You remember well that the 2008 financial crisis blew up and wrecked a number of rock-solid banks. You also may have believed along with most of other Americans that they were protected institutions. The crisis proved it as a false hope. Thanks to the toxic assets banks had multiplied, they became bankrupt when the losses mounted.
The lists of insolvent, important and historical institutions were too many to remember. Do you remember the names like Lehman Brothers, Bear Stearns, Washington Mutual, Merrill Lynch, and Wachovia? Eventually these too big to fail heavyweights all collapsed or were bought out by other banks in shotgun style weddings orchestrated by the Treasury and Federal Reserve.
As an effort to make the banks appear to be safer Congress passed the Wall Street Reform and Consumer Protection Act in 2010. This was the centerpiece of an effort to recreate the smoke and mirrors of financial system stability, and also known as the enormous Dodd-Frank Act. The U.S. government has been on a mission ever since the crash.
Fast forward to seven years later, and you might believe again that the banking system is stable, alive and kicking. New warnings from top financial regulatory officials have set the record straight.
Even the former United States Treasury Secretary Lawrence Summers added his voice to critics claiming that the banking reform protocols did not make the banking system in the United States safer.
There are three big reasons that this is the situation. The first is that banks have been given repeated deadline extensions on selling off risky assets. They would not be allowed to engage in investment behavior which was risky and did not provide a benefit to their customers.
Banks had a target of July 21, 2012 to sell off their risky asset. They could not achieve that, so they requested deadline extension after extension. Finally they have managed to get the deadline pushed out to 2022, a full ten years after the first one.
The second problem you find in the banking system is that the banks’ reserve capital is tremendously insufficient to cover potential losses on their books. This capital is the emergency reserve fund of any bank. Regulators were supposed to ensure that the banks keep more capital. The problem is that the rules include several loopholes which allow them to disguise their financial condition from you.
A final problem with the banks today is that the bank stress tests that are supposed to guarantee their solidity are only an delusion. The editorial board at Bloomberg has recounted that these stress tests allow for a tiny amount of equity capital of $4 for every $100 of assets. This is supposed to keep markets reassured that the banks will be solvent in a crisis. Their final evaluation was that “these flaws make a passing grade almost meaningless.”
Investing in Gold
There is no reason for you to be caught unprepared in the next banking crisis. By placing a portion of your bank account funds into physical gold, you can rest easy that your hard earned savings will be insured. Download your free kit from Regal Assets to start protecting yourself today.
Gold speaks an international language
Gold is rare. Anything that is in short supply commands a premium, and it was no different earlier. Nations used gold when trading with each other.
The acceptance of gold among people is also high – people generally pass on their wealth in the form of gold, as its fundamental value beats all forms of local currency.
In the USA, the price of gold tripled over a ten-year period from 1998 to 2008, reaching levels of $1000 per ounce. Over the next four years, it would go on to reach the $1800-1900 level.
Investing in gold is also a good way to beat inflation. The years when inflation was the highest in the United States following World War II were 1946, 1974, 1975, 1979 and 1980. During this time, the Dow Jones Industrial Average yielded – 12.33%, while gold returned 130.4%. Gold also comes to the rescue when there is deflation. The Great Depression that occurred in the 1930s saw a drop in prices, but the purchasing power afforded by the precious metal increased. The reverse is also true – you can see that whenever the US dollar increases in value, the price of gold comes down.
So in a bad economy, gold assumes greater significance. In a good economy, it helps you overcome rising prices. Either way, it is good – and that is why it is treasured so much. When there is geopolitical uncertainty (as seen from recent conflicts in the Balkans and the Middle East) in any part of the world, the price of gold soars. The reason is simply because the local currency ceases to have value.
This affects all countries that trade with it, and given the truly global nature of international trade today, they would rather prefer a more stable currency. But a crisis means that this cannot be easily obtained. For instance, it is hard to convert Syrian pounds into US dollars, since no one would want to buy them out of fear for what value the currency holds in a conflict-ridden war zone where buying and selling cannot be done freely. And so gold once again becomes the preferred currency of choice.
Currency crises can also happen due to economic factors. When they do occur in any part of the world which engages in international trade, the same situation as in the above scenario happens – other currencies are affected, and gold increases in value because of its stability.
The supply of gold is also declining, thereby increasing its value when demand is increasing. The annual gold mining output fell from 2,573 tons in 2000 to 2,444 tons in 2007. Bullion sales also saw a decline during this period. Less gold offered for sale also makes it being perceived as more valuable. The demand has also been increasing.
Gold jewelry is highly popular in India, especially during weddings – and a third of India’s 1.3 billion population is young. Millions of them enter into wedlock every year, and the number is increasing. In China, physical gold is seen as a form of savings. As its own economy becomes unpredictable, there is more demand in the world’s most populous country.
Gold is becoming dearer as more and more countries realize its value, and try to buy more of it. You can always have physical gold in your IRA if you do not trust fund managers.