The Fed's Failure Will Cost You

When I was a kid growing up with my grandparents, I'd head to Louisiana National Bank with my grandmother every few weeks on a Saturday - alwayson a Saturday - and I'd stand quietly behind the wooden counter while my granny moved some amount of money into her Christmas Club account.

I just googled it and found out some banks still offer those accounts today. Having grown up with lower-middle-income grandparents who worked as a tire salesman and a purchasing clerk, I fully understand the rationale behind these accounts: forced savings so that you have financial resources at a more important point in the future.

That's an apt strategy today, though not for reasons anywhere similar to why my granny was saving...

Last week, the World Gold Council reported that investment demand for gold surged to more than 1,000 tons for the first time in history during the first half of 2016. In that, there is a strong message of fear (mixed with some greed) as well as what I consider to be bad news.

First, I'll dispense with the bad news: Of the historic rise in investment demand for gold, nearly 55% was in the form of exchange-traded funds (ETFs). I'm a huge fan of gold to preserve wealth, but I am not a fan of ETFs as the venue for doing so. All ETFs carry counterparty risk that investors don't fully understand - or recognize.

Investors don't realize that with most gold ETFs, they're not buying and selling gold. They're buying and selling pieces of paper the ETF provider creates. That paper passes to market makers in New York, and ultimately ends up as a claim on (or a disposition of) physical gold held by a custodian. Sometimes the gold in question isn't even purchased or sold - it's leased/returned to a central bank.

All of that works fine and dandy in a market operating normally.

But what happens in a true crisis, when gold prices are soaring for whatever reason, and investors are scrambling to buy and others want to take physical delivery of the gold they own? Who knows how that plays out? But there are clearly potential risks in the system that could see ETFs fail to perform as expected at the worst possible moment.

Now for the news of fear and greed...

Gold Has Just One Job

The fact that demand for gold is soaring says a great deal about investors' combined frame of mind these days. People are scared. Having grown up in hurricane country, I liken what I sense today to what it's like as a massive 'cane bears down on the coast - there's a quiet panic as people scurry about getting their stores in order before the devastation.

And I fear devastation is in our future.

Central banks have failed in their efforts to save Western economies. Proof of that rests in the fact that despite more than $12 trillion in quantitative easing measures by major central banks in recent years (that's a sum of money equal to 15% of the global economy), we still have lethargic growth all over the West, including in America, and we have negative interest rates covering roughly a third of the world.

If central bankers had succeeded, we would, by definition, have no need for negative rates or even near-zero rates. Economies would have picked up by now, nearly a decade after the global crisis, and interest rates would be closer to normal.

We're at the point now where central bankers are doing all they can just to keep the economies on the correct side of the line separating life and death. They're like doctors using all the technology at their disposal to keep a terminal patient breathing for a few more days, hoping that their latest experimental treatment suddenly spawns a miracle.

Alas, that's not likely.

There is simply too much debt - too much financial cancer - in the system to save it.

And buyers of gold know this.

They're not thinking: "Deflation in the system; can't buy gold. Gotta own the dollar!"

They're not thinking: "You know, I feel some inflation in my life, I better buy some gold... "

No, they're thinking: "Oh, crap! Central bankers and the politicians made a hash of it this time. Currency failure somewhere in the West is possible, if not probable. I need gold to protect my standard of living and my wealth when governments step in to reset this debt-addled world we live in."

That's gold's only role today - the preservation of wealth.

So let me go back now to my granny and those Saturday trips to Louisiana National Bank...

A Christmas Club for Gold

I realize not everyone can rush out and grab a bunch of gold all in one swoop. At $1,350 per ounce, it's not like gold is an impulse buy.

That's why I tell people who ask that they should have a gold savings account. It's a lot like that Christmas Club my granny belonged to. Every month, you set aside some portion of your money to buy a little bit of gold, with the idea that it will amount to an ever-larger sum over time and that you will have a resource you can draw on when you really need it in the future.

Record gold buying is sending a message of fear. Heed that message now, while you can.

As a lifelong world traveler, Jeff Opdyke has been investing directly in the international markets since 1995, making him one of the true pioneers of foreign trading. He is Investment Director for The Sovereign Society and a weekly contributor to The Sovereign Investor Daily.

Ensure Your Financial Security

In today's uncertain economic times, owning gold has almost become a necessity. One must allocate a part of his earning towards gold investment. While inflation has continued its upward march, the value of gold has always shown a consistency in its growth. Possession of gold has protected and will continue to protect your purchasing power for decades to come.

In 1925, the price for 10 grams of gold was around Rs.18.75. The price of gold has undergone a long journey since then and the prices have roared now. In now-a-days, the cost for 10 grams of gold is approximately Rs.31000. Basically, any article or commodity we could have bought at Rs. 18 at that time, will cost Rs. 30000 approximately.

The important question which revolves in the minds of all is when to buy gold. And the answer to this question is the point at which you feel the need to invest or trade in something which can yield maximum returns for you. Gold is one of the foremost wealth insurance. You may not be able to reach the financial heights in any other investment option as compared to gold. You just need to cater to your own financial needs very wisely. Cost averaging can be a decent strategy. The real goal is to diversify so that your overall wealth is not compromised by economic crisis and uncertainties or the debt and currency issues now unfolding in rising nations.

Moreover there are actually many ways to invest in gold and get the advantage of its bullish. You could buy gold itself; buy gold derivatives, gold stocks and so on. Gold has tendency to tolerate your risks and develop your capital of a potential gold investor. Before investing in gold, you should carefully analyze your overall portfolio of the amount of gold you want to invest in and the funds you have.

While the purchasing price of dollars has fallen dramatically over the years, gold has still been a consistent store of value. At the end of the day when inflation goes up, it really works as the true form of money on the planet. If you need to ensure yourself against inflation, deflation and potential currency problems i.e. if you want to hedge financial uncertainties, there is only one item that will serve you against all seasons and under all circumstances - gold coins and bullion. Ensure yourself and do your homework properly about the company with which you choose to do business, and also make sure that the gold ownership vehicle you pick really reflects your objectives and goals.

Do You Really Own Your Gold?

What does it mean to "own" something? It's a question you should be asking... especially if that something is gold.

The Oxford English Dictionary defines ownership as "the act, state, or right of possessing something." That sounds about right. But what does it mean to "possess" something?

After all, you can own something that's in someone else's legal possession. For example, I own a house in Cape Town. My tenants have formal right of possession under a lease. I sleep at night because the sheriff of the Simon's Town Magistrates' Court will enforce my superior right of possession under South African law if needed - say, if they stop paying rent.

In other words, the "state or right of possessing something" that isn't under your physicalcontrol depends on contracts and on law. That in turn depends on the ability and willingness of those who honor contracts - and enforce laws - to do so.

If you "own" precious metals under certain types of arrangements, you may be shocked to find that you're in a legal limbo where ownership and possession are hazy at best.

It's not a place you want to be.

Deutsche Bank Unter Alles

German mega bank Deutsche Bank is in serious trouble. The International Monetary Fund (IMF) has publicly called it one of the greatest threats to the global financial system. The Russian government (no doubt crying crocodile tears) is investigating its role in rampant money laundering. And the U.S. government has just announced a fine related to its behavior before the 2008 crisis that is more than the bank's current market valuation.

Over the last few years, Deutsche Bank has been the principal banker and repository for a popular exchange-traded commodity fund (ETC) called Xetra-Gold. As you know, I don't like metals ETFs and ETCs because you don't really own any gold - just a claim on gold.

Xetra-Gold, however, differentiates itself from other ETCs by stating in its investor contract that "every gram of gold purchased electronically is backed by the same amount of physical gold" stored in the Frankfurt vaults of Clearstream Banking AG, a wholly-owned subsidiary of Deutsche Börse AG, one of Deutsche Bank's subsidiaries.

Xetra explicitly says that every time an investor buys shares, a corresponding amount of gold is purchased and put into the vault, so that "investors always have the possibility of demanding delivery of the securitized amount of gold per bearer note." Because of this promise, Xetra is extremely popular. During the first seven months of this year, order book turnover on Xetra stood at approximately €1.5 billion. The assets managed by Xetra currently amount to €3.5 billion.

But recently, an Xetra investor encountered a big surprise. When he went to arrange for delivery of physical gold, a Deutsche Bank account executive informed him that physical delivery "is no longer offered for reasons of business policy."

Oops.

Dude, Where's my Gold?

People piled into Xetra because it promised the small spreads and low fees of an ETC and the promise of quick physical delivery of gold on demand. Usually you get one or the other, but not both. It seemed too good to be true. It was.

As things stand, Xetra is a paper-only ETC. If you want to turn your shares into gold, you have to sell them to a willing buyer and use the proceeds to buy gold somewhere else. That's not what Xetra promised at all.

What about those promises of full gold backing? Nobody is quite sure how Xetra and Deutsche Bank are justifying their failure to deliver gold, but the likely culprit is a clause in investor contracts that allows Xetra to modify its terms as the need arises. Many contracts include such boilerplate, and many people ignore it precisely because it is boilerplate.

The problem is that any contract that allows one party to alter the terms at will means that the other party has no real rights of ownership. In this case, Xetra investors don't have gold in their possession, but neither do they have an enforceable right to convert their shares into the metal.

Possession Is 9/10 of the Law

The speculation about Xetra is predictable. Deutsche Bank has probably raided its gold holdings in its scramble to remain solvent. And there's nothing any Xetra investor can do about it, since they never really owned any gold in the first place - just a piece of paper.

If you want the protection that ownership of real gold bullion provides, you need to own it yourself and store it in your own name. You may pay a bit more in spreads and fees, but if you're owning gold as a hedge against financial calamity, that shouldn't matter.

The upside of avoiding massive loss far outweighs the extra cost of being a real owner of gold... not of a worthless piece of paper.

Ted joined The Sovereign Investor Daily in 2013. As an expat who lived in South Africa for 25 years, Ted specializes in asset protection and international migration.