They now face negative real interest rates, plus counterparty risk when their savings are left in the banking system. Jan Skoyles outlines why gold investment may be a more sensible place to place your savings.
Last week, to no one’s surprise, the Bank of England announced they would be increasing the size of their asset purchase programme by £50bn. This is equivalent to 22% of GDP or £12,500 per household.
Wouldn’t it be nice if we could all just print our own £12,500? Part of me suspects that this would be a whole lot safer for our savings than the Central Bank’s asset purchase programme. The Bank of England has sheepishly admitted that their first round of QE increased inflation by 1.5%, with very little obvious positive outcomes elsewhere. So, what good will a third round do?
What about the savers?
The staggering amount of cash injections being carried out are equivalent to every £1 in every £5 spent coming from the Bank of England’s money printing. Never before have we seen such levels of money devaluating actions outside of a world war.
According to the Bank of England’s website, one of the main purposes of the Bank is to manage ‘… monetary stability. Monetary stability means stable prices - low inflation - and confidence in the currency.’
Is anyone feeling particularly confident and stable about their savings at the moment? This little objective seems to have slipped the MPC’s mind, particularly as the real rate of interest remains negative.
The current rate of inflation, which stands at 4.2%, robs savers and investors of £41.8 billion a year. This money is not being stolen by anyone to put into another bank account, no; it is literally obliterated into thin air. It doesn’t exist.
Detlev Schlichter recently described to us how the British pound has lost more than 90% of its purchasing power since 1967. This means that nearly three generations of citizens in the UK have struggled to maintain the value of their savings.
It’s not even as if those of us who are just embarking on careers have much of an incentive to start saving in the long term. The Centre for Economic and Business Research predicts the bank rate will remain at 0.5% until at least 2016. We are not sure the economy will last that long and see far worse consequences for our monetary system.
More QE? Lower interest rates?
Many commentators and economists were originally for the rounds of quantitative easing and keeping interest rates low, but even for a select number of Keynesians and monetarists this has gone on far too long, as Andrew Lillico, a shadow member of the MPC, pointed out;
It cannot be right to maintain such a policy for more than an emergency period… How long is it morally defensible to protect those that over-indulged and that made mistakes at the expense of those that were more prudent and restrained? A policy that can be perfectly correct if implemented over a year or two years might be the wrong policy if it must be repeated for ten years…
According to the recent annual report from the Bank of International settlements these drawn out low interest rates are delaying and attempting to cushion the blow for an inevitable crisis whilst sowing the seeds for the next one.
Look after the savers
Lord Freud, a Pensions Minister, warned this week that British pensions were no longer ‘the gold standard that they were’. He stated that the generous pensions once enjoyed by older generations were a one off. He made the statement as an admission to rising concerns about the increasing amounts of quantitative easing from the Bank of England.
Historically savings accounts were set up with a philanthropic motive. They were designed to help the poor save small amounts of money, with a good rate of interest as they put money aside for a better quality of living. Now, it seems the poor are the last on the list to be considered as their quality of life in retirement is set to decline.
Savers have so many different products to choose from and yet not one which is offered in the commercialised high street banks is able to guarantee the safety of their money. In fact recent data shows banks are abandoning the usual savings bond market and are instead looking for ISA investments. This is no surprise considering those who have £10,000 in bonds maturing this winter are likely to see their income drop by £160 a year.
How are we reacting?
In the UK, we are still a highly leveraged nation. Our debt-repayments remain one-third higher than US households. It is not surprising we have little incentive to save at the moment, but recent research by Lloyds TSB research recently found 57% of the population were looking to increase their savings activity in 2012. This was due to concerns about the long term health of the economy. I wonder how many of them have changed their minds since the Bank of England’s announcement.
Lloyds TSB found that the average family in China saves nine times more than their counterparts in the UK. The average savings in China are around £19,000, compared to £5,000 for UK families. This amount will decrease further for as long as negative real interest rates are allowed to continue, and as we said earlier it seems they will for the foreseeable future.
Along with injecting more cash into the economy, Mervyn’s Merry Men also announced, a la Bernanke, that the bank rate would not be rising. So they remain at an inflation-friendly 0.5%. This, in turn, gives us a negative real interest rate. Therefore, is it sensible to leave your long term savings in a loss making account?
Positive rates for gold investment
So what do we do? The government and media are happily encouraging us to place the blame of this dire financial situation on the big, nasty commercial banks. But actually, as we can see from above, they are merely the henchmen to the central banks’ gangster.
Therefore, it is a good idea to move a proportion of your savings into a proven asset class which has consistently proved its worth when up against central banks and monetary policy: Gold.
Surely during times of uncertainty, you are likely to put your money in the less risky assets and certainly not a loss making one. You wouldn’t put your money in a loss making company after all.
Gold, as we have often said on these pages, is an excellent store of value. If central banks knew better they would be backing our currency with it. Unfortunately they haven’t made that decision yet. But they are, however, now net buyers of gold which shows that even they are beginning to protect themselves with the precious metal.
Perhaps we should follow the example of the Vietnamese, and many of their Asian counterparts. In Vietnam many savers respond to devaluations in the dong (which are a central bank response to the slumping stock and housing markets) by hoarding gold. It is estimated that citizens hold between 300 and 500 tonnes privately outside the banking system. 20-60 tonnes of the yellow metal are smuggled into the country each year.
An article from a Vietnamese newspaper recently referred to the negative interest rates currently being experienced, by us, in the West and referred to it as ‘financial repression’. This, according to the paper is what drives people into gold.
We have seen this since January as the gold price has made a significant beeline for new highs. It disappointed some investors in December, but it was merely taking a break. New developments in the Eurozone, announcements from both the Federal Reserve and our own Central Bank, have all placed increasing amounts of people’s savings into gold.
After the MPC's recent announcement it seems more of us should be following this lead and placing our hard earned money into gold. We know Mr King won't be doing this either our or his money, he has a hefty pension pot of over £5 million, but he certainly should be.
As a Vietnamese sociologist says in the article, "Empires may fall, currencies may change. ... Gold will always survive.”