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The Hard Assets Alliance Blog

Watching for the Canary in the Coal Mine

Like most investors, the experience of the financial crisis left an indelible mark on me as an evaluator of risk. Like most of you, I spent countless late-night hours reading, consuming the details of the crisis in real time as events unfolded. As I more intimately acquainted myself with vaguely understood terms like "credit default swap" and "collateralized debt obligation," I vigorously directed my energies toward grasping the true scope of what was unfolding, and more important, what the official reaction would be.

Unbeknownst to me was that experience would lead me to a completely new philosophy of counterparty risk, money, savings, wealth, and diversification. And after the immediate volatility had subsided, I did an autopsy on all my mistakes before and during the crisis, big and small. The biggest question I had to personally answer to myself is why I didn't see it coming. At what point during that period were the warning signs so glaring that I should have been better prepared for what was approaching?

After a few years of reflection, I am convinced that I should have seen it all coming, after the failure of the auction rate preferred market. The moment when these supposedly riskless investments – often used by investors to hold short-term cash – became completely illiquid, I should have known something big was coming. What one day was considered one of the safest instruments around was the next a completely bid-free, frozen market. To this very day – over five years later – 100 billion of those dollars are still tied up in auction rates. This blatant miss has driven me to follow current financial events, searching for that proverbial canary in the coal mine in today's market environment.

Mr. Market is Unfazed

Sadly, countless events are unfolding every day that in normal times would shock the markets to their very foundations, and yet today they elicit nary a yawn.

Whether it's Japan embarking on the largest monetary stimulus in this history of civilization or Cypriots waking up one day and finding out that the bulk of their life savings is in all likelihood gone, the warning signs seem to flash brighter and brighter every day that something is wrong. The rules seem to change as quickly as the headlines. It seems risk management has become a part-time job for proactive investors around the world.

In this vein, the recent announcement regarding Dutch Bank ABN Amro's decision that clients with gold deposits at the bank will no longer be able to take delivery of their property set off my alarm bells. Instead, all exchanges will be for cash. Refusing delivery is the ultimate form of betrayal to a gold investor. People purchase physical precious metals for many reasons; one paramount to almost all of them is the ability to use gold as a hedge against unpleasant economic outcomes... a hedge that protects value when the value of everything – including money itself – comes into question. Integral to the function of that hedge is the ability to take possession of your property at any time. What's the point of being forced to settle in currency when diversification out of currencies is one of the main reasons you bought gold in the first place? We already have a readily accessible method of buying gold that only settles in cash; it's called an exchange-traded fund.

Sophisticated investors buy the actual yellow metal because in its physical form gold cannot default and cannot be downgraded.

At the Hard Assets Alliance, we spend a lot of time helping clients make informed, educated decisions on how to buy their precious metals and where and how to store them. Our clients spend a great deal of time and effort evaluating counterparty risk, and we take the responsibility of helping manage that risk very seriously. That's why at the Hard Assets Alliance we store our metals outside the banking system, where a quick change in the rules isn't going to leave our clients flat-footed as in Cyprus or apparently for some ABN Amro customers. Providing our clients with timely delivery of their property on demand is at the very foundation of our business and our service.

I can't help but imagine how painful it would be for a physical precious-metals investor to be in the shoes of having a counterparty default on their commitment to them. To spend the countless hours of effort and energy of market analysis to come to the conclusion that gold should be a cornerstone of your portfolio, only for a counterparty to default on that obligation – likely at the worst possible time – is one of the worst imaginable outcomes.

Nothing is worse than having the correct investment thesis but the wrong vehicle of exposure. If nothing else, this should be a warning to precious-metals investors. Whom you choose to buy and store your property with is just as important a decision as how much to buy.

At the Hard Assets Alliance, we will continue to work diligently to earn your confidence in that regard. And in addition to offering real-time buying and selling of all products – all through competitive bidding on our SmartMetals™ platform– all of our clients' assets are 100% allocated in the location they choose. Plus we always facilitate delivery immediately upon request.

For an in-depth look at your many options for buying, selling, and storing precious metals – including answers to all of your questions about the Hard Assets Alliance, download your free copy of the SmartMetals Action Kit now.


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