Demand for physical gold as a hedge against losses in paper assets, such as stocks and the US dollar, is breaking records.
Record-Breaking Bank Failures Driving More Investors to Gold
Seven more U.S. banks were seized by regulators on July 2, 2009, pushing this year’s total bank failures to 52 as a result of rising losses on home mortgages, commercial real estate loans, and defaults on consumer credit cards. Even more startling is that bank closures barely make the news these days.
Serious investors, however, are keeping a close watch on the instability of the banking system, according to Capital Gold Group, Inc., a premier provider of precious metals assets in the U.S.
Capital Gold Group reports that investors holding cash in low-yielding bank accounts are turning to the safety and protection of physical gold that they can hold in their own hands and which they control, rather than allowing their money to sit in a bank earning next to nothing or rolling over a low-yielding CD for an additional term.
Gold has traditionally been a safe store of wealth for anyone looking to preserve and protect their long-term savings and retirement, and today more than ever, commercial banks dislike gold because it represents competition for investment dollars and savings, and because they can’t make money without your money on deposit.
Most recently seized were Founders Bank of Worth, IL; Millennium State Bank of Texas, Dallas, TX; First National Bank of Danville, Danville, IL; Elizabeth State Bank, Elizabeth, IL; Rock River Bank, Oregon, IL; First State Bank of Winchester, Winchester, IL; and John Warner Bank, Clinton, IL.
The Federal Deposit Insurance Corp. said its roster of problem financial institutions grew to include 305 banks and thrifts in the first three months of this year. On March 4 of this year, Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures. “A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said.
As of June 30, regulators had seized the most U.S. banks this year since 1933, a total of 45, with six months left to go.
“Banks are making good efforts to deal with the challenges they’re facing, but today’s report says that we’re not out of the woods yet,” FDIC Chairwoman Sheila Bair said in a statement. “As I see it, we’re now in the cleanup phase for the banking industry.”
“Troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry’s performance,” Bair said in a statement.
The names of banks on the watch list are kept secret to prevent runs that could destabilize them further. But at the pace at which failures are happening, it won’t be long before we learn the names of those financial institutions in trouble.
In the meantime, record numbers of investors aren’t waiting around. They are moving their retirement assets out of the banks, the stock market and money markets and into physical gold IRAs, a traditional hedge against volatile markets and returns that can’t keep up with inflation.
Consumers Going For Gold
Total demand for all types of gold – bullion, proof, and numismatic – have doubled year over year and continues to escalate as people realize the full impact of our economic condition. Gold is being viewed as a store of wealth, an essential part of every investment portfolio, and vital for the preservation and protection of one’s assets in very uncertain economic times.
People are reporting huge losses in the market, in their IRAs and 401ks, and are unhappy with low-yielding bank accounts. They realize these types of accounts will never reach their intended goal.
People are also catching on that shares in gold mining companies, gold ETFs, and shares of a gold mutual fund don’t provide the safety and security of the tangible asset because they’re still investing in paper gold. They never actually get to take physical possession of the metal. The safety and security of gold is in taking possession of it. You keep it in your hands, you put it somewhere safe, and you allow it protect the buying power of your money for the long-term.
As for those concerned about whether it is too late to enter the market: Buy gold now, then wait.
Considering gold’s inverse relationship with the dollar, a shrinking US dollar bodes well for gold. The US Dollar Index has lost over 30% since 2001, and continues to decline, while gold has risen over 300%.
Investors have a much better chance of recovering losses in the market by holding gold instead of stocks.
Louise Yamada, one of the top technical analysts in the business, stated in a recent CNBC interview (March 2, 2009) that the destruction of wealth relative to the crash of 1929, when the market declined 49%, was really in the 3-4 years following 1930, after a secondary rally in the market, which she related to the rally of 2007 within an ongoing bear market.
“In 1930, when the crash support level of 1929 gave way, that was the decline was wiped out the wealth, and that’s what we’re worried about today,” she said.
With the recent rush to buy gold, as well as cash-strapped consumers selling their gold to pay for everyday necessities, complaints against gold dealers have risen. Buyer beware! The biggest offenders, according to a recent tally on the Better Business Bureau’s website, are companies advertising heavily to buy unwanted gold jewelry on cable television channels. One company had 314 complaints in the previous 36 months. Another had 97. The complaints range from pricing discrepancies and misleading advertising to customer service issues and claims for lost shipments.
“Not every internet gold buyer is dishonest,” says Michael Gusky, whose company, GoldFellow.com has no complaints against it. The company was created to provide consumers a safe, competitive and easy method to sell unwanted gold, sterling silver and platinum.
“The owners of GoldFellow are the most honest and ethical dealers I have had the pleasure to do business with,” says Carla Stern who first tried to sell her unwanted jewelry to two other internet gold buyers. “GoldFellow paid me $1800 for the same package I had sent to a highly advertised on TV and Internet dealer, who tried to pay me only $310,” explains Stern.
Gusky strongly recommends reading a company’s Website and comparing policies and pricing before choosing a gold buyer. “Ask how much you will be paid for one pennyweight of 14 karat gold jewelry and compare prices. Ask if you will be notified of your value before you’re paid,” he suggests. “And for goodness sake, never agree to drop your valuables in a regular mailbox. There’s no record or proof that it has been mailed – and it’s not insured although many of our competitors would like you to believe otherwise.”
As for the production side of things, market research firm IBISWorld states that global mine production of gold decreased by 3.3% to 2,400 tons in 2008. Higher production in China was more than offset by declines in other major producing countries, especially Indonesia.
“China extended its lead as the largest producer over the year, accounting for 12.7% of world production”, said IBISWorld analyst Toon van Beeck. Other major producers of gold include South Africa (10.7%), the US (9.9%), Australia (9.7), Peru (7.5%), and Russia (7.1%). Countries outside of the top eight producers account for 34.2% of production.
In rare public announcement not too long ago, China revealed its gold holdings, which are 1,054 tons — up from 600 tons in 2002. Signs that China is losing confidence in the US dollar as a reserve currency further attest that gold is becoming the world’s de facto currency.