In a recent article, James Rickard talked about his conversations with people in his own neighborhood of “high rollers” and their perspective on the financial markets in which they are involved.
In my ZIP code of Darien, Connecticut, it’s not unusual to bump into a billionaire every now and then.
When I ask what they own, they’ll start to list stocks and bonds of various types. At that point in the conversation, I’ll interrupt and say, “You don’t own stocks; you own electrons.”
Most wealth today is in digital form recorded on hard drives and transferred through routers and servers in dispersed locations. What if those servers were hacked and your electronic wealth were erased? Where would you go to get it back?
To make his point, he brought up the hacking incident involving the New York Federal Reserve.
SWIFT is a “secure” global messaging network used by banks and other financial institutions to send payment instructions. It’s become a vital part of the global payments system, serving 11,000 banks. And it’s been hacked, as has the “safest” bank in the world, the New York Federal Reserve.
Obviously, as a hedge manager himself, he doesn’t want you to run out and sell all of your stocks. He is suggesting, however, that it might be wise on your part to have some insurance just in case.
That’s not to say you should call up your broker and tell him to sell all your stocks. Not at all. Stocks form an important part of a well-balanced portfolio. And I strongly recommend select gold stocks right now, as an example.
But you should also have physical gold as insurance.
Of course, it isn’t just the hacking that presents a problem in the financial markets. There is the US financial debt which is now well over $19 trillion, and growing at close to a trillion per year.
But China doesn’t trust the United States, and it shouldn’t. It knows the United States historically has devalued the currency through inflation to get out from under the debt. So China is highly vulnerable to inflation because it owns so many U.S. dollar-denominated securities.
Why doesn’t China simply dump them? The answer is that it can’t dump them. The U.S. Treasury market is not that deep. It’s not very liquid. China can’t dump that quantity of Treasury securities even in the market we have. And the President could actually stop them if they tried to do it.
Isn’t that just amazing! The US is in so much debt that the market for selling them isn’t deep enough to make it possible for China to unload the Treasuries that it holds, without severely affecting the value they get back.
So, China had to find a way to protect their “investment” and minimize their losses. And, if Donald Trumps brash comments are any indication of the US’s future intention with regard to the debt, China has certainly hedged their bet well.
But if we inflate the dollar and it loses value, they’ll lose on the paper side. But they’ll make it up on the gold they own. The price of gold is going to soar. So they’re creating a hedge position. Again, they prefer a strong dollar. But with their gold purchases, they’re ready for a weak dollar.
James Rickards advice to the average investor?
My advice to you as an investor is, if it’s good enough for China, it’s also good enough for you.
It sounds like reasonable advice to me. If you’d like to read more of the background information provided by James Rickard, you can do so by going to dailyreckoning.com.