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The Sunday Times - Money Comment 06/12/09

Posted by Jill Kerby on December 06 2009 @ 08:41

 

The price of gold hit $1,215 an ounce last week (and over €808), yet the morning afterwards it didn’t even merit a mention on the morning business news. Instead, the usual ISEQ and FTSE prices were announced – they were both down of course. 

I’ve been writing about the importance of gold as a store of value against depreciating currencies and the threat of future price inflation in this column since the autumn of 2005 after the first signs appeared that the US property bubble had finally popped.  It then cost about $575 an ounce. 

Since then, the price of gold has gone up and up, and sometimes, down, but always the projectory was upward.  Meanwhile, property bubbles have burst all over the place, the world’s financial system has imploded, dragging a few countries down with it.  Last week was Dubai’s turn. 

Gold is what nervous people buy when they see the value of savings, property, and shares fall and debt rise.  But very few of those gold buyers are ordinary people who foolishly stuffed their pensions with companies they can’t name, buy-to-let properties and holiday homes that don’t pay their own way, or fancy cars that lose a quarter of their value the moment they’re driven off the forecourt. 

Most gold buyers are contrarian, competent, knowledgeable professionals (and their clients) who understand the very simple principle that the more pieces of paper money you print, the less they are worth.  They know that you can’t print gold coins or bars. 

And these people, but especially the ones who work for the Indian, Chinese and Middle East governments are very, very worried.  

Their purchase of hundreds of tonnes of gold from the IMF in recent months is pretty much the main reason why the price of gold, and silver - another form of sound money - have soared this past year and is up 13% in November alone.  

Half the commentators I read think gold is due a brief sell-off, that like the stock market, the price is too ‘toppy’, and that the dollar is probably oversold.  The other half just say, “buy it”. They’re convinced that over the medium to long term the dollar is toast and Dubai’s inability to repay its sovereign debts is just the tip of a debt iceberg that is on a crash course with massively indebted countries that includes the United Kingdom, the United States, Greece, most of the Baltic countries… and us, of course. 

If the high price of gold frightens you, then you can always try and time the market by waiting for a sell-off, which many commentators believe will happen when this stock market rally ends. Or you can buy cheaper silver on the dip. 

In fact, the historic correlation between gold and silver is so out of sync at the moment that gold has to become a lot cheaper or silver a lot more expensive before the historic 16:1 price ratio reappears.  On that basis, silver might be the better value buy.

Finally, if someone says that gold is in a bubble, ignore them.  A gold bubble will only form when your neighbours and in-laws are talking about gold and are queuing to buy krugerrands, gold ETFs or Perth Mint gold certificates and not to sell their old gold jewellery.  

Richard Russell, one of the world’s greatest investment gurus said not long ago: “The greater the world ocean of fiat paper, the higher gold goes. You see, gold is the secret, unstated world standard of money. Gold can't be devalued or multiplied out of thin air. So as the various currencies of the world decline in relation to each other, gold stands alone. It can't be cheapened or devalued or bankrupted.”

 

Financial Services Ombudsman Joe Meade retires

The Financial Services Ombudsman Joe Meade retires at the end of this month and has decided to let rip about the state of the industry before he goes. 

"Financial institutions have to understand that they are given people's money in trust,” he says in his final report. “It is obvious from the complaints I have dealt with that banks and other financial institutions have been giving wrong advice.”

How wrong?  Well, how about the advice a bank gave a 68 year old separated woman with no pension to invest the €410,000 proceeds of her family home into the same property fund that they had earlier convinced her to place her entire savings of €100,000?  (She was refunded the entire sum.) 

Or the high risk investment fund that an elderly couple with €113,000 in savings were sold, despite the fact that they went looking for a “deposit account with a good interest rate”?  

And then there was the six year guaranteed bond that a life assurance company sold an 80 year old grandmother with no history of investment experience, who actually wanted a fund for “emergency expenses” and “a burial fund” for herself and her husband. 

Meade says that the culture of misselling and sharp practice that targets vulnerable pensioners in particular, hasn’t changed since he took office five years ago. At least when he leaves his job in a few weeks, he can go knowing that unlike the bankers and investment industry chiefs who continue to oversee this behaviour, he goes knowing he’s done the people of this country some service. 

 

Pension Funds

Anyone working for an Irish publicly listed company like AIB and Bank of Ireland, Aer Lingus and others won’t be too pleased to hear that despite the stock market surge since March, the combined pension deficits of all these companies has risen almost 15% to €5.4 billion from €4.7 billion at the start of this years.

Asset values held in these pensions went up by €2 billion to €14 billion says Attain, the Dublin pension consultancy firm that did the research, but liabilities rose from €16.7 billion to €19.4 billion.

Pension funds here have taken one of the biggest hits in Europe and continue to be volatile because of the low exposure by Irish pensions to bonds, says Maurice Whyms of Attain, but also because “With close to a quarter of pension liabilities on Irish company balance sheets relating to UK subsidiaries, the deterioration in the UK [pension] position was bound to have some spill over effect.” 

It’s another reason to review your own pension urgently…and to buys some gold.

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