Is My Money Safe?

Theme and Background

This chapter focuses on the fundamental issue of capital safety amid the current banking crisis. The report argues that banks' "borrow short, lend long" business model poses systemic risks in a high-interest-rate environment, that deposits are not safe, and that the government's inflationary policies in response to the crisis will further erode purchasing power.

Core Views

• Bank deposits are not safe: Deposits are essentially loans to the bank, and their safety depends on the investment decisions of bank management. When short-term interest rates rise rapidly, the "borrow short, lend long" model directly leads to losses.
• Physical gold is the safest asset: The report explicitly asserts that "no asset is safer than physical gold."
• Inflation has not subsided: After bailing out banks, the Federal Reserve's balance sheet expanded by $400 billion, nearly reversing quantitative tightening, and inflation (CPI 6.0%) remains well above the 2% target.

Key Arguments and Data

1. Fragile bank system balance sheets:

• At the end of 2022, the U.S. banking system held $17.5 trillion in loans and securities, but equity was only $2.2 trillion.
• Unrealized losses on bank credit during the same period reached $1.7 trillion.

2. Silicon Valley Bank (SVB) case:

• Rising interest rates caused its long-term bond portfolio to fall from $91 billion to $76 billion (a loss of $15 billion).
• This directly led to the second-largest bank failure in U.S. history.

3. Contradictory Fed policy:

• After the SVB collapse, the Fed's balance sheet expanded by $400 billion, almost completely reversing prior quantitative tightening.
• CPI remains at 6.0%, far above the 2% target; the report argues inflation is "still active."

4. Historical comparison: 2008 vs. 2023:

• Commonality: Both were triggered by the bursting of bubbles caused by the Fed's ultra-low interest rate policy.
• Difference: In 2008, bad debts were concentrated in housing; in 2023, bad debts are "everywhere" (housing, consumption, corporate, real estate, government).
• The report believes the government will repeat the post-2008 inflationary playbook (suppressing interest rates, printing money, uncontrolled fiscal deficits).

5. Performance comparison of various assets (from market peak on January 4, 2022, to March 31, 2023):

Asset	Price on Jan 4, 2022	Price on Mar 31, 2023	Change	% Change
Gold	$1,814.60	$1,969.28	+$154.68	+8.52%
GDX (Gold Miners ETF)	$31.38	$32.35	+$0.97	+3.09%
S&P 500 Index	4,793.54	4,109.31	-684.23	-14.27%
Bitcoin	$46,220.42	$28,395.30	-$17,825.12	-38.57%

6. Long-term bond performance: Since 1900, the average annualized real return on bonds across 21 countries has been only 0.6%.

7. Stock risk: Veteran investor Jeremy Grantham (managing $1.18 trillion in assets) expects the S&P 500 could fall 50% due to a "severe recession."

Companies/Assets Involved

• Silicon Valley Bank (SVB): Case study; collapsed due to a $15 billion loss on its bond portfolio from rising interest rates. Bearish on its business model.
• Signature Bank: Also failed due to the "borrow short, lend long" model. Bearish.
• Credit Suisse: Forced acquisition by UBS, seen as a signal of systemic risk. Bearish.
• Republic Bank: Listed as a "canary in the coal mine," representing systemic risk. Bearish.
• Gold Bullion: Explicitly bullish; considered the safest asset, up 8.52% over the period.
• GDX (Gold Miners ETF): Bullish; up 3.09% over the period.
• Bitcoin: Bearish; affected by speculative bubble burst and regulatory risk, down 38.57% over the period.
• S&P 500 Index: Bearish; Grantham expects a potential 50% decline.

Investment Implications

• Avoid bank deposits and bonds: In a high-interest-rate environment, the banking system faces liquidity crises and solvency risks; bonds offer extremely low long-term real returns, and inflation erodes gains.
• Go long on gold: The report argues physical gold is the only asset that can simultaneously hedge against banking system risks (restricted access to deposits) and government inflationary policies (declining purchasing power).
• Be wary of stocks and cryptocurrencies: An economic recession could trigger a sharp drop in corporate earnings and a major stock market correction; cryptocurrencies remain in a post-bubble deleveraging phase and face regulatory uncertainty.

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Theme and Background

This chapter directly responds to the prevailing market view that funds should be deposited in banks during a banking crisis. The author argues that this advice overlooks gold’s unique value as an asset with no counterparty risk and systematically demonstrates the safe-haven function of physical gold during crises.

Core Argument

The author’s central judgment is that physical gold is a safer asset than bank deposits. This view is entirely contrary to the mainstream opinion in The Wall Street Journal, which advises investors to place funds in “high-yield savings accounts, money market funds, certificates of deposit, and short-term Treasury bonds.” The author believes that financial media discussions of gold remain superficial, while gold’s zero counterparty risk makes it irreplaceable in systemic risk scenarios.

Key Arguments and Data

• Performance Comparison During Crises: Across seven crises since 2007, gold posted an average return of +10.93%, while the S&P 500 Total Return Index averaged -14.75%, and U.S. Treasury bonds averaged only +4.06% (data as of December 31, 2022).
• No Counterparty Risk: Gold is the only asset without counterparty risk, whereas all financial instruments—including bank deposits and government bonds—carry counterparty risk.
• Liquidity Advantage: Gold is highly liquid and maintains its absolute value and purchasing power relative to financial assets over the long term.

Asset Performance Comparison During Seven Crises (2007–2022):

Asset Class	Average Return
Spot Gold	+10.93%
S&P 500 Total Return Index	-14.75%
U.S. Treasury Bonds	+4.06%

Companies/Assets Involved

• Sprott Physical Gold Trust (NYSE: PHYS): The author’s top recommendation. Advantages include physical redemption capability, potential tax benefits over other gold ETFs (for U.S. non-corporate investors), and avoidance of the “collectibles” tax rate (long-term capital gains do not receive preferential tax treatment).
• COMEX Gold Futures: Carries counterparty risk; not recommended.
• Gold Coins/Bars: Inefficient; not recommended.
• Other Gold ETFs: Difficult to redeem physically and taxed as “collectibles”; not recommended.

Investment Implications

• Directional Judgment: Given rising fragility in the banking system, investors should allocate to physical gold to hedge against systemic risk.
• Specific Tool Selection: Prioritize physically redeemable gold trusts (e.g., PHYS) over gold futures or ordinary gold ETFs to avoid counterparty risk and tax disadvantages.
• Risk Note: The author does not discuss short-term price volatility risk for gold but emphasizes its long-term safe-haven function.