The Dangers of Zero

Zero is an important number in the psychology driving demand for bullion. There are periods when investors find the argument that gold or silver prices “will never go to zero” compelling.

The 2008 financial crisis and the years immediately following it are the most recent example. The fear of conventional securities and even the fiat dollar becoming worthless was palpable for many in the metals markets. Bullion demand hit record levels.

While demand for gold ETFs and futures contracts has been strong in 2016 and 2017, some investors in the physical market for coins, bars, and rounds seem to have overlooked the modest gains of the past two years and are anxious instead to participate in bull markets elsewhere. If they are worried about anything, it is the possibility of missing out.

Gold and silver’s appeal as a safe haven is in temporary eclipse.

The metals markets are awaiting the moment when investors lose their conviction about ever higher stock prices and once again grapple with the idea that prices do fall.

Indeed, the value of some securities can, and does, fall all the way to zero. Companies miss expectations or fail outright. Bond issuers occasionally default and fiat currencies eventually die. Investors discount risk in the euphoria of a bull market.

In fairness, it is also possible for investors to focus too much on the downside.

Given the Fed’s absolute unwillingness to allow overall asset prices to fall and remain at low levels, the fear driving investors in the years following the Financial Crisis certainly looks now to have been overblown. A more meaningful threat is a devaluation in the purchasing power of the Federal Reserve Note – NOT broad-based declines in nominal asset prices.

The Fed will not allow nominal asset prices to crash, but it won’t guarantee our currency retains value.

The Federal Reserve Note has lost more than 97% of its value in the past 100 years, with an acceleration in this decline since the 1970s. That’s 97% of the way to zero.

We’ll find out in the years ahead whether the historic intervention by central banks around the world cushioned economies from the worst effects.

We continue to hold the minority view. Manipulating markets, printing money and propping up failed banks is a recipe for bigger and more destructive bubbles, not prosperity.

Regardless of how history ultimately judges these markets, now seems like an important moment to remind people that metals will never fail and be valued at zero. Even if it sounds blasé, it is worth repeating; physical gold and silver carry no counter-party risk. A gold coin in your possession will have value regardless of what happens or who breaks a promise.

For investors with a portfolio stuffed full of paper, that means genuine diversification. It is why holding some bullion is always a good idea.

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