Wealth Protection for Traders and Investors II

Three years ago in September of 2008, I wrote an article on Wealth Protection. It was a general overview of how to keep your money as safe as possible in the uncertain economic times during the banking crisis of 2008. I’m saddened to report that the world economy and the world of forex doesn’t seem to have settled down and looks even more dangerous than it was back in 2008. Let’s check up and see how things are going.

There is some good news. Since the fall of 2008, a large number of bad brokers have gone out of business. Although regulations make a lot of things harder for traders who trade with US brokers, other regulations make brokers operating under NFA and CFTC rules control much safer to trade with.

Then there’s the bad news:

A trader at UBS evidently made some unauthorized transactions, losing well over $2 billion. Oops.

I knew the US government supported alternative energy projects. A few tax incentives applied in the right places can make a big difference. I didn’t know that they also provided backing for loans made to such companies. A big solar power startup called Solyndra filed for bankruptcy on August 31st, minus about a billion dollars. US taxpayers are on the hook for over $500 million of that. Oops.

And this is just the stuff we get to hear about on the front pages and in lead stories on the news channels. A few million here and there doesn’t make much of a splash in the news anymore, but it adds up. How many dollars and euros will need to be printed up to cover these sorts of things?

The huge increases in the US deficit and the inevitable downgrading of US debt (first by China, then by Standard and Poor) has shaken world markets. Other government bonds have been or will likely be downgraded soon. The number of financial issues in Eurozone countries continues to increase. There are still plenty of brokers out there that either will deliberately rip you off if you make any profits or will just go bankrupt, potentially cutting off access to your forex funds for years or forever.

The US Social Security system keeps delaying its day of reckoning as the world’s largest Ponzi Scheme. I’m personally amazed that the people in Washington have managed to keep juggling the books on it for this long. I haven’t checked on other countries, but I’m pretty sure the US isn’t the only one with some form of social insurance for a growing number of senior citizens that’s being paid for by a smaller and smaller proportion of workers.

On a more frightening note, I’m positive I’m not the only one to notice that there is one essential items we can’t live without that’s been steadily increasing in price. That’s food. Foodflation at these rates alone is a particularly worrisome sign of potential problems ahead. The reasons vary from country to country, but the overall prices of food now are significantly higher than last year in most countries.

Still, there are many ways to protect your assets. I’d like to re-emphasize not leaving all your money with your broker or even in your bank. I’m firmly in favor of good risk management, but let me restate a point from the original Wealth Protection article in more concrete terms.

If you NEVER have more that 4% of your account at risk on all open trades, you can cut your “bad brokerage” risk in half by pulling out 50% of your forex trading money now and then risking no more than 8% of the remaining balance on open trades. Your trade size stays the same, your profits (and losses) stay the same. You’re just cautiously using twice the margin that you would if all of your money was in the brokerage account while keeping half your money somewhere else. Naturally, only a conservative trader can do this, since people who regularly risk large percentages of their accounts would be begging for quick margin calls by increasing their risk. Keep the money you pull out in a safe place. I’d recommend a safe bank account, a safe deposit box, and/or a safe in your home. More on those options later.

If your account continues to grow, get accounts at several different brokerages. Then one failing broker doesn’t wipe you out. If opening the same trades at more than one broker is tiresome, there is trade copying software out there that you can check out.

And now, how to cover more than your forex accounts.

Number one, you must have some cash on hand. By on-hand, I mean inside your home (although having enough money for a couple tanks of gas and meals buried in the trunk of your car also isn’t the world’s worst idea). A large scale power failure can leave your credit and ATM cards useless. If your bank goes under, I’m sure the government will probably pay out the deposits, but will only do so at the usual efficient pace we’ve all come to expect from large bureaucracies.

Splitting your assets between cash and precious metals is something I highly recommended. The percentage of your assets in cash vs. precious metals is a personal decision based on your worries about the risk of massive deflation (Great Depression, Mark II) vs Hyperinflation (Today’s special – Only $500 for a cup of coffee with any meal costing over $10,000!). In 2008, if you had all your money stuffed in your mattress, inflation probably ate some of the value, depending on what currency(ies) you used for stuffing. Hint: It never hurts to think about having at least a little of your cash in foreign currencies. This is why you need to consider covering yourself both ways. Let’s assume you read my original Wealth Protection article in September 2008 and felt inspired to buy gold and silver, and then needed cash earlier this month and sold the metal. Let’s see what would have happened:

The highest price of gold in September 2008 was about $924.60/ounce and the highest price for silver was about $13.82/ounce Note that I’m pulling these prices off monthly candles at a forex broker that carries gold and silver, so the physical market may be off slightly from these numbers. Over the last 30 days, the lowest price for gold was $1532.90/ounce and the lowest price for silver was $26.09/ounce. Both of those lows are due to recent pullbacks in the bull trend, prices were significantly higher a short time ago (almost $50 an ounce for silver and over $1900 an ounce for gold). This means that if you had bought $100 worth of gold and $100 worth of silver at the absolute highest price during September 2008, and sold them for the absolute lowest price during the past month, thus taking the worst possible price on both ends of the trade, you would have gotten about $355 back for your $200 purchase of gold and silver, leaving you a net profit of about $155. Not bad for letting some metal sit around and collect dust.

Currently, I’m watching the pullback and am planning my next purchases soon. BTW – by purchase, I mean physical metals I can hold in my hand. I buy gold and silver for safety, and I don’t consider paper contracts to be completely safe. Personally, I usually buy my silver in the USA via eBay and get my gold when I’m in China from different banks. You can read about my first experience trying to buy Chinese gold here.

Let’s say you decide to follow my advice. Since you probably don’t have a great pyramid with concealed treasure rooms and traps that would keep the most determined tomb raider out of your vaults available to stash your treasure in, you need a safe place to keep cash and metals.

The good news is that the US FDIC increased the amount of insurance on bank deposits in the USA (as a method of discouraging bank runs during the crisis of 2008). The bad news is that if (when?) we see another massive banking crisis, you could be spending a very long time waiting for them to mail you a check to replace the money in the bank you thought was safe. The worse news is that many of my readers are in places with banks that inspire even less confidence.

A safe deposit box is less convenient than a bank account. You don’t get an ATM card and can’t write checks against it. You can’t access it at 3 in the morning. On the other hand, you can keep anything you like inside, no government agency knows what your have there or how valuable the contents are, and chances of theft are very small (unless the government itself goes bad). A good bank will set things up so that it takes a fingerprint to even be allowed to take your key into the vault. If you misplace the key (or your fingerprint), you have to provide all sorts of ID, know a PIN code, etc. If your country is mostly stable, it’s probably a safe place to keep at least some of your cash and precious metals, but you need to be ready to empty that box the moment things start showing any significant signs of instability. There are only two worries with safe deposit boxes under normal conditions. First, they can be opened by a court order. Second, if someone does somehow managed to break into the bank vault and steal what’s in yours, the contents of safe deposit boxes are generally not considered insurable.

In some countries, there are private firms offering secure storage for gold and other valuables. Some of these provide insurance. I haven’t investigated these and don’t know how stable or secure any of the companies behind them are.

Then there’s my favorite method. I like keeping things that I value within easy reach. Previously, I recommended not one, but 2 in-home safes. The smaller one would be easy to find, not too hard to open, and should contain only a modest amount of your stashed valuables. I saw someone had copied my article to another forum and this advice was being made fun of as a foolish idea since any real criminal would know that the first one wasn’t the main amount. This could happen, but only in two ways. First, if you tell everyone “Hey, I’ve got PILES of cash and precious metals in my home” and a criminal finds a safe containing $28.17 and 1 ounce of silver, then your attempt to misdirect the burglar will likely fail and now you’ve got an annoyed burglar in your house. On the other hand, if you don’t tell everyone that you prefer to keep valuables in your house (and don’t write articles about it – there’s a reason I don’t tell you my name and home address), then having a small cash box with a few hundred dollars and a few other valuable items will probably be more than enough to make a simple thief declare victory and leave.

Let’s take a quick moment to examine types of burglars. There are several types. The most common are just there to get in and out as fast as possible. Leaving something they want that you can live without where one of these can find it improves the chances that this sort will decide to leave quickly and not do a lot of damage. A worse type is the kind who has already determined your schedule and knows that he’s got at least several hours to do a detailed search of your home. The absolute worst is the one (or group) who decides to visit when you are home so you can be forced to give a guided tour of where everything is.

Most of your cash and metal should be inside a well concealed safe that’s bolted in place from the inside. If you are really worried about burglars paying you a visit and demanding to know where the safe is or they kill you, it may be worth having 2 such safes in different areas of the house. Two solid and secured safes is unusual, so most burglars won’t even consider the possibility that there could be a second one. Naturally, don’t brag to friends and family about this. All it takes is one person mentioning it where the wrong person can hear and all of your efforts at concealment are wasted.

If you haven’t gotten a safe yet, or want to disburse your money to make it harder for burglars to find, you need to think like a burglar so you can make life harder for them.

Bad Idea #1. Despite my references to Mattress Bank (protecting your assets since 1929!) as a good place to hide your money, please don’t literally put your in your mattress. In, under, and around the bed is the first place any competent burglar will look. Many people seem to want to hide money in the master bedroom, and most thieves know this. If you want a place to have that lower value cash box, bolt it into the sock drawer of your dresser. That plays into the burglar’s expectations.

Bad Idea #2. Hiding things in the toilet tank looks really clever in the movies, probably even on the disk that was still in the last DVD player your burglar stole from someone else. It’s also something virtually every teenage drug user has already done. Guess what? A lot of burglars are looking for money to support their drug habits and they are happy to look for drugs too. There’s no sense in hiding anything somewhere where your burglar already knows to look. If you want to leave some bait to encourage your neighborhood addict/burglar to quit his habit, tape a plastic bag filled with half a dozen generic laxative pills under the lid of the tank.

Bad Idea #3. Don’t repeat a good idea too many times. If you have a lot of books, hiding some money in one or two would be reasonable. Hiding a $100 bill on page 100 of each volume of a set of encyclopedias is a bad idea. If your burglar finds one, he’ll probably find them all You’re supposed to be making burglars waste their limited search time, not giving them a roadmap to your cash.

Bad Idea #4. Don’t hide it so well that you can’t get to it yourself. Having to slither the length of an attic or under-house crawl space and then removing 3 tightly bolted steel panels to even access a safe might be taking things a little too far. Spreading $10,000 around your home as one dollar bills, each in a different location will make sure that a thief doesn’t find it all. It will also make it very hard for you to remember where all of it is yourself.

Good Idea #1: If you have enough money and metal, buying a good safe is an investment in your financial security. If you have $1000 to protect, then spending 4 or 5 hundred dollars on a safe is silly. On the other hand, if you have tens of thousands, to not spend several hundred or even a thousand is foolish. A decent small fire resistant safe can be had for well under $100.

Good Idea #2. If the service is available in your area, a monitored alarm system can save you from burglary as well as alerting the fire department. Some systems even can tie in through a dedicated cellular phone, thus rendering the simple trick of cutting the phone lines ineffective. I had a not too skillful burglar manage to force the back door in my home. He made it as far as the kitchen before the alarm company asked him to identify himself. He ran out the front door and got nothing.

Don’t trust those ads that offer cheap alarm service and installation. They usually only cover one door and a few windows. They then charge a small fortune to install each additional door or window sensor. In some cases, they “own” the hardware, which makes changing monitoring companies very difficult later. If you can read an instruction manual and use a screwdriver, you can buy everything you need online, install it yourself, and then take bids for monitoring services.

Good idea #3. Check those doors and windows. Upgrade them (safer and more energy efficient) and upgrade the locks. Most burglars want an easy target. If the choice is two houses and one is very easy to get in and out of and one isn’t, which one do you think will get robbed? Go ahead and get some motion activated lights too. They don’t just scare off burglars, but also make life more convenient if you come home after dark. Even if you live in an apartment, having a motion activated lamp that comes on when anyone steps through the front door can serve both purposes. A couple of lamps on timers can also make it looks like someone is home when you are away.

Lastly, getting back to that mention of foodflation, think about it long and hard. If you can stockpile even a little extra food when it’s on sale, this can even save you money in the long run. Even if food prices level out, hurricanes and other natural disasters can easily disrupt supplies for days or weeks. A really bad disaster can have effects that linger longer than that. A bar of gold and a couple of hundred dollar bills won’t buy you a bottle of water and a sandwich if there aren’t any available for sale.

It’s a dangerous world out there. Protect your wealth, yourself, and your family.

Original Wealth Protection article from September, 2008

Buying Silver and Gold in China