Friday, May 8, 2015

Diversify Like A Central Bank - SDR Future Account

I was recently approached by SDR Future for a Q & A session that has been posted on their site. I have published it in full below for readers of this site.

SDR Future market themselves as the "first full SDR service for retail investors" and make it easy to gain exposure to a currency basket that mimics the allocation of the International Monetary Fund's (IMF) Special Drawing Right (SDR). Those who follow news in this space will be aware that the SDR currencies and allocations are under review and many speculate (there is good reason to think it will be the case) that the Chinese RMB (and possibly other currencies) will be included in the mix when it comes into effect on January 1, 2016. So SDR Future allows you a choice of various currency basket options (including "potential" SDR allocations):

They also have RMB Depeg Protection & Gold Backing strategies and can re-balance the basket on various schedules (e.g. weekly, monthly or quarterly).

I can see the benefits in being able to easily diversify your savings/reserves across a portfolio of currencies (that are managed on your behalf), but probably the biggest shortcoming (and this isn't specific to this particular product) is that like Gold and other monetary assets, those who make a "gain" against their local currency will (potentially) be liable to pay capital gains tax. We don't have competing currencies in Australia (despite the claims by RBA Governor Glenn Stevens that we do). Preserving global purchasing power in a non-speculative way would be made much easier with the right rules in place to accommodate it.


Question and Answer with Bullion Baron

Jared:  Thanks for joining us Bullion Baron.  I’d like to ask you about the importance of gold as a base for any portfolio.  With the large accumulations of gold by China, India, and Russia, among other emerging economies, and the implicit recognition of the value of gold by central banks and global financial institutions such as the IMF, should investors not consider holding precious metals as a means of replicating the diversification and base valuation which is being utilized on a more macro level by the banks and institutions themselves?

BB: Thanks for having me. Having unencumbered physical Gold as part of the base for an investor’s portfolio is critical. Gold has unique properties and attributes (inherent and extrinsically applied by the prejudices of people) which make it an ideal asset of last resort in various types of crisis or panic. If everything comes crashing down around us, bank accounts get frozen or seized, stocks crashed, governments default on sovereign debt or worse, Gold stored safely will always have value and it has been common for investors to rush to buy it in event of crisis (driving up its value relative to other assets and fiat currencies).

Many western investors have grown complacent and dumped any Gold holdings, but you don't need to be a conspiracy nut or doom and gloomer to think it's worth holding a core position in the metal at all times. Many personal accounts of the GFC (2008-2009), including those who were right at the epicenter (such as Hank Paulson, then United States Secretary of the Treasury), describe a financial system which was days or even hours away from complete collapse. I don't think it's a coincidence that central banks turned from net sellers to net buyers in the years following that crisis. Just as many western central banks divested of Gold holdings in the 1990s citing diversification as the reason (as their reserves were Gold heavy), it’s probably the case that central banks realised they were light on Gold and appropriate diversification of their reserve assets would require obtaining more.

The level of Gold accumulation by emerging economies and recent comments out of China suggest that there might be more reasons they are accumulating Gold (other than as a safety net or diversification of reserve assets). For example, last week the China Gold Association said they expect Gold demand to rise in China and other countries (Far East and Central Asia) along the new Silk Road they are constructing, suggesting there is intent or an expectation that Gold may be used more often in trade.

Investors shouldn't ignore these trends.

Jared: Outside of holding physical gold, do you believe there are other effective methods for investors to indirectly pad their portfolios with the precious metal?  Could a gold ETF which is managed efficiently offer a similar portfolio backing as physical?

BB: A core position in personally controlled Gold (i.e. stored securely) is important, but electronically managed Gold products offer a convenient way of increasing exposure to the metal without the hassle of dealing with it all physically.

Two features that I see as vital before considering such a product is:

A) 100% physical backing with allocated metal and;

B) Investor has the ability to take delivery.

Though I was not previously familiar with The Gold Merk Trust (which you mention in one of the later questions) it appears on the surface to have these features, so would likely get a tick from me. In regards to products I've used with these features, one is PMGOLD, which is an exchange traded product (trades on the ASX), structured as a call option (with no expiry) which provides an investor the right to take delivery of physical Gold bullion from the Perth Mint. Another I recently discovered and reviewed on my site, MetalDesk from Bullion Capital, is itself an exchange for physical metal and allows you to trade, store (100% insured, vaulted in your choice of locations around the world) and have delivered (if you wish) physical precious metals.

The ability to buy and sell metal with the click of a button is both a blessing and curse, proceed with these options only if you have the self-control to avoid buying or selling in a panic. The inconvenience of having to retrieve physically stored metal in order to sell it can be a useful way to avoid irrational decisions made in haste.

Jared: When overvalued stocks begin to deleverage, where do you see the largest adjustments taking place?

BB: As I see it the stocks most prone to falling (or crashing) will be:

A) Those most overvalued (relative to profits today) and;

B) Those whose profits rely on income streams that will take a hit in the future. 

Of the former (A), those which look risky to me are some of the U.S. based technology companies, Facebook, Amazon, Twitter, LinkedIn, and Yahoo, many of these companies look overvalued and may struggle to achieve the business growth they’ve had in the past. The NASDAQ recently breached its (nominal) bubble peak from 15 years ago, it doesn't look parabolic at the moment (though growth has been strong) and could go further than some expect, but in many cases the fundamentals don't support current prices.

On the latter (B), we've already seen what happens to resource based companies in Australia when the price of the resources they are mining crashes and margins get squeezed, just look at the share price of Gold, coal and iron ore exploration or mining companies. Many of these companies have already seen a large adjustment downward; I think the FIRE (Finance, Insurance, and Real Estate) sectors (in Australia) might be next to take a large hit. The booming property market in Australia has provided our banks with record profits and share prices, but this will turn and we may already be seeing the start of it now.

Jared: Canada, Australia, and many other countries, including the United States, are experiencing disproportionate property valuations.  With the overvaluations in stocks and in property, do you feel investors have no choice but to seek out gold backed financial instruments?

BB: Investors should already have a position in Gold, regardless of overvaluation in other sectors, but the risks in other asset classes could provide justification for increased exposure (overweight Gold).

Looking at the ratio of Gold ounces it takes to buy a house in the United States, it actually fell to the lowest level since 1980 (around 100) in 2011, I noted this on my site when it happened and suggested it might be a good time for those invested in Gold to look at moving some capital into real estate. The ratio has almost doubled since as property in the United States has recovered somewhat and the price of Gold has fallen from US$1900 to circa $1200 at present. With the S&P/Case-Shiller 20-City Composite Home Price Index still well lower than the 2006 peak, I’m not sure that U.S. housing is substantially overvalued, but it seems likely Gold represents better value relative to property than it did in 2011, so is worth accumulating.

I am more familiar with Australia and it’s obvious we have a two-speed market. As a whole the Australian property market would be considered expensive, but we have Sydney & Melbourne home prices growing at blistering speeds while the rest of the capitals are seeing only moderate price growth, some of them are still around the same price level as 5 or more years ago (& so is Gold in Australian Dollars).

One thing worth noting is that when you buy an ounce of Gold, you are buying an asset which is indistinguishable from another ounce (or at least once melted). When you buy a property you are buying a unique asset which is different to every (or most) others in the market, you may be able to renovate and generate a higher return or subdivide or rent it out by room, it’s a much more versatile asset than Gold (and one owned for different reasons). Property is an asset class worth having exposure to.

Jared: Where do you see the SDRF and its gold backed strategy with The Gold Merk Trust fitting into the diversification of portfolios?

BB: Currency baskets (such as the SDR) are a great way of minimising risk from the price movements of any one currency. I'm sure many investors and even savers who've experienced significant price moves in the value of their local currency could appreciate the benefits of this, just look at the recent moves and volatility in the Russian Ruble, Swiss Franc and Australian Dollar. I could see an SDR Futures account being an especially valuable asset to an investor who either invests or travels across the world on a frequent basis and wants to preserve their global purchasing power without the need to put faith in a single currency, along with the convenience of having the allocation managed for them. If an investor in the SDRF strategy doesn't already have an allocation to Gold, then this would seem the opportune occasion to do so in conjunction with diversifying their currency position.

Jared:  Any final thoughts you’d like to communicate in regards to gold, national fiat currencies, and the SDR?

BB: Unlike some other commentators in the Gold space (some of whom think we'll see the end of fiat currencies and return to a classical Gold standard) it’s my opinion that all three of these monetary assets (Gold, fiat and SDR) will be around for a long time to come. I suspect how we (and central banks) use each of these assets may change dramatically at some point or gradually over the coming decade, but we can't know exactly what or how things will unfold and that is why diversification is important.


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  1. If we are going to have to pay a insurance fee for the stupid decisions these banks make , then as depositers we should have as much right to have a say in the banks decisions as any shareholder or any bank employee have.This is just another bandaid on top of the festering sore that is ready to explode due to the bad decisions that these unmoralistic monsters make .Just watch the fee rate go up as well. Also written into most big Australian firms Ebas are the fact you have no choice but to have your pay go thru a financial institution . They have really sewn up all avenues .If my business goes down due to my silly investments I should just tack on a fee to all my customers of say 2$ just in case my business goes down .Now this would be popular .Another thing is why do we have a reserve bank ? Why would I say give my money to friend ,then to get it back payy him interest just to get it back.This is the role the reserve bank has with our government .What a joke .

  2. I agree they have things pretty stitched up & can relate to some of your sentiment, but given the choice of paying a 0.05% levy on your savings or losing the government guarantee, which would you choose?

  3. To keep this charade up , they will have to keep adding to the levy from having this system collapse .With crippling inflation no growth where does this leave our future generations?More bail ins for the bank until the people have had enough. But as long as these central banks have the mass media to propergand the public I can't see this ending soon.The Western world and the powers at be are watching the reaction to this levy , as you said in your article we won't be the only ones to suffer this.
    It's time for people to change the saying ;as safe as money in the bank;
    This is not the case anymore.

  4. I understand having gold as your hedge against the crisis but I have to disagree that your gold (say in bullion ) is safe .No way! Look at the states in the thirties .
    All gold was made illegal to own and storing gold was a illegal offence .
    Now most people buy gold from say a bullion dealer or a mint which Is traceable and if they want to grab your holdings they know who has it and will grab it .
    But if you own say a gold or silver nusmatic coin which in reality is worth a lot more then the face value it's worth ,now this is the hard asset they cannot touch , because in reality it just a old coin with a small face value .
    Gold coins were the only safe item to own in the US thirties gold heist thus is why people in the know were turrning in there bullion for legal face value gold coins.

  5. One thing I forgot to add was in 1933 , gold coins were confiscated , but families were allowed to keep $400 worth of face value coins . Now today the face value of a old neusmatic gold or silver coin that is still legal tender is a better investment then bullion which is priced at spot , this is why if they come after your assets gold bullion included , you have no kickback to fall back against as you would with a old face value coin.

  6. Precious metals keep tumbling each time you promote them

  7. BB- I wish you would see the big picture here. Precious metals are not the be all and end all. Stocks are where you should have had your money sitting, not in precious metals, they will continue to fall.

  8. Are you kidding? Tell me if your looking for short term gains with a lot of risk the stock market might be a option. But when the house of cards fall and the companies who were pumping up there own stock with stock buy backs , only then will you know who the real deal was in stocks. Not the kind of gamble I want to take , give me a tangible asset that I hold any day rather then a pumped up sorry stock.

  9. It's a completely different time today compared with when the US was on a Gold standard. What benefit would there be in them confiscating Gold today (unless you think we are heading back to a Gold standard)?

    But I agree there is no asset without risk, including Gold, that has been a core theme of this site, especially so over the last dozen posts or so.

  10. Just because I write predominantly about precious metals, doesn't mean it's the only asset I think is worth owning. For many 5-25% may be an appropriate allocation & then forget about it, work on other areas of the portfolio. You are welcome to your opinion on future price, but I disagree.

  11. The way things stand now , with the government means testing your assets to see if you qualify for the pension or any other benifet.Spot bullion gold and silver won't escape this as it's also traceable .Give me a rare coin anyday with a low face value that way the real value of that asset is his behind the face value.

  12. Sorry about the spelling , I'm not a proof reader .

  13. I hope to avoid needing the pension all together. But for those who do need it I don't see why precious metals should be an exception to any asset limits.

  14. BB has been promoting pm's for years & they just keep dropping. If you had your money in stocks the last 5 years you would have made much more money!!!

  15. I write about PMs because it's an area of interest & I think it's worth having a position (particularly in Gold) no matter what the price is doing.
    Some stocks have performed well over the last 5 years, others haven't (i.e. see iron ore stocks in Australia).

    If you have a better record of predicting what assets will rise and exactly when, feel free to share it here with us.

    I don't pretend to be an oracle and have highlighted in the past when I have got specific calls wrong.

    You seem to have some sort of grievance with me, not sure what your problem is, but it's not really constructive.

  16. Agreed , but I wouldn't count on this being the way of the future .Anything in the organic food industry is the go in my opinion ,but gold and silver are a long term hold not a quick fix .

  17. You want my prediction?
    Further falls in precious metals- the contrary of what you are predicting. Your poor calls can be seen on on the blog you write there. Consistently calling for precious metals to move higher in the last 5 years. Try a public apology & admitting to being very wrong.

  18. Hey BB....given the mania/over heated/bubble state of AUS property (see Sydney), would be good to get some updated thoughts from yourself.


  19. Some more recent thoughts here: But will get around to updating in near future given recent changes to foreign buyer rules and tighter lending. I think Sydney & Melbourne have the potential to suffer a severe correction, but I am gearing up to buy in Adelaide if the right properties come up over the next 12-24 months.

  20. BB - I agree re Armstrong getting things wrong which he does on an almost daily basis and especially re Gold. He even advise the followers that if they must buy Gold then it should be in coins & not bars. He may be a clever clogs but he has plenty of faults.

  21. He has also made some astounding accurate calls over time & does write about some interesting monetary history, so do read his site regularly, but like you I don't agree with all he has to say on Gold. I guess we all have our blind spots though.