looking at the risks, let’s consider the big questions about owning and investing in gold – Why does it make sense and why now? Why should anyone invest in an asset that does not pay any yield?  We point out below some of the simple yet powerful answers on why.

As to why now, we point out the trend so far this year has been bullish for gold in U.S. dollar terms, but emphasize how gold has already been bullish in most non-U.S. dollar terms over the past few years already.

In addition, gold is an asset which performs well in extreme inflation and extreme deflation environments[i], and serves as protection in times where there is a loss of confidence in government. There are strong deflationary forces in the world today[ii], and many like Martin Armstrong point out how a loss of confidence in government can lead to hyperinflation.[iii][iv] These trends are very bullish for gold now and we think very likely to persist for the remainder of the decade.

Why Gold?

Courtesy of Matterhorn Asset Management GoldSwitzerland

The quote from Voltaire has proven to be true for thousands of years. Paper money issued by governments eventually either loses its value or is taken out of circulation and existence. Here some long term charts showing this phenomenon[v][vi]:

Courtesy of Bullion Management Group Inc.

Courtesy of Bullion Management Group Inc.

In Roman history, coins were either phased out of existence or were chipped at the corner to reduce their value or were made with successively less gold and/or silver content.[vii][viii]

And since the creation of the Federal Reserve (U.S. central bank) in 1913, the purchasing power of the U.S. dollar has steadily decreased to a fraction of what it once had:

All of these charts and trends emphasize the importance of holding gold as an asset and a currency for wealth preservation – purchasing power protection. Indeed gold is real money as JP Morgan proclaimed:

We can also look at gold as money from the perspective of how the ancient Greek philosopher Aristotle defined money as.  He detailed characteristics of money as follows – gold meets all of these[ix]:

1.) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.

2.) It must be portable. Money holds a high amount of ‘worth’ relative to its weight and size.

3.) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. Dictionary.com describes fungible as:

“(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”

4.) It must have intrinsic value. This value of money should be independent of any other object and contained in the money itself.

This is all fine and dandy. But the real reasons why it makes sense to hold gold and to hold it now stem from the current risks in today’s economy, financial system and investment environment. And it is these risks and how to mitigate these risks which really determine how best to hold gold today. Let’s explore these risks and some associated mitigation strategies below.

Risk Management Is The Key To Properly Investing In Gold

FRA has put together a nifty matrix (contact us to get more information on this risk matrix) of the risks stemming from the good-intentioned (macroprudential) central bank policies, government fiscal policies and financial regulations focused on controlling excessive government debt, attempting to stimulate economic growth and minimizing the potential for financial and economic crises. Let’s explore a few of these risks applicable to gold below.

Counterparty Risk

This is the risk relating to the entity or provider of an investment in which the entity or provider:

• does not live up to their contractual agreement
• presents adverse risks caused by changes in the regulations or environment where the entity or provider operates
• presents adverse risks caused by the limitations or vulnerabilities in how or where the investment is held or stored

For gold as an investment, examples are counterparty risks stemming from:

• insecure vaults or volatile environments where the gold is stored,
• a financially stressed or bankrupted limited partnership entity holding the gold as an asset for its partners
• a bank where there is the high potential for theft or confiscation resulting from changing financial regulations relating to gold held in a safety deposit box at that bank
• a provider offering low quality gold

Mitigation of Counterparty Risk: Gold as an investment already represents holding an asset with no liability to any party.

Also, buy the gold from a reputable provider which can deliver the highest quality gold – 999.9 or 99.99% for 1 kilo and 100 gram bars, and for 400oz bars a certification for London Good Delivery.

Additionally counterparty risk needs to be mitigated for storage provider and jurisdictional concerns. For that, invest and store physical gold outside of the banking system and diversify the location of the storage in different jurisdictions. Ensure that the gold is held in an allocated and segregated format with direct ownership (in your name or entity, not that of the provider or a limited partnership). And in the event that the storage providers go out of business, ensure that you still own the gold, and that you can easily and promptly get your gold. Also ensure that the gold is insured by a major international insurance company. And ensure that you can inspect your gold upon request, that you can collect your gold when you request to even in the event of a financial or economic crisis.

Default Risk

This is the risk for an entity or provider of an investment and its associated storage to not meet its payment or debt obligations. For example a gold storage provider is not able to, or does not pay, its loans, debt or bonds, and which provider subsequently goes bankrupt.

Mitigation of Default Risk: Invest and store gold with entities which have financially strong balance sheets, little or no loans or debt, and which are located in secure, stable legal jurisdictions protected through bailment and other laws which will clearly and promptly allow you to get your gold without any legal hassles or potential for confiscation in the event of a default with the entity or provider. And also ensure that the gold is insured by a major international insurance company.

Valuations Risk

This is the risk of entering into an investment when the valuation of that investment is not attractive. An example is like buying a stock at a stock market peak.  For gold, it is difficult to put a valuation to it as it lacks corporate earnings and yield. However, here is a chart showing how little interest there is now in gold as an investment asset class. With such a miniscule interest, it is not likely that its valuation is very high currently.

Courtesy of Dan Popescu

Gold is under owned relative to financial assets at this time. Incrementum has a great chart showing how small gold is relative to other investment asset classes[x]:

Courtesy of Incrementum Liechtenstein

Mitigation of Valuation Risk. At this time investing in gold already mitigates this risk due to the above considerations.

Purchasing Power Loss Risk

This is the risk of an investment not able to preserve how well it, or the proceeds from it after selling it, can be used to purchase the goods and services you need or want. It’s about preserving your wealth when a currency loses purchasing power from inflation or currency depreciation/devaluation.

If this year you have an investment from which you could liquidate to buy 100,000 cups of Starbucks Tall Dark Roast coffee priced at $200,000 but in 5 years from now the same investment only allows you to buy say 50,000 cups of Starbucks Tall Dark Roast cups of coffee, even though the price at that time is say $300,000, what good is the $100,000 gain in that investment?

A key characteristic of gold which has held for thousands of years is the preservation of purchasing power. The old saying of one ounce of gold is equivalent to a fine European cut suit is an illustration of this[xi].

Mitigation of Purchasing Power Loss Risk. Simply keeping a certain allocation of one’s assets in gold is sufficient to mitigate the purchasing power loss risk. The optimal percentage depends upon what assets you hold, what currencies those assets are in, and the correlation of those assets with gold. It is generally recommended to hold more or less 10% of your assets into gold – some say as low as 5% while some say as much as 25%.

Negative Yield Risk

This is the risk that an investment yields a negative yield, such as with many bonds and some bank deposits today around the world as central banks push us into the twilight zone of negative interest rates. For gold, there is no yield, so that there is no issue of negative yield risk.

Mitigation of Negative Yield Risk. Simply owning physical gold entails a yield of 0%, higher than a negative yield.

Liquidity Risk

This is the risk that an investment cannot be sold easily or quickly due to limitations in market participants or to the insufficient volume of a market.  For gold, this means the ability to sell your gold easily and quickly at reasonable market-based rates and to get the proceeds from such a sale easily and quickly as well.

Mitigation of Liquidity Risk. A provider setup to offer and store allocated, segregated and directly owned gold translates into gold that can be easily and quickly sold.

Correlation Risk

This is the risk of linkages and similarities in the performance between investments.  For gold, the historical data indicates an inverse correlation with stocks[xii]. Also many studies have shown that adding gold as an asset in a traditional stocks/bonds portfolio not only adds performance but also reduces overall risk & volatility to the portfolio.

Courtesy of Bullion Management Group Inc.

Mitigation of Correlation Risk. In an environment in which stocks are in a bear market, such as what appears to be in place for this year so far, gold is a great asset to own, given the inverse correlation to stocks. And even if stocks are not bearish, it is nice to have an asset allocation to gold just for purposes of balancing the correlation risks within a portfolio in general. And there is a case to be made for holding gold in a portfolio for asset allocation optimization[xiii].

Negative Interest Rate Risk

This is the risk of negative interest rates, whether they be nominal negative interest rates or real negative interest rates (nominal minus inflation rate), representing a loss of purchasing power over time.  As an asset in a negative interest rate environment, gold performs very well[xiv].

Mitigation of Negative Interest Rate Risk. Simply holding gold as an asset in a negative interest rate environment addresses this risk.

Capital Controls Risk

This is the risk of restrictions placed on the movement of capital and assets, whether physically or via wire transfer across international borders or between different jurisdictions. For gold, this means the ability to transport gold across international borders and also the ability to wire transfer the funds to purchase to buy gold, or to wire transfer the sales proceeds from sold gold holdings.

Mitigation of Capital Controls Risk.  Consider buying and holding gold in jurisdictions which are stable, secure and with strong legal infrastructures, a gold-friendly history and little or no debt, and the ability for capital and assets to freely (through minimal paperwork and restrictions) move across its international borders.  In this regard, we see jurisdictions like Switzerland, Hong Kong and Singapore as being some of the best. The mitigation of this risk is also tied to the mitigation of nationalization risk.

Nationalization Risk

This is the risk of assets, funds or companies or even specific resources being taken over, managed or controlled by the government.  For gold, this could mean a declaration or regulation instituted by the government to take over the ownership of gold within a country or jurisdiction.

Mitigation of Nationalization Risk. Monitor in an on-going basis your investment-related jurisdictions worldwide. Keep abreast of new or changing government regulations, edicts or legislations affecting any aspects of the purchase, sale or storage of gold. The mitigation of this risk is also tied with the mitigation of geographical risk.

Geographical Risk

This is the risk of geo-political events and jurisdictional regulations adversely affecting the valuation, holding or storage of an investment. For gold, this could mean events like war or social unrest affecting the safety and security of the storage of your gold. Or for another example, a regulation stipulating the illegality of investing in, holding or storing gold in a particular jurisdiction – like the U.S. for many years from 1933 referred to in the above under nationalization risk.

Mitigation of Geographical Risk. Diversify internationally where gold is held and how it is held from a country and jurisdictional perspective.  An emphasis on stable and secure political, economic and financial jurisdictions is important. In this regard, we see jurisdictions like Switzerland, Hong Kong and Singapore as being some of the best.

Wealth Confiscation Risk

The risk here is the outright confiscation of assets through bank bailins, wealth taxes or changes in ownership structure. For gold, this could mean bank bailins or bank account dormancy involving the confiscation of safety deposit contents, or the imposition of wealth taxes on gold profits or the valuation of holdings.

Mitigation of Wealth Confiscation Risk.  Consider buying and holding gold in jurisdictions which are stable, secure and with strong legal infrastructures and a gold-friendly history and little or no debt.  In this regard, we see jurisdictions like Switzerland, Hong Kong and Singapore as being some of the best. The mitigation of this risk is also tied to the mitigation of nationalization risk (addressed above).

Regulatory Risk

This is the risk of changes in regulations or legislation affecting the viability or operation of an investment. For gold, it could mean changes in how or where gold is bought or stored, by method, volume, timeframe, or use.

Mitigation of Regulatory Risk. The mitigation of this risk is covered by the mitigation of capital control risk, wealth confiscation risk, nationalization risk and geographical risk – addressed above.

Bank Bailin Risk

This is the risk of banks assigning or confiscating assets from bank depositors, which could extend also to bank safety deposit boxes, in the event of a banking crisis. For gold, it could mean getting your gold simply taken by the bank to shore up the capital adequacy of the bank in the event of a banking crisis.

Mitigation of Bank Bailin Risk. The mitigation of this risk is covered by the mitigation of capital control risk, wealth confiscation risk, nationalization risk and geographical risk – addressed above.

Custodial Risk

This is the risk of loss or theft on assets resulting from events or actions (such as insolvency, lawsuits, or expropriation) of the storage provider, holder, custodian or manager of the assets. For gold, this could mean a bankruptcy in the storage provider, resulting in difficulties or impossibilities on getting your gold, or a long drawn-out entanglement in court with unclear and confiscatory liquidation actions on bank assets, bank buildings and operations, and bank safety deposit boxes.

Mitigation of Custodial Risk. Invest and store physical gold in safe, secure non-bank vaults outside of the banking system and diversify the location of the storage in different stable, secure jurisdictions with little or no debt, minimizing the potential for insolvencies, lawsuits or expropriations. Ensure that the gold is held in allocated, segregated and direct ownership (in your name or entity, not that of the provider) format. And ensure that you still own the gold, and that you can easily and promptly get your gold in the event that the storage provider goes out of business. And also ensure that the gold is insured by a major international insurance company. And ensure that you can inspect your gold upon request, that you can collect your gold when you request to, even in the event of a financial crisis.

Conclusion

Investing in gold makes sense now and very likely for the remainder of the decade. However the way you invest in gold Is very important as there are many market, credit and operational risks which affect gold investing. These risks pose potentially adverse outcomes to vulnerabilities which could mean your investment in gold may not meet your expectations or worse, could translate into capital losses or legal complications.

A Financial Repression Authority (FRA) Brief

See our website for more information – www.financialrepressionauthority.com

FRA Macroprudential Policy Advisors, 200-131 Bloor Street West, Toronto Canada M5S1R8,  tel/fax = +14163525508

[i] http://dailyreckoning.com/how-inflation-could-be-caused-in-15-minutes/

[ii] http://goldsilverworlds.com/economy/jim-rickards-what-will-the-fed-decide-in-2016/

[iii] http://news.goldseek.com/GoldSeek/1437940421.php

[iv] https://www.armstrongeconomics.com/history/ancient-economies/punic-wars-the-economic-confidence-model

[v] https://goldswitzerland.com/why-gold/

[vi] http://bmgbullionbars.com/gold-is-money/

[vii] http://www.armstrongeconomics.com/research/monetary-history-of-the-world/roman-empire/monetary-history-of-imperial-rome/294-360-ad

[viii] http://history.econtrader.com/devaluation_of_the_roman_currency.htm

[ix] http://www.marketoracle.co.uk/Article10370.html

[x] http://www.incrementum.li/research-analysis/in-gold-we-trust-2013/

[xi] http://www.bmgbullion.com/doc_bin/gold_investor_vol_4_infographic.pdf

[xii] http://www.bmgbullion.com/doc_bin/RethinkingAssetAllocation_Jul08.pdf

[xiii] http://www.merkinvestments.com/downloads/2014-03-20-case-for-gold-optimal-portfolio-allocation.pdf

[xiv] http://dollarcollapse.com/gold/gold-in-a-negative-interest-rate-world/

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Charles Hugh Smith* explains why the central bank policy of negative interest rates (NIRP) is communicating that “this sucker is going down” – therefore suggesting it is time to sell everything, hoard your cash & precious metals .. “The last hurrah of central banks is the negative interest rate policy–NIRP. The basic idea of NIRP is to punish savers so severely that households and businesses will be compelled to go blow whatever money they have on something–what the money is squandered on is of no importance to central banks. All that matters is that people and enterprises are forced to spend whatever cash they have rather than ‘hoard’ it, i.e. preserve and conserve their capital. That this is certifiably insane is self-evident. If an economy depends on bringing future spending into the present by destroying savings, that economy is doomed regardless of NIRP, for eventually the cash runs out and spending declines anyway.” .. but the driving reason why NIRP will fail is more fundamental – negative interest rates force us to save even more, not less, meaning we are going to spend even less by saving more .. “If banks start charging savers interest on their cash, savers will have to save even more income to offset the additional costs imposed by central banks on their savings.” .. in any case, the big point is what does it say about the health & stability of the financial system if central banks are saying the only way to save the status quo is to force everyone to empty their piggy banks & spend every last dime of cash? .. “What exactly are we saving by destroying savings and capital? Isn’t capital the foundation of capitalism? What NIRP says about central banks is that they have run out of options and are now in their own end zone, heaving the final desperate Hail Mary pass that has no hope of saving them from complete and total defeat. NIRP also says the economy that needs NIRP is sick unto death and doomed to an implosion of impaired debt, over-leveraged risk-on bets and asset bubbles generated by stock buybacks and central bank purchases of risky assets. The central bankers are delusional if they think NIRP will inspire confidence in investors, punters, households and enterprises. Rather, NIRP signals the failure of central bank policies and the end-game of credit expansion as the solution for all economic ills.”

link here to the article

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

Euro Pacific Capital’s John Browne explains the fundamental absurdity of the concept of negative interest rates .. money has a time value, funds available today are worth more to the owner than money available tomorrow .. “Negative interest rates mean that borrowers are paid to borrow. This serves as a powerful inducement for companies to borrow up to the hilt to buy other companies, to pay dividends that are unjustified by earnings levels and to invest in financial assets. Often this includes buying back their own corporate shares thereby increasing earnings per share, the share price and linked executive bonuses. For savers, negative rates discourage savings, stifling future business investment and consumer demand. However, central banks hope that discouraged savers will instead be lured into spending on consumer products and create short-term economic growth albeit at the price of future growth. Negative interest rates mean that lenders have to pay borrowers and that depositors have to pay banks to keep and use their money. One does not require a PhD in economics to recognize this as an unnatural distortion that will create more problems than it solves.” .. Browne sees bank liquidity problems resulting from negative interest rates .. “Should banks with loans to high-yield companies and emerging market nations, especially those hit by falling oil prices, see their loans become non-performing at the same time as deposits are falling, a potentially catastrophic banking crisis could threaten .. We are of the opinion, now echoed by others, that the U.S. will see zero and possibly even negative interest rates before it experiences a one percent Fed rate. This does not bode well for our future.”

LINK HERE to the article

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

FRA Co-founder Gordon T. Long recently interviews Felix Zulauf, Founder and President at Zulauf Asset Management AG. 

FELIX ZULAUF has worked in the financial markets and asset management for almost 40 years. He started his investment career as a trader for a large Swiss Bank and received training in research and portfolio management thereafter with several leading investment banks in New York, Zurich and in Paris. Felix joined Union Bank of Switzerland (UBS), Zurich, in 1977 and held several positions over the years including managing global mutual funds, heading the institutional portfolio management unit and at the same time acting as the global strategist for the UBS Group. After two years with a medium-sized Financial Organization as a member of the executive board, he founded his wholly owned Zulauf Asset Management AG in 1990, allowing him to independently practice his own individual investment philosophy.

Mr. Zulauf focused on macro and strategic issues within the firm. In spring 2009 Zulauf Asset Management was split in two parts and Felix Zulauf fully owns the split-off Zulauf Asset Management AG focusing on some advisory activities to selected family offices and institutions including a US based global macro fund. Felix Zulauf always believed that the world economy and the financial markets move in cycles. That has helped him avoiding all the major casualties in the financial markets since the 1973/74 bear market in equities. He has been a member of Barron’s Roundtable for over 20 years.

QUESTION: How would you define Financial Repression?

FELIX ZULAUF: “Financial Repression is an attempt by the government and central banks to reduce free market forces and the freedom of individuals to do what they would do if they had the free choice.  It is compounded by market manipulations such as money printing, regulations, and distorting the interest rate; which are the best capital allocator there is and much better than any committee or central bank. Government authorities force capital to be allocated wherever they want capital to be allocated and not where the market would allocate it. It is the beginning of an era that will lead to decisive decline of prosperity and individual freedom.”

QUESTION: What type of economist would you consider yourself?

FELIX ZULAUF: “I am closer to the Austrian School. It is important to know that economies and financial markets do not progress in a linear way. They are cyclical; there are expansions and contractions and recessions have the job to remove the excessive build up in expansions. Bear markets have the same job, to reduce excess in boom markets. This is a very natural action and reaction process.”

QUESTION: You wrote the following – could you elaborate on it:

FELIX ZULAUF: “At some point in time we have to get rid of the debt that we have. Obviously central banks are trying to do that by financial repression. The consensus among the investment community is that financial repression will work. I’m not so sure. Financial repression means that they put interest rates below the inflation rate, and by doing that the debt-to-GDP level of the different segments in an economy, the households, governments, etc., drops down over time. I’m not sure that policy will be successful, but for some more years they will try that. If it doesn’t work, then we will go into other things such as currency reforms, confiscation .. It’s very hard to imagine the world will solve its problems in a conventional way. More likely we will see more government controls on capital flows as things get out of control over time.”

Central banks have used mechanisms to reduce the level of debt ration within the economy. They have tried these mechanisms for many years and it hasn’t worked. You have seen some deleveraging in parts of the world economy, but in total the world economy has leveraged more.  Debt to GDP is the highest level it has been in modern history and therefore this route the central banks have taken has failed.

QUESTION: Where are we in the possible outcomes you warned us of?

FELIX ZULAUF: If it unfolds in a free market mechanism fashion then it would lead to massive bankruptcies but I doubt the authorities will allow this to play out be cause it can lead to a systemic collapse. I think eventually there will be another burden on taxpayers and there will be attempts to confiscate some of the wealth out there through whatever means they can think of to bring down and finance the debt. The bottom line is in the future we will be less wealthy.

QUESTION: How will the leverage failure unfold?

FELIX ZULAUF: I don’t know if there is a way to escape. Even if you made all the right decisions and came out a winner and were able to preserve your capital, they would most likely tax you on whatever gains you make. Ideologically, we are in a very highly socialist environment.  You have to have a certain diversification as an investor and you have to make sure you’re in the right jurisdiction.

QUESTION: How can the fed raise rates into a economy where broad fires are burning especially in credit markets?

FELIX ZULAUF: Quantitative easing does not work. You cannot fix the problems rampant in today’s economies by printing mass amount of money. You have to solve problems from a political and economic angle but not by printing money. I don’t expect any further rate hike by the Fed, they are attempting normalize but it won’t work because the economy is soft. They have tried and I think it is becoming more and more apparent to them that money printing does not work. Rather than money printing I think they have adopted a bond yield target. Central banks are tired of QE, they realize they have to leave some pressure on the economy, politicians, and entrepreneurs move forward and make the necessary decisions. I don’t think this is a good message to the financial markets, because it means the financial markets have to suffer more pain until the central banks come in and attempt to fix the system again.

QUESTION: What does the BOJ’s recent announcement of NIRP signal?

FELIX ZULAUF: With the world economy growing at such low rates, we have a risk of running into systemic growth again. I suspect the Chinese will eventually let the currency go and then you have another deflation hit the world economy, this is when you run into another systemic crisis.

Letting the currency go and letting the currency find its own equilibrium will lead to a central bank crisis. This affects pricing power and when pricing power is affected it trickles down to profit margins, and therefore corporate earnings are going to decline.

Abstract written by, Karan Singh

Karan1.snigh@ryerson.ca

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.

GoldMoney’s John Butler describes what is money & how gold & silver serve as sound money .. he highlights why he thinks gold & silver prices will keep rising in the current environment of financial repression: “The spread of negative interest rate policies around the world, heralded by economic officials as the answer to the disappointing results of zero-rate policies and quantitative easing, is in fact nothing of the sort. By degrading the nature of money, negative interest rates will have commensurately negative consequences. As savers and investors seek non-negative yielding monetary substitutes, gold and silver prices are likely to continue rising .. If the store of value function of all major currencies is substantially undermined, as indeed it is by negative interest rates, then investors are going to have to look for a non-national currency alternative. Historically, gold and silver have most frequently served as reliable, stable international stores of value, protecting against devaluations and default generally.” .. he makes a key point about gold as a 0% yielding asset: “Which brings us to an important point: If currencies in general are offering negative rates of interest, then what, exactly, is the opportunity cost of diversifying into zero-yielding commodities? Zero! And if commodities offer greater diversification benefits than a basket of negative-yielding currencies, which should you overweight in a low-risk, defensive portfolio designed primarily to function as a store of value? Diversification is held, rightly, to be the only “free lunch” in economics. Not Keynesian pump-priming; not central bank interest rate manipulation; not holding an asset for the long-term just because history has been kind (eg equities, housing). No, diversification is the only exception to this other Iron Law of economics. And in a world of negative rates the benefits of diversification into gold and silver are available at a favorable, non-negative yield. This is having the effect of shifting the demand function for gold and silver. With supply for both gold and silver growing only slowly and steadily over time as a result of costly mining production, however, negative interest rates thus imply potentially far higher prices in future.”

LINK HERE to the PDF

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.