When they’re defending the high allocation of gold in their portfolios, many gold bugs point to the fact that ever since the 2008 financial crisis, central banks have been printing money at a rapid pace in a desperate attempt to keep the world economy out of another recession. Economic recovery this decade has been slow and sluggish, prompting unprecedented actions from central banks, including the Federal Reserve. Between the four most powerful central banks in the world, the U.S., Japan, the ECB, and the U.K., $9 trillion have been printed in the last decade. That’s a 12.5% increase in the world’ total existing cash, which now stands at $80.9 trillion. Despite rapid cash printing and low interest rates, central banks have struggled with low inflation.
Where Money Is Really Made
But that’s practically a drop in the ocean compared to the real impending debt crisis. That $80.9 trillion is only the actual cash in existence, meaning coins, paper money, and deposited in bank accounts. When you expand your definition of cash to include gold and financial products, the total number of cash in the world is one quadrillion dollars. Most of that has been created by commercial banks.
When a commercial bank issues a car loan, credit card loan, mortgage, or lends any type of money for any reason, they don’t actually move real cash out of their vaults and into someone else’s bank account. They transfer money electronically to the bank account of the borrower, money that actually never gets printed. That’s because a commercial bank only to needs to hold a fraction of its total loans in actual capital.
The Next Debt Crisis
That was the seed of the 2008 financial crisis. When major banks’ debts were called in, they didn’t have the money to cover it because they were overexposed on bad loans, much of it subprime mortgages. This time, it’s subprime car loans. U.S. personal debt has climbed to $13 trillion, higher than U.S. personal debt levels before 2008. Americans have taken on a lot of debt at extremely low interest rates, including car loans and mortgages. As interest rates start to go up, Americans who have just been getting by will no longer be able to make payments on mortgages, car loans, student debt, and credit card bills. That could trigger the next financial crisis.
Silver and Gold: Alternative Assets
Investors aware of the impending debt crisis are going to buy silver and gold ahead of time and they’re not going to store it in the bank. First, another debt crisis would obliterate stock market gains and send investors flocking to safe haven assets. Gold and silver have proven again and again to be the market’s preferred safe haven assets. Another crisis would push gold prices well past its points of resistance and into a realm where speculators and sentiment would send gold and silver into a years-long climb.
Second, investors should be concerned about the new bank bail-in regime meant to save taxpayers from the fall out of another financial crisis. Bank bail-ins put creditors and shareholders on the hook for a bank’s bad debts, rather than obligating governments to come down and rescue them. Since depositors are considered creditors, many believe high net worth depositors could be at risk. That’s led many gold investors to keep their precious metals with gold storage providers like Silver Gold Bull rather than in the bank vault.
Where Will Bitcoin Fit?
When the next debt crisis hits, one thing will be different. In 2008, the major assets in the alternative class consisted of gold, silver, and real estate. This time, there’s a whole new world of alternative assets. The last year has seen an explosion of cryptocurrencies. Not only has Bitcoin surpassed the $19,000 mark at the peak of its bubble and settled down at prices that are still astronomically higher than last year, but there are also now hundreds of competing cryptocurrencies and ICOs in a frighteningly unregulated market.
There are a number of cryptocurrencies that have gained considerable legitimacy and could be considered potential alternative assets in the case of a new global financial crisis. Bitcoin, Ethereum, LiteCoin, Bitcoin Cash, Ripple, and Dash are all widely-used cryptocurrencies with high market caps. However, investors should be very careful when investing in ICOs (initial coin offerings) or lesser-known cryptocurrencies, many of which are being manipulated in “pump and dump” schemes.
In the event of a debt-triggered market panic, Bitcoin will likely see major gains in the aftermath alongside gold and silver. Others will lose out big time on bad ICO investments. Stick to cryptocurrencies that are easy to trade. For example, gold dealers like Silver Gold Bull accept Bitcoin, Ethereum, Dash, LiteCoin, and several others in exchange for gold and silver. Make it easy to transfer alternative assets to take advantage of how they move in relation to each other.