The Fed's Failure Will Cost You

This article create by: By Jeff D. Opdyke title:  The Fed's Failure Will Cost You, When I was a kid growing up with my grandparents, I'd head to Louisiana National Bank with my grandmother every few weeks on a Saturday - alwayson a Saturday - and I'd stand quietly behind the wooden counter while my granny moved some amount of money into her Christmas Club account.

 The Fed's Failure Will Cost You

 I just googled it and found out some banks still offer those accounts today. Having grown up with lower-middle-income grandparents who worked as a tire salesman and a purchasing clerk, I fully understand the rationale behind these accounts: forced savings so that you have financial resources at a more important point in the future.

That's an apt strategy today, though not for reasons anywhere similar to why my granny was saving...

Last week, the World Gold Council reported that investment demand for gold surged to more than 1,000 tons for the first time in history during the first half of 2016. In that, there is a strong message of fear (mixed with some greed) as well as what I consider to be bad news.

First, I'll dispense with the bad news: Of the historic rise in investment demand for gold, nearly 55% was in the form of exchange-traded funds (ETFs). I'm a huge fan of gold to preserve wealth, but I am not a fan of ETFs as the venue for doing so. All ETFs carry counterparty risk that investors don't fully understand - or recognize.

Investors don't realize that with most gold ETFs, they're not buying and selling gold. They're buying and selling pieces of paper the ETF provider creates. That paper passes to market makers in New York, and ultimately ends up as a claim on (or a disposition of) physical gold held by a custodian. Sometimes the gold in question isn't even purchased or sold - it's leased/returned to a central bank.

All of that works fine and dandy in a market operating normally.

But what happens in a true crisis, when gold prices are soaring for whatever reason, and investors are scrambling to buy and others want to take physical delivery of the gold they own? Who knows how that plays out? But there are clearly potential risks in the system that could see ETFs fail to perform as expected at the worst possible moment.

Now for the news of fear and greed...

Gold Has Just One Job

The fact that demand for gold is soaring says a great deal about investors' combined frame of mind these days. People are scared. Having grown up in hurricane country, I liken what I sense today to what it's like as a massive 'cane bears down on the coast - there's a quiet panic as people scurry about getting their stores in order before the devastation.

And I fear devastation is in our future.

Central banks have failed in their efforts to save Western economies. Proof of that rests in the fact that despite more than $12 trillion in quantitative easing measures by major central banks in recent years (that's a sum of money equal to 15% of the global economy), we still have lethargic growth all over the West, including in America, and we have negative interest rates covering roughly a third of the world.

If central bankers had succeeded, we would, by definition, have no need for negative rates or even near-zero rates. Economies would have picked up by now, nearly a decade after the global crisis, and interest rates would be closer to normal.

We're at the point now where central bankers are doing all they can just to keep the economies on the correct side of the line separating life and death. They're like doctors using all the technology at their disposal to keep a terminal patient breathing for a few more days, hoping that their latest experimental treatment suddenly spawns a miracle.

Alas, that's not likely.

There is simply too much debt - too much financial cancer - in the system to save it.
And buyers of gold know this.

They're not thinking: "Deflation in the system; can't buy gold. Gotta own the dollar!"
They're not thinking: "You know, I feel some inflation in my life, I better buy some gold... "
No, they're thinking: "Oh, crap! Central bankers and the politicians made a hash of it this time. Currency failure somewhere in the West is possible, if not probable. I need gold to protect my standard of living and my wealth when governments step in to reset this debt-addled world we live in."
That's gold's only role today - the preservation of wealth.

So let me go back now to my granny and those Saturday trips to Louisiana National Bank...

A Christmas Club for Gold

I realize not everyone can rush out and grab a bunch of gold all in one swoop. At $1,350 per ounce, it's not like gold is an impulse buy.

That's why I tell people who ask that they should have a gold savings account. It's a lot like that Christmas Club my granny belonged to. Every month, you set aside some portion of your money to buy a little bit of gold, with the idea that it will amount to an ever-larger sum over time and that you will have a resource you can draw on when you really need it in the future.

Record gold buying is sending a message of fear. Heed that message now, while you can.

As a lifelong world traveler, Jeff Opdyke has been investing directly in the international markets since 1995, making him one of the true pioneers of foreign trading. He is Investment Director for The Sovereign Society and a weekly contributor to The Sovereign Investor Daily.

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