Gold in times of crisis

Turbulent times

As you probably noticed by now, a bit of turbulence has come into the world’s stock markets. Some of you may also have noticed that gold has steadily gained value in the meantime. While most stock markets are down in the double digits since the start of this year, gold is now up in the double digits in the same period of time.

So what does that tell us?

In turbulent times people get scared of losing their money in the stock market so they pull out and go into things that feel more stable and safe, like gold and silver.

Why is it like that?

I think that it is something that is printed into every person’s unconscious mind. For thousands of year’s true money has been gold and silver and every time there has been a crisis, people have been going back into gold and silver for stability and because . People get more eager to get their hands on stable things so the amount of stuff that it’s something real and has a limited amount. It has been this way since the invention of money. Every time people get scared they might lose their savings in some way they turn to the most solid things they can find, and that is gold. Gold cannot be printed and created in some way, there is a limited amount of it in the ground and there is a limited amount of it above ground. The amount of above ground gold can only increase with the hard work of digging it up from the ground. If you look at the stock market, all the companies there can go bankrupt and the people owning stocks in those companies will lose all their hard earned money. There are no company that have the benefit of never being able to go bankrupt. Anything can happen, companies go bankrupt for many reasons like market conditions, poor management or the lack of developing. Think about the business of a bank, it should be impossible for a bank to go bankrupt, the only reason banks are going bankrupt is because of greed. The people owning the banks, are greedy and they create new financial instruments, take bigger risks every year just to increase profits. We can all see the ones that are the greediest and have the worst management because they are the ones that tank (and sometimes get bailed out). Because the banks run our economy with the greed of ever increasing profits at whatever risk possible we can be certain that a new 2008 will come again.

As we went through in last week’s post about inflation, currencies can lose value very quickly even though is doesn´t look like that right now with deflation in most of the western world. The central banks have no clue of what they are doing. I believe that at some point people will stop believing in their capability of keeping the economies stable, that’s when the deflation will turn into inflation. The inflation will be rapid because people don’t believe in the currencies anymore and a new system will be put into place. These are of course just my personal theories and everything might turn out fine, but one thing is very sure. It is a very cheap insurance to exchange some part of your currency into gold and silver in case of emergency. Gold and silver will never go to zero, like stocks and your currency might do.

The financial crisis 2.0

What we have been seeing so far I believe is the beginning of the next financial crisis, and the next big stock market crash. The similarities to 2008 are many and many things are looking a lot worse. For example I read recently that the Chinese banking sector is at a whopping size, 340% of Chinas GDP, to compare with the US banking sector in 2008 was just 110% of the US GDP. Add this to the fact that we are seeing huge problems in most parts of the Chinese economy. World trade has gone down a lot shows the mayor shipping companies and the Baltic dry index . While the shipping companies are still doing ok, since the price of oil has gone down a lot, we can only assume the companies that are now not shipping as much products anymore are not doing so well, many of those companies are Chinese.

A lot of mayor banks around the world are showing huge losses and are in deep trouble and since most banks have connections with other banks in different ways, we can only guess that the problems will spread.

One of Sweden’s biggest banks, SEB, showed a great annual report for the past year, as they did in February 2008. The similarities to the situation in 2008 are many and if we look at the chart here below we can see what happened just after the dividends were paid out in 2008, dividend payouts are marked with “U”. I don’t know about you but to me the trend from 07/08 here looks kind of similar the trend we are seeing right now.

SEB Chart

There is also the “interest rate gun” that central banks used in the last financial crisis to stimulate the economies and get trade running again. The interest rates are already at record lows. For example, if there is a new crisis around the corner and the Swedish central bank want to do the same move in interest rates that they did in the last crisis. The rate will then be lower than – 4%. Will we then get paid to borrow money?

The case for gold

Gold doesn´t pay any dividends, that´s the most common argument for not holding gold. While that is true, gold still serves some kind of insurance against a crisis. Gold is up about 15% or so in the past 6 weeks, that is because people start to get scared. Do you think that if there are more financial trouble ahead, it would be a good idea to hold some gold?

Due to the fact that we know people move towards gold in uncertain times…

The more uncertain times, the more people will want to move into gold and with more buyers, the price will increase. So if you think that that there are more uncertain times ahead it might be a wise idea to follow Ray Dalio´s recommendations to own a portion of physical gold. And it might be a good idea to get it before everyone else wants gold as well, with more buyers prices increases.

As I mentioned before, it is still possible until 1/7 to buy VAT free silver and gold (gold is VAT free everywhere) from Liberty silver in Estonia.

 

Take care

Robin Flint

Passive income together

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