We Humans are Slow Learners

by JDH on March 30, 2013

As I posted yesterday in my recap of our first quarter 2013 predictions, we didn’t do well. We all thought that gold would continue to rise, and the Dow would drop.

How could we all be so wrong?

We were wrong as of March 31, 2013, but that may be an error of timing, not an error of direction.  I will be shocked if the Dow continues to make new highs forever.  I will be shocked if gold continues to fall for years and years.  Eventually reality has to take over.

Like it has in Cyprus.

Back on February 11, 2013 the Central Bank of Cyprus sent a letter to the Laiki Bank (a big bank in Cyprus) disputing the claims in a Financial Times article about a radical rescue for Cyprus, where uninsured depositors would take a haircut.  Less than two months after denying it would happen, it did.

John Demetriou, aged 65, retired in Cyprus with $1 million in life savings, earned from running a business.  All of his savings were in the Laiki Bank.  It would appear that the first 100,000 is safe, but the rest is gone.  Thanks for coming out…..

But that’s Cyprus, right?  An almost-third-world country?  It could never happen here?

Or perhaps it could.  The federal budget in Canada released last week contains a similar “bail-in” provision to protect banks.  Just like in Cyprus, if a bank needs to be bailed out, the depositors could end up footing the bill.

And so, with that backdrop, why is gold not trading at $100,000 per ounce?

If you knew that there was a chance that the money in your “risk free” bank account could be taken on a whim, why would you leave all of your money in the bank?  Would it not be prudent to put some of your money in a few gold coins?  If John Demetriou had put his money in gold and silver bullion, buried in his backyard, his life savings would still be his life savings.

But he didn’t, for the same reason that very few people today are protecting their wealth.

It never occurred to him.

Despite what happened in Cyprus, and despite the hidden wording in the Canadian federal budget, we all believe that our bank deposits are safe.  We believe a dollar is a dollar, and will always be a dollar.  We see government inflation statistics at 2% per year, so we assume our dollar retains it’s value.  We don’t understand that even if you believe the 2% number, that’s still a hidden 2% “tax” each year.

We humans are slow learners.  We still smoke, even though we know it kills us, but we keep doing it, until it actually kills us.  Until my money is actually taken from my bank account, it’s not my problem.

Eventually, though, when we get whacked in the head enough, we get the message.  We haven’t been whacked in the head enough, which is why gold remains moderately priced.  But if we see a few more shocks to the system like in Cyprus, and if the average Joe makes the connection that it could happen to him, gold is going to the moon.

I had a discussion with a business colleague of mine this week, a smart man, who opined that perhaps more government regulation of financial institutions is necessary.  I believe the opposite.  I think we should all watch out for ourselves.

Don’t put your entire $1 million retirement nest-egg in one bank.  Spread it around.

If I had $1 million, and I was nearing retirement, I would:

  • put $100,000 in three or four or five different banks, perhaps not all in my home country
  • I would put $100,000 or more in physical gold and silver; some would be in the form of coins stored close to home; the rest in one or more offsite secure storage locations, in different jurisdictions; and
  • I would put the rest in physical assets, like a paid for house, car, farm land and equipment (a shovel, a tractor) that retains it’s practical value regardless of the economy.

My numbers are approximate, but you get the idea: don’t put all of your eggs in one basket.  Understand the bank where you are storing your money.  Assume that everything is at risk.

If John Demetriou had followed my approach, he might have lost a significant portion of the funds he had in the banks, although by spreading it around most of it would have been protected.  His precious metals and his shovel would still be his, and he would be able to sleep easy tonight.

Inevitable is not the same as imminent.  Remember that.

Thanks for reading, and see you next week.

{ 0 comments… add one now }