Billionaires Are Buying Gold by Mark Nestmann |
October 12, 2016
In the last few days, gold
has been on a losing streak. Last Tuesday, gold prices fell
by $42 per ounce – 3.3% – the biggest single-day drop in
value in nearly three years.
Does that mean gold has resumed its long-term
downtrend since it reached its all-time high of $1,923.70
per ounce in 2011? Some analysts predict gold prices will
fall another 20% or more before stabilizing.
That’s certainly what central banks and
governments would like you to believe. But it’s not how
the world’s richest investors and central banks themselves
Billionaire George Soros, for instance,
recently sold stocks and instead bought gold and shares
of gold mining companies. The world’s central banks are
buying gold at the fastest pace in decades, adding nearly
500 tons of gold to their vaults in 2015. The pace increased
in 2016; central bank demand in the first three months climbed
28% versus the previous year.
A big reason people are piling into gold
is the lack of other good options.
Take bank accounts, for instance. When you
deposit money into your bank account, from a legal point
of view, it’s no longer your money. You become an unsecured
creditor holding an IOU.
Not that long ago, you could earn 5% or
more in accounts at US banks, which offset some of this
risk. But no more. Today, you’re lucky to earn one-tenth
that much. In some countries, money on deposit in a bank
earns a negative interest rate.
That’s right. You turn over your money to
a bank for safekeeping, lose legal ownership of it, and
pay the bank for the right to keep it there.
But how safe is the money you have on deposit
in a bank? Not very safe at all. In the US, the five largest
banks have a capital ratio of only 6%. In effect, if depositors
in these banks demand their money back, these banks could
repay only six cents on the dollar before they ran out of
Sure, there’s always deposit insurance.
In the US, the Federal Deposit Insurance Corporation (FDIC)
guarantees bank deposits up to $250,000 from losses due
to bank insolvency. But for every $100 on deposit, the FDIC
has only $1.15 with which to back it.
Doesn’t that make you feel warm and fuzzy
about the safety of your bank deposits?
Then there’s the “bail-in” phenomenon, which
first emerged during the 2013 banking collapse in Cyprus.
Some uninsured depositors got half of their money back,
although, at one bank, customers received nothing over the
Billionaires and central banks, of course,
also purchase bonds. These securities at least can’t be
bailed in. But there’s a reason my colleague Doug Casey
calls bonds “instruments of guaranteed confiscation.”
First, interest rates are the lowest they’ve
ever been in at least 5,000 years. Indeed, more than $13
trillion in bonds with negative interest rates are now sloshing
through the global financial system. Just a 0.1% increase
in interest rates could lead to losses of $1 trillion in
Second, the credit quality of bond issuers
has declined sharply in recent years. That’s particularly
true of government bonds. For instance, credit ratings firm
Fitch has downgraded 15 nations in the first half of 2016.
That compares with a previous high of 20 downgrades for
all of 2011.
How about the stock market? While US stocks
are trading at close to record levels, the biggest investors
are fleeing stocks at the fastest pace in years. Investors
have dumped more than $150 billion in mutual funds so far
in 2016. That’s more than two times the amount in all of
2015 and the most in any year since 2008. As I mentioned
above, billionaire Soros recently placed a huge bet on plummeting
US stock prices.
That leaves physical assets – things like
real estate, collectibles, and of course gold. All of these
items have a place in your portfolio, if only because they
have intrinsic value and can’t be bailed in.
Only gold has a 5,000-year track record
of preserving wealth. Indeed, the very first Egyptian dynasty
in 3100 BC referred to gold in its legal code. The Bible
mentions gold more than 400 times and repeatedly refers
to gold as money.
Today, there’s another important reason
billionaires are turning to gold: privacy. Unlike most other
financial assets, it’s possible to store gold privately
– in some cases, even anonymously. And unlike a foreign
bank or securities accounts, US taxpayers can still store
certain forms of gold offshore without needing to report
it to Uncle Sam. That may be one reason that in the first
six months of 2016, nearly 1,400 tons of gold, with a value
of $40 billion, were imported into Switzerland.
In Austria, next door to Switzerland, you
can actually store gold anonymously at two private vaults.
By anonymous, I mean just that; you can begin a relationship
at one of these vaults by identifying yourself as Wonder
Woman, Jason Bourne, Morpheus, or any other name you choose.
There’s no need to show a passport or provide any identification
at all. You simply pay for your safe deposit box, choose
a code word, and go. If you don’t want a paper trail of
bills from the vault, you can pay up to five years in advance.
Even a small box at one of these vaults
will hold well over $1 million in gold coins. If you’re
a US citizen, you need not make an annual filing to report
its existence – or the value it represents – to your friendly
Big Brother, the IRS.
The fact that gold retains this key privacy
advantage doesn’t please the powers that be. Last year,
the Financial Action Task Force (FATF), which bills itself
as developing and promoting policies to combat money laundering
and terrorist financing, warned that gold was being used
by criminals and terrorists to launder money.
Sadly, it’s probably just a matter of time
before governments crack down on anonymous gold storage.
But even if that occurs, gold will retain its intrinsic
value and serve as an incredibly useful alternative to more
mainstream investments. Best of all, you don’t need to be
a billionaire to own it – even anonymously.
Protecting your assets (and yourself) against
any threat – from the government, the IRS or a frivolous
lawsuit – is something The Nestmann Group has helped more
than 15,000 Americans do over the last 30 years.