So the first question is what are you trying to insure? Before you can determine what sort of policy you need and what this policy needs to cover, you need to understand what are the risks you’re trying to ameliorate. So if the risk you’re trying to ameliorate is– if you’re just trying to hedge your portfolio, meaning if it goes down by 10%, I want something else that goes up by 20% to offset the decline in 10%. That’s one line of thinking. If you’re thinking about insurance, the proper insurance, then there are principles. There are certain principles that have nothing to do with gold or anything else that apply across the board.
Like, for example, systemic risk cannot be insured within the system. So if you go to your insurance policy– anybody who’s listening to this, go to any insurance policy you have– any one. Read the fine print. It’s going to say war, riots, insurrection, nuclear threat, and terrorism are excluded. These are called uninsurable perils. OK, so they’re insurable perils, they’re uninsurable perils. They are systemic risks because the concept of insurance is based on collecting a small amount of money from everybody and then paying large sums of money to few to whom something bad happens. Insurance does not work– that type of insurance does not work when everybody has a loss. It’s like with lottery, everybody cannot win the lottery. Because if everybody won the lottery, the only thing they could get back is the cost of the ticket minus expenses because there’s no money in the fund rate.
So the first principle is you can’t insure systemic risk inside the system. You don’t plug your backup generator back into the wall socket because it will work perfectly up until the moment the grid goes down and then so will your generator. So when you talk about GLD and other instruments, it doesn’t matter how good– we can go into the fine points, but that really doesn’t matter. As a matter of core principles, it is not an appropriate vehicle to hedge systemic risk because it is in the system and is exposed to the very same risks you’re trying to insure.
So that’s how you get to physical gold outside the system. That’s why central banks– I mean, we’re having this discussion. It’s almost like funny because there is a body of– I mean, look, the United States government– I mean, you don’t need to go far– do they keep their gold in the banking system? Do they own GLD? No, they keep it with the military. Now, the New York Fed, for example, holds gold for other countries, but not to the US. There’s very little US gold in there. All the US gold is at the West Point and— Fort Knox. Fort Knox– that’s right– in a vault, in a private vault— Guarded by soldiers. That’s right, guarded by soldiers. So it’s not like we’re talking about it like this is some sort of revelation, but it’s all around. You don’t need to you don’t need to figure out that. But is it– see, I think it– this strikes me because it is a revelation to a lot of people because we’ve become so used to everything being done within the system because there’s been no need to escape the system for 30, 40, 50 years.
And so people have been educated or educate themselves to do everything within the system, and that means you put your hedges where you shouldn’t put them. You take all the risks that complacency and a lack of any material disconnection creates. This is self-fulfilling. There is no field of human endeavor– I’ll say that one time. There is no field of human endeavor in which backup systems are constructed to rely on the primary system, except in finance.
Except in finance, precisely. Nowhere– I mean, would you want to get on the Boeing aircraft to learn that the backup steering system will fail if the primary steering system fails? If the left engine goes, the right shuts off automatically? I mean, does that make any sense?. Gold As Insurance