How to Position Yourself for the Future: Step 1 - Financial Security

Wednesday, December 7, 2011, 9:12 AM

What we care about most here is helping people adjust and adapt -- happily, profitably, and safely -- to what is likely to be a very different future.

Our framework centers on the idea that humanity is facing a set of predicaments quite unlike anything else in the history books. Because this time there are no borders to cross in search of safety; the entire world is involved. On a global basis, we've never experienced collective debt loads of this magnitude. Never before has an entire set of intertwined currency systems -- all debt-based money -- collectively been backed by nothing more than the hope of a larger future, and never before have this many people had to figure out how to move from more-concentrated to less-concentrated energy sources (from fossil fuels to sun- and wind-based alternatives). 

The convergence of exponential trends in population, energy depletion, debt accumulation, and an economic model that is hooked on growth will combine to produce quite an interesting, if not challenging and disruptive, future. The funny thing about complex systems is that they are unpredictable, and therefore preparing for what may come is a non-trivial (yet absolutely essential) task.

All of this is spelled out in the Crash Course and more recently in a succinct presentation that I gave at the Madrid Gold Conference in November.

The immediate question for most people is What should I do?  We break down the intelligent responses into three big buckets: financial, physical, and emotional. In this report, I detail the financial steps that everyone should undertake right now to manage future risks using the framework that I use to assess and understand the financial world and markets. 

My approach is founded as faithfully as possible on facts and data. But my views on how the markets operate are formed from personal experience, observation, and connecting a few dots that rely on opinions and sometimes beliefs. Therefore, this financial and investing framework is something that you should only accept if it works for you -- and reject if it does not.

The Basics

I am of the opinion that we are in a gigantic structural bear market. The role of any bear market is to get the most people to lose the most wealth. And so our first goal is to help you be among those who lose the least, as they are the ones who win the most.

This bear market, however, has more to it than the usual bust the follows a typical period of irrational exuberance. Where past bear markets could always count on the natural world helping to induce a recovery by providing more natural resources (especially energy) in whatever quantities and qualities that were necessary, it seems that this time oil will be playing a spoiler role. 

Because this bear market has the additional complicating factor of being global in nature, mauling a global financial edifice saddled with the most debt and liabilities ever recorded in addition to stubbornly high oil prices, it is my view that the economy will not respond in the same ways as it has in the past. Further, we need to be mindful of the idea that the risks are large (derivatives, anyone?), they are actively and collusively hidden from view (what are banks really holding?), and where they are concentrated is mostly unknown -- something I spell out in greater detail in Part II of this report.

Even more troubling, it is no longer unthinkable that one or more major currencies will lose some or all of their value over the next few years.

The conclusion I draw from all of this is that this is a period of time to be concerned with return OF capital instead of return ON capital. Maximum safety has its own rewards these days, not least of which is the value of having a good night’s sleep.

Our basic advice has changed little over the years.

Gold (and Silver)

The first step is to have physical gold in your possession. By this we mean bullion coins or bars stored somewhere very secure that does not place you at risk. I keep mine in vaults and safe deposit boxes, mainly because I lead a very public life and find it too risky to store it in my home. You may wish to protect yourself similarly.

Gold remains a very attractive store of wealth to me at this point because of the main tailwind factors that remain in place today, as they have for years:

  1. Negative real interest rates. Whenever the price of money set by the Federal Reserve is below the rate of inflation, you have what are called ‘negative real interest rates.’ Such periods of time are historically quite favorable to the price of gold. To understand why, just consider how much harder your choice to hold gold would be if you could get a 10% return on Treasury bonds today. When interest rates are positive, there’s a choice to be made about whether or not to hold gold. Plenty of people will decide the answer is ‘not,’ and this lack of buying pressure will keep the price of gold down.
  2. Reckless monetary policy. Since 2009, the world’s central banks have eased more than they ever have in history. They’ve done a lot of it in public and even more of it in secret, to the tune of tens of trillions of dollars. All of this money has been printed out of thin air, and there are no credible plans for how it is all going to be reeled back in someday. That’s just reckless.
  3. Reckless fiscal policy. The world’s reserve currency belongs to a government that spends 40% more than it takes in and runs a deficit in the vicinity of 10% of GDP with no end in sight -- a government that also carries enormous off-balance sheet liabilities in the tens of trillions of dollars and an effectively broken political machine that assures paralysis through at least the next election cycle. Note that I didn’t put a date on that election cycle; I am confident that this statement will be true for many an election cycle to come. 

There’s a fourth reason that I really like gold, centering on the idea that there’s a possibility that gold may be remonetized someday. Not because it’s a perfect system, but because in times of crisis, the solutions that get adopted tend to be the ones that are lying around. 

We don’t have any other tried-and-true monetary systems to dust off and reuse that can do all of the things that we know gold can do, such as assure a balance of international trade and monetary flows and impose a non-evadable limit to what any given country can do in terms of overspending and consumption. 

Perhaps there are other ideas sitting on shelves somewhere in the IMF or World Bank libraries, but none have been tested, and so they will not be selected in a moment of crisis.

Like any good call option, gold remonetization will pay off for the holders of gold quite handsomely, assuming that confiscation without adequate compensation is not also part of that future scenario. My personal target for the price of remonetized gold is somewhere between $10k and $30k per ounce.

Silver is an entirely different metal to me, and I love it because of its industrial utility more than its potential monetary role. It is the most conductive and reflective element with other magical properties as a microbicide for which no substitutes currently exist. Further, it tends to be used in trace quantities, so if it goes up significantly in price, its demand does not ratchet down by an equivalent degree. 

One final thought is that a lot of silver is produced as a by-product of other base metal production, and I am of the view that as energy costs continue to rise, fewer and fewer mile-deep mining pits will be dug into the earth in pursuit of vanishing ore yields. So scarcity becomes a factor, combining nicely with the observation that a whole pile of silver is simply lost, one smidgen at a time, into the environment every year, never to be economically recovered. Once mining slows down, people will suddenly realize that there’s a lot less silver left above-ground than is perhaps commonly assumed.

I happen to hold silver as my generational play: If I ever have grandchildren, I plan to pass my silver along to them. This exposes my personal belief that we will go through a dark period economically, but that recovery from some lower level will occur, and silver will be both scarce and in demand for industrial processes in that future.

For more information on the specifics of where to buy gold and silver bullion and in what proportions, please read my free guide on buying gold and silver.


Given the instability in Europe and elsewhere, the possibility of a banking holiday that would prevent credit and debit cards from functioning normally is no longer too remote to consider.

Because we have no idea if or when the banking system might enter a protracted shutdown due to some form of systemic failure, we recommend that everyone have some cash out of the bank equaling at least three months of living expenses. Similarly to gold, the fact that bank balances are earning close to zero percent makes the decision to hold cash in hand a pretty easy one.

During our most recent natural calamity here in New England, which resulted, once again, in the power being off for days on end, people discovered that cash was king, especially for the local purchase of needed goods. 

One final note to anybody reading this in one of the PIIGS countries: There’s not much reason to keep your money in either cash or deposit form in the banks there. In fact, there are plenty of reasons to remove your money from those banks and place it elsewhere, and you’d be joining tens of thousands of other former depositors who have already moved their money to safer locales.

In fact, when it comes to pulling your money from a failing banking system, you either get it out in time or you don't. It's a binary event.

Anxious Greeks Emptying Their Bank Accounts

Georgios Provopoulos, the governor of the central bank of Greece, is a man of statistics, and they speak a clear language. "In September and October, savings and time deposits fell by a further 13 to 14 billion euros. In the first 10 days of November the decline continued on a large scale," he recently told the economic affairs committee of the Greek parliament.

With disarming honesty, the central banker explained to the lawmakers why the Greek economy isn't managing to recover from a recession that has gone on for three years now: "Our banking system lacks the scope to finance growth." He means that the outflow of funds from Greek bank accounts has been accelerating rapidly.

At the start of 2010, savings and time deposits held by private households in Greece totalled €237.7 billion -- by the end of 2011, they had fallen by €49 billion. Since then, the decline has been gaining momentum. Savings fell by a further €5.4 billion in September and by an estimated €8.5 billion in October -- the biggest monthly outflow of funds since the start of the debt crisis in late 2009.


There are still more people with their savings in Greek banks than there are people who have removed their funds, and this reflects the inertia that is typically found at key moments like these. I would submit that the rational response for anyone looking at the actual data would be to get their money out of Greek banks as soon as possible, even though I know that everyone cannot do this at once because fractional reserve banking assures that those funds are not really there. It's a conundrum, but enlightened self-interest may trump civic altruism here.

Bank and Trading Accounts

Most of us need to have money in both bank and trading/brokerage accounts. Not all institutions are run equally well. Because of this, I keep my money spread across three banks and three brokerage accounts, which I regularly monitor to ensure that those monies and funds are safe.

The banks are all highly rated, are well-run by my standards, and have never appeared on any of the Federal Reserve bailout lists. While this is no guarantee of anything, I prefer to avoid companies that have already demonstrated that they cannot manage to survive without being bailed out from time to time. 

Further, the MF Global fiasco, where segregated client accounts were raided and drained to support the failed bets of John Corzine, was an enormous wake up call, or should have been to those with money in a brokerage account(s). 

What it told us was that major violations of normal operating practices and agreements will not only be tolerated by the authorities, but helpfully covered up after the fact. More on that below.

My general rule is that I only keep as much money in any one account that I could lose without being overly harmed. Sure, it would hurt, but I wouldn’t be wiped out; far from it. I keep less than 10% of my liquid net worth in any one institution precisely because I have no faith that the rule of law will protect me or that the bailouts will continue indefinitely. 

Editorially, the loss of investor faith in US institutions and the erosion of the rule of law is an incredibly important process, yet it seems to be almost entirely out of mind for US authorities -- as if US dominance in something as simple as running lucrative paper-trading and banking schemes was somehow a permanent birthright.

Having the Right Investments

Listen, if we were at the endgame stage and the situation was clear, we could just toss all of our money into gold (and silver) while we wait out the emergence of the next monetary system and that would be simple enough. We'd drain all of our accounts, buy tangible assets, and patiently wait.

But we’re not there yet, and a lot of time may yet pass before anything too dramatic happens. Life goes on, bills must be paid, savings must be stored somewhere, and cash flows must be managed. 

Here we are adamant that you need to be working with a financial advisor whom you trust to safely navigate the most perilous speculative environment that anyone has lived through. If you must have your money at work in the markets, then you must have someone you can trust managing it for you.

It is our view that the days of simply tossing your money into a diversified universe of stock and bond funds is over and that over the coming years, returns from these vehicles will be lackluster at best and destructive at worst.

You deserve to work with someone who understands the true predicament we are in, knows the risks, and can adjust your holdings to match your life stage and preferences. I have listened to hundreds of stories from people who tell me that their broker openly scoffs at the idea of holding gold and actively tries to dissuade ownership for a variety of reasons (“it’s in a bubble” being one). Or their broker just tilts their head and stares quizzically when the subject of currency risk on the portfolio, especially dollar devaluation or euro destruction, is raised.

You deserve to work with people who not only appreciate the risks, but know how to manage them, and even have a plan for profiting from some of the larger and more obvious trends -- in energy, for example.

Most importantly, you should be able to sleep well at night knowing that your money will not be absconded by some former Goldman Sachs alum, nor tossed faithfully but blindly into a failing investment strategy because that’s what worked in the past. 

To this end, we are slowly accumulating a list of firms and investments that we think offer appropriate solutions for these troubling times (contact us if you're interested in learning about them). But do not skimp on doing your own due diligence to identify wealth managers that provide you with the insights and conscientious stewardship most fitting for your needs. At the end of the day, you have to be able to trust yourself and the decisions you make with your assets -- or anxiety will keep you awake at night and likely lead to poorer decisionmaking when volatility really hits.

Putting Safety First

The basic theme here is safety. Managing risk is everything in these times when official policy is opaque, risks are actively hidden from view, and true losses on bank balance sheets are still being masked by fantasy accounting gimmicks.

For example, Bloomberg went through an exhaustive FOIA battle to get at Federal Reserve documents that would show the true extent to which banks were bailed out during the crisis. 

Secret Fed Loans Gave Banks $13 Billion 

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy.

And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.


As speculated about here during the crisis, there was plenty going on behind the scenes that was never publicly disclosed about the true nature of the risks that had been discovered or the scope of the efforts to contain the damage.

How can anyone assume that we know anything about the actual condition of the banks or the true risk of a systemic crisis now? Personally, I am hopeful that the risks are low, but hope alone is a terrible strategy, especially when it comes to money and investing.

Most gallingly, even as the banks were receiving money at 0% and lending it back to the US government at 3% for the ultimate free lunch in risk-free profits (with special emphasis on the word “free”), they were doing two things: paying themselves record bonuses and continuing to make larger and larger bets on derivatives.

What can we deduce from the extra $100+ trillion in derivatives taken on over the past two years? The key thing would be that the lesson was not learned.

Making Better Decisions With Your Money

So my conclusion is simple enough: Where the chance exists to take money/wealth out of the banking system and store it elsewhere for a while until the situation clarifies a bit, it is a prudent thing to do. Gold and cash represent two obvious ways to play that game, with gold sporting the larger role in that story.  For money that remains in the system, be sure to rely on trusted institutions and advisors as much as possible. 

In Part II: The Framework for Predicting Our Financial Future, I share in detail a framework that has taken me years to refine, which I use to forecast what to expect from the financial markets, how things will most probably unfold, where the risks lie, and otherwise demystify and enable investment and wealth management decisions. The intent here is to provide a hard-won set of rules that can increase your odds of making sound decisions when facing tough choices in the increasingly volatile future we're entering.

Click here to access Part II of this report (free executive summary, enrollment required for full access).

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Kid-Canada's picture
Status: Member (Offline)
Joined: Aug 4 2011
Posts: 5
Interesting and great report

Interesting and great report here as well as the video from Madrid.

Read into a little bit on some of the new silver mining projects coming online in the next couple years, specifically Pan American's Navidad project in Argentina (I think the second largest or at least one of the largest undeveloped projects in the world) showing resource estimates at something like 5 troy ounces of silver per tonne (~0.01-0.02% Silver), with a little bit of lead and copper mixed in. A bit worrisome to contemplate the amount of effort for that kind of ore grade if my math is correct.

Kinda makes me think a silver price spike might come sooner than later and even if there is a slowdown economically and some decreasing demand (and a short-term price drop in silver), supply will also soon decrease as much mining activity will be economically unfeasable at such low prices.

That 3/4 quadrillion derivatives number is also just a little bit scary...'s picture
Status: Member (Offline)
Joined: Dec 4 2011
Posts: 8
Brokerage Risk

The MF Global / John Corzine fiasco should scare the begeezus out of investors. Now, not only are investors taking risks on their own bets, but the are also taking on the risks of their brokerage.

teyesahr's picture
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Joined: Oct 7 2009
Posts: 3
Retirement accounts

My wife and I are both young (26 & 29 years old). We both recently got our first "real" jobs, the type with reasonable pay and benefits. We each work for non-profit institutions (a public school and a land conservancy), each of which offer 403(b) retirement accounts. Our question is: is it worth putting money into these accounts? I find it very difficult to imagine that money still being there in four decades when we are ready to retire... if that is even an option. I don't want to throw away present money (which could be exchanged for any number of tangible things items), on what I think is likely to be a broken promise of future security.

What should we do?

Poet's picture
Status: Diamond Member (Offline)
Joined: Jan 21 2009
Posts: 1893
Teyesahr, Make Your Own Decision


You'll have to consider a number of factors, like:

1. Do you get a match? How much? If you get a 100% match, by all means, that's worth considering.
2. What kinds of investment options are available to you? If you only have a few stock and bond funds, it may not make sense. But if you can invest most of it in money market and individual funds or stocks or bonds, it may make sense if you are a savvy investor.
3. Do you have debt? Considering most people's credit card rates are between 10% and 22%, you'd do better to pay off those debts, even lower-interest student loans and auto loans, first, while only putting a very token amount in the 403(b) fund.
4. Are you good at saving and staying away from your savings? For some people, a 401(k) or 403(b) is the only way they've ever managed to save money.
5. Are you also able to diversify your wealth by buying some preparation materials, saving money, putting some money into a Roth IRA, maybe even precious metals? Some people belief it is important to diversify.
6. What your values or goals? Some people are of the belief that 401(k) or 403(b) are useless despite any "match" temptations, because of the limitations and penalties on withdrawal and because of their view of the future. Others believe that debt free and having 6 months to a year of living expenses first, makes sense before they consider any investing. If you are buying a house and anticipate pulling money out, a Roth IRA may make more sense: "Up to a lifetime maximum $10,000 in earnings withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence for a first time buyer." (Source: Wikipedia) This would be one of the few times when Roth IRA earnings are not federally taxed when withdrawn before age 59.5.

What should you do? Make your own decision after consideration of various factors.


teyesahr wrote:

My wife and I are both young (26 & 29 years old). We both recently got our first "real" jobs, the type with reasonable pay and benefits. We each work for non-profit institutions (a public school and a land conservancy), each of which offer 403(b) retirement accounts. Our question is: is it worth putting money into these accounts? I find it very difficult to imagine that money still being there in four decades when we are ready to retire... if that is even an option. I don't want to throw away present money (which could be exchanged for any number of tangible things items), on what I think is likely to be a broken promise of future security.

What should we do?

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