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Developing a Financial Plan B

August 21, 2023

There are plenty of financial doomsdayers out there that write ad nauseam about the imminent demise of the U.S. dollar and how everyone needs to pile all of their assets into Bitcoin or gold or some foreign currency as a life raft to weather the pending financial/economic Armageddon.  This week we are not piling on and adding to the panic. We are going to talk about building assets in an alternative structure to achieve a hedge – a “Plan B” of sorts to even out the risk in our financial planning.  However, first we would like to start with why the US dollar IS NOT imminently going to zero.

The Problem with the U.S. Dollar
Understand that the monetary system that the entire world uses was built by the United States post World War II. The U.S. dollar was then “as good as gold” as it was backed by and could be redeemed for gold. Although that system has been altered along the way – Nixon ended the gold-backing in 1971 - much of the same system is still intact. The IMF and the World Bank that were created at the same Bretton Woods meeting post WWII have continued to heavily influence world finances. The US dollar remains the world’s reserve currency. Let’s look a little further into what that means…

The dollar is the official currency of 11 countries other than the U.S. mostly in the Americas and the Caribbean. It is also the quasi-official currency of many countries that have a set exchange rate pegged to the U.S. dollar. It is accepted in many countries as payment where there is no pegged interest rate including many countries in Southeast Asia. It is the medium of exchange for approximately 80% of international trading outside of the Eurozone where the Euro is dominant.  U.S. dollar denominated assets make up about 60% of the world’s central bank reserves. In daily currency trades, the U.S. dollar is part of 90% of the transactions. Perhaps most importantly, the U.S. treasury bonds have turned into the dominant asset class in which central bankers around the world hold assets. It is a U.S. dollar dominated world – PERIOD. Everything else – even the Euro – is completely overshadowed by the U.S. dollar.

Right now, there are many people talking about the BRIC (Brazil, Russia, India, China) countries putting together a gold-backed currency – as in they say it’s happening this month!! This is wishful thinking at best. These countries don’t trust one another except when they are all resisting the U.S. worldwide monetary bullying. They won’t be able to agree on a depository for gold that could establish a delivery mechanism for a gold-backed currency. They have all built paper currencies that have crumbled within recent memory, and they won’t be able to put a new one together as a collective. But do keep in mind that they are talking about it and will continue making efforts to evolve away from the U.S. dollar for international transactions which over time will be detrimental to us.

Our monetary system does have some serious flaws - both in its design and in its execution - that we continually review in this weekly post. America, actually the entire world, has a Federal Reserve that is behaving recklessly stimulating too much then contracting too much engineering repeated boom/busts. Now they are changing rules on the fly and shooting from the hip to bail out banks such as Silicon Valley Bank or carving up a Signature Bank and giving the good parts to Chase. On the fiscal side, the financial profligacy of our government is onto absurd levels with budget deficits and total debt rocketing to the moon. Interest rates are higher than they have been since before the 2008 meltdown and these increased rates are being applied to a debt load today that dwarfs what we had in 2008. We have an ageing population - a student loan disaster that to this point has only been brushed under the rug and a litany of other problems. No, the U.S. dollar isn’t going to zero tomorrow, but we should be looking for an onramp for that proverbial “Plan B.” The Fed will at some point have no choice but to come back to the table printing more currency units to try to fill the void they have created.

Alternatives to the U.S. Dollar
We are looking for avenues to diversify and effectively create a hedge for some of our holdings, not looking for a total divestment of the U.S. dollar. Historically people have talked about other currencies – such as the British pound or the Japanese yen. Without rehashing details, we are not fans of looking for another paper currency for the long term. The whole world is dependent on the U.S. dollar and if it falls apart, serious damage will be sustained by the entirety of the world economy.  Other paper currencies may be a successful short-term trade, but they are certainly not a long-term Plan B.

What about crypto currencies? We have written repeatedly about cryptos and the efforts of world central banks to create their own. That would be a nightmare of totalitarian control and we can’t stress enough how dangerous a central bank-controlled crypto would be. As far as Bitcoin and those types of cryptos, we are relatively agnostic. However, the price volatility alone in Bitcoin keeps it from being the center of any monetary system or a viable alternative for a significant percentage of your U.S. dollar based net worth. That being said, speculate with smaller sums if you choose – just be careful. The BlackRock and Vanguard-type players in the financial world are taking control of the crypto space too.

Gold as Plan B
An obvious alternative to the current monetary system is gold, especially considering that it is money and has been for more than 5000 years. We frequently talk about gold and encourage the purchasing of it. However, when contemplating the building of a Plan B there are some concerns that need to be addressed. When talking about the ownership of gold for those trying to build wealth in a comprehensive manner, the most frequently asked question is “where should we store it?” The answer to that is certainly not a safe deposit box, so some end up paying for professional storage, which is generally about .75% annually. That gets annoying and adds up over time. Some prefer to “own” gold through the ETFs on the stock exchanges and that can incur fees as well. Past the storage, some investors are repelled by the doomsdayers and don’t subscribe to the immediate panic. Especially since a lot of the doomsdayer guys have been vocal for a couple decades and disaster just hasn’t happened yet.

There is also the issue with what type of metal to buy – gold coins that are rare and have numismatic value or just bullion? And what about the liquidity? How does one buy and sell? These are challenges when considering diversifying some of your assets out of the dollar, but let’s take a historical perspective on the long-term financial viability of investing in gold before we worry about some of these details. Of course, any time we are discussing such a long-term and nuanced topic/strategy we must oversimplify the analysis, or we will be here all day. But let’s take a look at owning gold since it came back available to individual investors in 1975. We will compare it to owning and continually (for 47 years) rolling a one-year bank CD. For now, let’s disregard taxes and inflation and just look at the dollar performance of these two strategies – and understand that the national average one-year CD rate since 1975 is not perfect and available data. Therefore, these numbers are good for conceptualizing, but they are not precise.

The results are quite remarkable. If you took $100,000 forty-seven years ago and bought gold coins with it, the result would have been almost the same amount of money now as you would have had if you rolled one-year CDs over that same time frame. The price of gold in dollar terms has rocketed almost tenfold during this period. Also, keep in mind that for some of that time the CDs were paying 15-17% annually and for some of that stretch they were paying next to zero (so much for the ides that the Fed exists to provide more stability). For some people this is all they need to see. They want to own some gold, find undisclosed and safe storage for themselves and simply keep it as a rainy-day guarantee in case our monetary system hits the rocks. We understand and encourage that strategy – and for some the discussion can stop there, feeling that at least a minimal Plan B has been covered.

Others want to see if there is a way to take things a step further. Of course, gold mining stocks can be a levered-up way to take advantage of gold prices going higher. During the run up of gold in the late seventies some investors raked in fortunes as some of the mining stocks rallied many multiples more than the rally in gold prices. We are not against that strategy; however, we are convinced it is a difficult and dangerous one. Mining is a tough long-term investment, and we look at mining stock ownership as largely a shorter-term trade.

What if there were a way to earn a low-risk rate of return on gold much like the CDs we just looked at? What if there were a consistent rate of return on our gold – in gold terms. Look at the same comparison chart we just looked at, but with the added assumption that we earned 2.5% in gold every year on our gold holdings. Not wild interest rate differentials like CDs had over the last 5 decades, but just a consistent return in gold on gold… How many dollars would we have now?

As you can see, gold with a consistent yield is obviously a compelling concept. Over time gold prices will go higher as paper currencies erode in value and if you are getting gold interest on your gold – well, you see the results above. We are not talking about speculative or leveraged positions in gold, but just a consistent 2.5% yield in gold on gold. But is that available in our financial markets – is it even possible?

How to Utilize Gold as Plan B
Fortunately, a company based in Scottsdale, AZ but with international operations, has solved the issues with owning gold we discussed earlier. Essentially, they have created a gold “bank”. Investors deposit gold and silver, and companies borrow the metal for use as capital and pay interest in gold and silver. There are many companies that prefer to borrow, and pay interest, in gold and silver terms because they are in businesses that use these metals.

The classic example is a jewelry maker. Imagine that they borrow U.S. dollars and then go buy the gold to make their jewelry.  Then the price of gold goes down so the jewelry they sell makes less money. The problem is that they still must pay back the U.S. dollars they borrowed and risk losing money. If they borrow gold and add their 25% (or whatever) value by making it jewelry, then the U.S. dollar price of the gold doesn’t matter to them. They owe in gold terms and can still make their percentage!

We're Here to Help
Jewelry makers aren’t the only such business and by using gold and silver as currencies for transactions. We have done our due diligence and found, here in Scottsdale, a company that has literally engineered a micro-monetary system. This is not an upstart company providing this metal borrowing and lending marketplace. They have been active since 2016 and they are growing rapidly. The returns that investors depositing metal are earning is very consistently a very low risk 2-3% just like we showed on that chart. There are higher returning opportunities for more aggressive investors. Depositors can log in to their account safely and securely online and view their precious metal holdings, as well as monthly returns. And yes, investors can see their holdings and returns calculated in U.S. dollars if they so choose. Buying and selling is easy and there are no storage fees – rather, there is interest earned!

As an authorized associate we are sharing this information as an investment option for our clients. We confidently consider this an onramp to developing a Plan B for America’s monetary situation that will probably continue to get worse. Reach out to us if you would like to discuss how this might be a good investment strategy for you!

Regards and good investing,

Greyson Geiler