by Chris Marcus, Miles Franklin:

Traders often look at the financial markets as a science of valuing risk. With those who are able to spot the mispricings often coming out ahead in the end. Over and over. Much like a poker player who expects to win in the long run when he knows the conditions of the game are in his favor.

In today’s financial markets, there exists a great mispricing of risk. Sitting there for anyone who chooses to notice. In fact, perhaps the best part is that it’s rather simple, and you don’t even need to take my word for it to see it for yourself.

Because the current mispricing of U.S. dollar cash risk is one of the more glaring financial market anomalies I’ve seen in my lifetime. Or even read about historically.

While many market analysts will readily talk about the risks of precious metals, or a stock or bond, very few ever mention the actual risk of holding cash in a bank. The theoretically safe and secure option that investors and savers can count on during times of market chaos.

However we live in 2019 where the financial system has veered drastically from the free market ideals we were lead to believe were in place all along. In fact on a recent trip back east to the New York area for the holidays, I talked with several traders I used to work with. And we were all stunned at how distorted the markets have become in the past decade. And right now if you hold cash in a bank, you’re taking on far more risk than you probably realize.

In Europe and Japan, their central bankers flat-out admit that they’re offering a negative real rate of return. And with a more accurate barometer of the rate of inflation than what’s produced by the BLS, real interest rates in the U.S. have already been negative for quite some time.

Which means that if you put money in a bank and take it out a year later, your best case is that you only lost a little bit. Because if you put $100 in the bank and received a negative 1% rate of return, you would be getting the equivalent of $99 back next year.

Of course if the rest of the world begins to price in that the Fed’s monetary base has quadrupled since 2008, and now the Fed is already beginning to back away from further interest rate increases, value of the dollar is likely to decrease even further.

Additionally, many of the banks you could conceivably put those dollars in are on shaky financial footing. Deutsche Bank continues to struggle, and the central bankers have yet to offer any insight as to what happens should DB default on its massive derivatives book.

If rates continue to rise, that puts further pressure on the real estate sector. As well as the government debt markets. And remember that the banks own much of this debt. Just as they did back in 2008 when the Fed came in to print away the losses because nobody else in the market wanted to buy it with their own money. So if rates rise, the bank that’s holding your money is going to be in even further financial distress while you’re counting on them to return your capital.

Of course the alternative is that rates do not rise, because the Fed sees what’s happening and reverts back to lowering interest rates. Which means printing more money. Which means the supply of dollars is increasing, and the value is going down. Whereas with gold and silver, you have the opportunity to own assets that cannot be printed and have served as money for thousands of years more than the U.S. dollar has.

Which is not to say to take every dollar you have and buy gold and silver. Obviously there are risks to any decision that you make in life. Although if I was faced with the choice of holding $10,000 in cash versus $10,000 of gold or silver for the next 10 years, to me, picking the metals is an easy choice. If you have any questions about this, as always you’re welcome to email me here.

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