What to do with your spare money besides blowing it on nice things :-)

Assuming you have a home and perhaps even a spare one, with money as cheap as it is, it’s not worth paying down mortgages but indeed rather the opposite. If u can find a bank to give you a loan these days you should borrow more!

Considering the mess western governments have got themselves into it is likely that interest rates will stay very low for a very long time… see Japan!

The ways out of this mess are few:

1. Default on debt – possibly too complicated to do since no one exactly knows where or how the debt is distributed.

2. Keep printing money and let inflation ride thus reducing the value of the money and of course of the debt itself.

3 A combination of 1 & 2 with 1 being a controlled default and 2 trying to disguise inflation by altering the inflation basket of items to make it look as closer to the proclaimed target thus attempting to ensure that the population doesn’t catch on to what is going on and suddenly runs off to some other asset class making the current situation even worse.

Of course the governments can opt to kick the proverbial can down  the road and let things ride a little longer which basically consists of not dealing with the problem and swapping bank debt for government debt and vice versa. A bit like paying off one credit card with the other… the debt doesn’t disappear!

It looks that for all intense and purposes #3 is what the European governments are opting for. We have seen Greece’s debt being in part defaulted on, or repayments being delayed with interest being reduced; what Europeans like to call debt restructuring. It resulted in certain banks writing down large amounts of the debt they were holding. At the same time we are seeing unprecedented printing of money going on, with unwanted government debt being bought up by the European central bank something they prefer to call quantitative easing.

Anyway to cut a long story short under these conditions, printing of money and rampant inflation, the value of the cash you are holding is progressively being diluted. If the mechanism by which this is happening is somewhat abstract you can think of your money as shares you are holding in a private company, say each share is 1/1000^th of the total value of the company. While you are holding these shares the company directors, without you having any say, decide to dilute your holdings by issuing 1000 more shares. Now your holdings are worth 1/2 of what they were, such that when you wish to exchange them for goods, you get 1/2 of what you could get before. A very similar thing is happening with your cash.

So under these conditions it’s important that you should do something with your money since its value is going down at the same speed as central banks print money! It’s literally like ice cubes melting in your hands the more you wait the less you have.

What are your options?

1. Buy something which retains its value and yields more than the amount by which money is being devalued

2. Convert it into something which is not subject to devaluation

Easier said than done!

If we discount houses and fixed assets which are currently in most courtiers undergoing a downward revaluation, option #1 requires knowing about stocks, preferred shares, yields etc. and besides that… what yield are we targeting? What is the true value of inflation that we are undergoing? If we were to take the basket of items used by the US a few years back then Inflation would be at about 8% if we were to use Italy’s inflation calculations from a few years back then figures would look more like 9 to 10% per annum. When it comes to reporting back to their citizens it would appear that governments are less than honest and prefer to change the rules of the game rather than report back that they have screwed up! In fact their use of words like Quantitative easing and debt restructuring in preference to the words like devaluing your cash and defaulting on their debt would at times appear as if they are truly trying to pull a quick one on us. Of course if you govern, ignorance of the masses is bliss! Some governments have for years relied on this principle to stay in power by denying good proper education to their own people. Anyway off subject…

Well if we cannot trust the CFOs & CEOs and are not sure what the government’s next moves are going to be that leaves us with option #2; convert to something that retains its value… currently the options here appear to be the Swiss Franc which historically has been a safe haven when currencies are being devalued. The reason why its retains it value is because the Swiss unlike their counterparts run a rigid fiscal policy which doesn’t include printing vast amounts of money in their back rooms, almost as if were toilet paper, in order to pay for their debts. This very fact means that there is a limited amount of Swiss Franc in circulation. However if we follow unrestricted market rules the supply/demand will raise its value in relation to our currency and if this happens for too long unchecked, Swiss products becomes so expensive that they become un-exportable causing the country to end up with a huge import deficits and a wrecked industrial/manufacturing sector. To counteract this effect the Swiss have historically acted to try and depreciate the attractiveness of their currency by dropping the interest rate paid to holders of their currency right down to negative values. Yes you pay the Swiss government for the pleasure of holding your wealth in their currency! This of course may still be a trade worth doing at least as long as their currency keeps appreciating rapidly.

The popular alternative of course is gold… this useless, hard to find element which prior to paper money was a successful store of value and a valuable medium in exchange for goods and services, has as it principle virtues:

a.       The fact that it’s a pure supply/demand trade since governments cannot affect its value directly.

b.      There is a limited supply of it

Gold has always done very well in times of low interest rates. In fact if we look at store value attribute alone, it appears that in the last 2000 years that the same amount of gold has bought the same amount of food and clothes. This is staggering when one looks at how the prices of everything, in terms of paper money, have climbed and climbed even during periods of relative monetary stability!

The right move

Of course the right move to preserve your wealth is very much still tied to you needs and to where you are in life. Risky assets being more suitable for younger people while preference shares, and corporate debt being more apt for those of us that require a bit more safety and some slightly more serene nights!

Is it too late to jump into gold? If you expect it to hit 3000 USD/Oz then I guess not but it’s clear that at some point this metal will leave behind its role as protector of value and become a pure speculative play. We have all witnessed how in the last week gold future charts, a leveraged speculative play on the underlying asset, have started moving in a parabolic way. While parabolic moves can last weeks, month, and occasionally even years, they always finally end with the tanking of the underlying asset.

What can you expect in the final moves of any asset? A rapid increase in its value, a parabolic looking chart, extreme volatility.

Finally if you are one of those believers in the total disaster you might want to hold real physical gold and these days you can do just that and trade it just as easily is you would any other commodity. Companies like Bullion Vault http://www.bullionvault.com/#aegdawson and bullion direct http://www.bulliondirect.com/ enable you to do just that.