The more things change, the more they stay the same. I can not think of a better saying to describe the financial markets (NYSE:XLF). Over the years, Wall Street has undergone many changes, yet we still have the same problems. When will investors realize that hard assets such as precious metals (NYSE:DBP) are one of the best ways to hedge against an industry plagued with fraud and turmoil?
Physical precious metals such as gold (NYSE:GLD) and silver (NYSE:SLV) hold a special place in the investment spectrum. They are among the purest investment vehicles available, as they do not require fund fees, property taxes, or commissions. The kind of gold and silver that you can hold in your hand has a certain calming effect that printed financial statements or fiat currencies can not offer. This was a cruel lesson for investors that trusted Bernie Madoff, the convicted stockbroker who ran a $50 billion ponzi scheme for 20 years. Despite pleads to the SEC by whistleblower Harry Markopolos, dating back to May of 2000, Bernie Madoff’s ponzi scheme and fictional paper trail lasted until December 2008.
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There seems to be no end to how far some in the financial industry are willing to go in the name of profits. In 1995, Nick Leeson made news by singlehandedly bringing down Barings Bank, the former personal bank to Britain’s Queen. Leeson became a rogue trader after trying to hide losses on his poor Japanese Nikkei index trade. His bet did not work out and cost the bank $1.3 billion and its very existence. Last September, another billion dollar rogue trading scandal broke, this time involving Swiss banking giant UBS (NYSE:UBS). Kweku Adoboli was arrested for alleged illegal trades amounting to a loss of $2.3 billion for the bank. The staggering loss prompted the resignation of CEO Oswald Grubel and the co-heads of equities. Unlike these traders, physical gold and silver will never go rogue.
An added bonus of physical gold and silver is that they do not require a CEO to make business decisions for it. This week has shown once again that fraud and bankruptcy are just a headline away. On Monday, futures broker MF Global (NYSE:MF) filed for Chapter 11. Within a day, it was made aware that the company was not in compliance with the CFTC and CME in regards to customer segregation requirements. After refusing to disclose information to regulators, CEO Jon Corzine admitted to using client money as its financial troubles mounted. The former Goldman Sachs (NYSE:GS) CEO managed to run MF Global into the ground after taking the reigns of the company in March 2010. Investors have to wonder when will regulators take leveraged money and Paul Volcker seriously? Leverage not only gave birth to the housing and credit bubble, but also brought down MF Global as the firm and its CEO apparently learned nothing over the past few years. Eric Lewis, a specialists in international insolvency cases explains, “For every dollar of its own capital on its books, it had borrowed $40, a leverage even greater than that of Lehman Brothers at the time of its collapse.”
The grim reality is that instead of an improving economy, conditions are getting worse. In addition to companies going bankrupt, municipalities and countries are now collapsing. After being rated one of the country’s best livable cities last year, Harrisburg, Pennsylvania’s capital, declared bankruptcy last month. After receiving a bailout last year, Greece is once again in need of more money as the debt ridden country hangs on the edge of insolvency and holds the financial markets hostage to headlines. This is nothing new though, Greece has defaulted at least five times since 1826. As more fraud and market turmoil unveils itself, and history shows it will, investors will seek out precious metals as a way to keep a closer eye on their wealth.
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