A quick reminder that this blog is written from an Australian perspective. Suggestions I make or preparations I am taking may not be suitable in countries where the situation has degraded further and more precautions are necessary.
My coverage of the precious metals bull market has predominantly been about taking advantage of the speculative opportunities that present themselves as a result of appreciating metal prices. Generally this has consisted of reviewing well positioned mining companies, looking at prices or ratios for medium term targets as the metals head into the parabolic/public phase of the bull market, looking at what the spot price might do short term (which I get wrong as often as I do right!) and even some posts on specific coins.
While I have at times traded Gold/Silver proxies on the ASX (PMGOLD and ETPMAG) and even sold some of my physical Silver position between $35 and $50 (after going large on Silver when it was under $20), my core physical Gold position has remained largely untouched and I even added to it over the middle months of the year (when Gold was around $1500).
As much as I see opportunity to increase wealth in this bull market, I also understand there is a dark side to some reasons for the precious metals moving higher. Gold isn't just rising because that's been the trend for the last 10 years, there's also a growing mistrust in governments and regulatory authorities which has led to questioning the worth of monetary units and assets (currencies, shares, housing, bonds, etc).
There may come an inflection point where the public has had enough and turns away from regulated markets and look to store their wealth where there is no counterparty risk. Such a change in perception could bring around many devastating consequences. A meltdown of the banking system. Collapse of currencies (hyperinflation). Failure of government (sovereign default). Breakup of political/economic unions (such as the European Union). Many of these monetary and political systems are intertwined, so their breakdown could occur in tandem or one could lead to the other.
Four years ago this would have all sounded like nonsense. Come another four years I suspect that some events like this could have played out. Of course the effects on you personally will likely vary hugely based on where you live, how you live and whether or not you are prepared for such events.
Regardless of whether you think a collapse is likely or not, it doesn't hurt to be prepared. The most basic of decision matrices provides an overview of consequences from being prepared or not (your matrix may differ, I suggest drawing one up and listing the consequences of each scenario as they apply to you):
|CLICK TABLE TO ENLARGE|
To be prepared costs little. You may lose a little interest on cash stored outside of the banking system. You could buy some Gold and it falls in value. You could buy long life food and some of it goes to waste (obviously some of these costs could be reduced, such as rotating large stores of food so that it gets used).
To be unprepared could have dire consequences. For example if you have large loans for assets that fall significantly in value and you are forced to liquidate (from job loss, lack of liquid assets to get by, etc) then you may find yourself with outstanding debt and no assets to show for it. You might struggle to provide for yourself and family.
The preparations I have taken to date are fairly basic:
- Reduced debt to virtually nothing
- Obtained & safely stored (deposit box) physical metals & cash
I think keeping some physical cash out of the banking system could be a good move, as if we saw collapse or even measures are implemented to protect the banking system (such as limiting account withdrawals) the use of cash would still be widespread, I don't think a change to physical metals would happen overnight.
Some others advocate further preparation such as food storage. I don't believe we are at the stage that such preparations are necessary (in Australia). Not to say that we couldn't see food shortages like anywhere else, but a quote from Michael Ruppert's movie 'Collapse' comes to mind:
"If you are in a camp and a bear attacks, you don't have to be faster than the bear, you only have to be faster than the slowest camper." - Michael Ruppert, Collapse
Some may prefer to prepare for any situation. I would like to think that I had enough foresight to see the need for storing food as the situation developed.
There is a common misconception that Australia's banks sailed through the GFC with barely a scratch, some even going so far as to say that they didn't receive government bailouts:
John Taylor, founder of FX Concepts LLC, the world’s largest currency-hedge fund, says Australia’s banks, which remained profitable throughout the financial crisis without government bailouts, are now overextended and will cut back on credit, helping spark a recession. Bloomberg
What they often fail to mention in such comments is that:
- Australian banks tapped the US Fed for billions in emergency funding
- Australian banks were extended deposit and wholesale funding guarantees
- Australian banks benefited from increased lending stemming from the FHOB
- Australian banks were supported by the RBA (who bought RMBS)
- Australian banks were protected by ASIC with a ban on short-selling shares
So while our banks didn't receive a direct capital injection similar to that seen in the US, I think suggesting they weren't bailed out is just ridiculous.
It's interesting to note that in the case of recent stimulus, insider documents point to the stimulus being designed to prevent the collapse of the housing market:
The short term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market. FHSA FOI Doc
In my opinion this initiative (and others aimed at first home buyers) was not introduced to 'help' first home buyers, but rather to protect the Australian housing market and all the leeches that hang off it (banks, construction, retail).
While our banking system in Australia appeared strong during the last financial crisis, it is clear that it was propped up.
The stop gap measures were not limited to Australia. As we all know, banks in many counties were and still are being propped up in a non sustainable fashion.
This weekend there is further talk of a Greek default. If allowed to occur, we then face the unintended consequences. What will they be? Are global governments prepared to bring the banking system back from the brink like they did after the chain of events leading on from the bankruptcy of Lehman Brothers? I don't have confidence in their ability to do so. Collapse may be years away or it may just be around the corner...