It’s perhaps not so astonishing to see another financial firm blow up in a matter of a couple of days with Knight Capital reporting a $440 million loss due to a software malfunction. But this is a reminder just why holding physical gold and silver in your portfolio is a good idea right now.
The value of precious metals does fluctuate daily but it will always be there because you do not have a third party between you and your wealth. Gold and silver are money in its purest form.
Third Party Risk
Nobody is going to ring you up to announce the bad news that your money has gone, unless you leave your safe open for some burglar to steal it. Yet that is exactly what you do with third party risk in financial firms in times of crisis.
Not only does it make sense to keep some of your assets outside of the financial system when that same system is malfunctioning so badly, but is it not obvious the you will not be alone in thinking this.
You and millions of others are thinking about buying precious metals for precisely the same reasons. And when you all actually do so then the demand for gold and silver will go up and so will the price.
The supply of gold and silver is pretty much static apart from tiny amounts of annual production that cannot be easily increased. There is no inflation of this money supply.
So it is hardly surprising that gold and silver become increasingly popular as a store of wealth when financial institutions can lose billions in trading mishaps. In truth these institutions are far too leveraged, that is to say they trade on little actual capital and so the smallest error becomes a tragedy.
2008 Precedent
In 2008 Merrill Lynch, Countrywide Mortgage and AIG all became insolvent within a week. Do you remember Lehman Brothers? How about MF Global and more recently PFG Best?
Now how will central banks respond? Thursday the ECB got away with disappointing markets with another holding statement but it knows its time is up. One way or another money printing is going to have to happen to save the euro zone from sinking under the weight of its own sovereign debt.
Increasing the supply of paper money while the supply of gold and silver remains fixed can only have one result, higher prices for precious metals. And at most we can only be one crisis away from that happening. Then third party risk will be truly back on the agenda and gold and silver’s true value will be evident to al.
