Rethinking “safe” investments

by
Claudio Grass
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Part I of II by Claudio Grass, Hünenberg See, Switzerland

To most observant citizens and diligent investors it is surely quite obvious that the current monetary, fiscal and banking system is inherently flawed, hopelessly unjust, corrupt, unsustainable and simply destined to collapse sooner or later. With every (predictable) recession and every (foreseeable) crisis, this structure gets weaker; its very own architects increasingly second-guess it, mistrust and question it and the wider public sees ever more clearly its fundamental defects, its inadequacies and its fatal flaws.

The formula for individual investors (until not too long ago) used to be a simple one – at least for those reasonable, sensible investors that sought stable, predictable and reliable returns: the classic 60-40 portfolio, consisting of 60% stocks and 40% bonds. For the longest time, it was perceived as the prudent thing to do, as the safe and responsible approach. And justifiably so, as it did work – for a time at least.

In fact, it worked so well in that (brief but impressive) period of time that it led many investors to adopt a dismissive view towards real assets, particularly towards physical precious metals, and to grow dangerously, foolishly and hubristically arrogant towards the need to secure any kind of “insurance” in case their outlook and analysis was wrong.

Many investors, analysts and “experts” were so extraordinarily overconfident and so unreservedly assured, not only that their “magic” formula was uniquely effective, but also that it would continue to be so – they genuinely believed they “cracked the code”. Bizarre as this approach and this juvenile confidence might seem to us today, to be completely fair, it did seem reasonable at the time. More than that even, it attracted a sizable following. Countless investors embraced it back then and the optimism it projected even enticed many ordinary savers to do their homework, to educate themselves and to learn and understand more, just so that they could become a part of this ambitious, aspirational, “proto-disruptive” group.

After all, the actual strategy, the overall mentality, and the “promised” returns were realistic and reasonable. None of it was reliant on blind greed and reckless speculation. If anything, it required patience, moderation and restraint. And while these qualities are generally commendable for any human being and specifically indispensable for any long-term, responsible investor, those who actually adopted this strategy too enthusiastically to ever revise it made one grave mistake: they misplaced their faith and their trust.

They were deceived, they were taken advantage of, and they were swindled by the promise of stability, security and dependable expertise, honorable conduct and human decency.

To be clear and to be fair, it was not a silly or risible mistake to make. At that moment, investing in (Western/“advanced” economy) government bonds was indeed widely seen as the safe, conservative bet. It was the responsible, mature, sensible thing to do, Many readers might even recall from high school or college the mantra “government debt is virtually risk free”; basically equivalent to keeping cash in the bank.

This “given”, this “axiomatic truth”, was not just what state schools taught, it was also the conventional wisdom in the investment world for decades. Pension funds, public or private, would heavily rely on it, prudent and responsible individual investors and everyday savers in search of safety and stability would flock to these assets.

Everyone accepted it as “received wisdom”, and nearly nobody dared question the credibility, creditworthiness or overall reliability of their government. Surely, they thought, if you’re going to lend your money to anyone, there’s nobody more trustworthy than the State itself: any single person, no matter how well you think you know them, or any business, small or big, no matter how successful or robust it might seem at the moment, they could all easily go bust from one day to the next. And even if do not, they could just decide to cheat you.

Your own government itself, though… It would never betray you like that –  the same thought process goes… Surely, it wouldn’t cheat you out of what you’re rightfully owed and it would most certainly never just “go bust” and casually announce that it is unable to repay you. Or if it borrowed any amount of money from you, it would never pay you pack a mere fraction of it, in a currency that’s worth half of what it was when you originally granted that loan, and then just unilaterally declare that its debt is paid in full. It would never do that, would it?

—————END PART 1

In the upcoming second part, we’ll dive a little deeper into the topic and its far reaching (and perhaps surprising)  implications, and we’ll also examine the bigger picture and look at what this all might mean for physical gold and silver investors.

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland.

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