Paper assets are those assets that are simply owed on paper. This includes such assets as stocks, bonds, ETFs annuities, mutual funds, and cash. Physical gold is the most practical and private way for most investors to diversify their assets away from paper.
We speak to many clients every day who are seeking to add safety and stability to their portfolio while ensuring wealth preservation. We appreciate the opportunity to educate our clients on true wealth preservation and diversification. Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. The client told me,
I visited my advisor at the bank today. My advisor told me I am diversified to weather any financial storm. My whole portfolio is in mutual funds, annuities, bonds, and cash. I asked my client if those assets were all paper assets in dollar terms. My client answered yes. I asked my client if they held any of those assets in your possession. My client answered no. I asked my client if those assets were vulnerable to a computer hack or cybercrime. My client answered,
I hope not. I asked my client if all those assets were tied to the banking system. My client answered yes. I asked my client if she held her mutual funds, annuities, bonds, and cash privately. My client said no. I told my client she was not diversified, and she really should be thinking about wealth preservation that she can control. Something she can own privately away from the banking system. Something that is not just a paper asset.
Global debt is spiraling out of control
Global debt is a figure that includes the debt of governments, households, and non-financial firms. The pandemic has added about $24 trillion to the global debt over the last year, to take the total to $281 trillion and the worldwide debt-to-GDP ratio at over 355%. The rise in the last year in global debt is much greater than the rise in the 2009 financial crisis. The rise is much steeper, almost as if it takes much more printing and stimulus today than it used to. Stimulus and printing to get a little movement from the global economy. It took 2000 years for global debt to reach $100 trillion somewhere around 2001. In only twenty years since then, global debt has added on $180 trillion to approximately $281 trillion. A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets—a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset. Global derivatives could be worth $1.5 quadrillion. When derivatives fail during the next financial crisis, the debt behind those assets will also fail. Global debt and gross derivatives could exceed $2 quadrillion by 2030. For those investors who are aware of this toxic global debt and derivative situation, physical gold has always been a good way to diversify and lighten up on paper assets.
Margin debt is as high as it has ever been
Margin debt is the debt incurred by brokerage customers who use a margin account for trading. It is a situation where you borrow a part of the initial capital from the broker to purchase securities instead of buying it from your savings. FINRA has released new data for margin debt, now available through May. The latest debt level is up 1.7% month-over-month and is at a record high. Margin debt peaked in the summer of 2007 at $425 billion, three months before the market did and it tanked. Margin debt stood at $525 billion in March of 2020. It now stands at $875 billion in just a little over a year later. That is quite a spike in margin debt in such a short period. Such a huge spike will eventually mean a serious fall in equities. Stock markets are overvalued historically by many metrics and ratios, but they still could go higher with all this free money through stimulus and debt. Since 2000 after margin debt hits a peak, the S&P500 falls anywhere between 20–60% over the following few years. The huge spike in margin debt makes an expensive equity market much riskier. For those investors who are aware of this big margin debt spike, physical gold has always been a good way to diversify from your paper assets.
US debt to GDP has increased by 440% since 1980
In the mid-1940s, the US was dealing with the costs of World War II. Debt as a percentage of Gross Domestic Product was about 115%. The Fed engaged in yield curve control until 1980 and yields spiked. US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983. The Federal Reserve board led by Paul Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The federal funds rate is .25% today. Today debt as a percentage of gross domestic product is 135%. With the pace we are on today, and the upcoming debt that is unavoidable at this point, debt as a percentage of gross domestic product could be 200% by 2030. Some day this reckless banking must matter. You cannot fix a credit problem by issuing more credit. History proves that this debt will eventually matter. It even mattered to the Roman Empire if you recall. The US Congressional Budget Office projects that debt as a percentage of GDP could be 200% by 2050. I think the US Congressional Budget Office is being far too conservative in its projection. For those investors who are aware of this debt as a percentage of the gross domestic product situation, physical gold has always been a good way to diversify from your paper assets.
There is a time and place for everything. Of course, I have played a few hands at the casino. Of course, I owned some internet stocks twenty years ago. Of course, I flipped a home in 2008. Speculation is great while it is working. Someday soon speculation will not work, and we will not know when that will be or what will cause it. Common sense will tell you that all this debt will end very badly. Physical gold is for those investors who do not want all their assets in paper. Physical gold is about wealth preservation. Debt is going parabolic. Equity and real estate valuations are getting to historical extremes. Sure, they could become more extreme, and they could also fall apart at any time. If speculation, luck, debt, hard work, inheritance, whatever made you wealthy to some degree over the past thirty years, common sense would say to diversify and protect it. In such a reckless banking and debt era, defense is in order. Physical gold needs to be a significant part of your nest egg for now and for the future. The ship is going down, but it does not mean that you must go down with it. The mother of all bubbles will eventually burst.