Any
of you who were not in the markets during the recent crash, or by dint of great
foresight or even pure luck managed to sell out near to the top, are probably
feeling fairly pleased with yourselves at the moment. You are probably sitting
on a sum of cash and as the old saying goes ‘cash is King’…or is it?
Right
now, invisibly, even cash is under threat and we all need to give some
consideration as to remedial action to preserve our wealth. The major economies
are going through a fundamental change at the moment and are moving steadily
from an inflationary to a deflationary environment and with this change comes
the need to re-assess our financial strategies.
Along
with falls in the prices of all commodities such as oil, gas, timber etc, you
will soon notice that inflation will probably also fall sharply and that this
will inevitably translate into falling interest rates as well. Now this is
naturally bad news for holders of cash; in fact, it is not entirely implausible
that the current rates of interest available today may seem but a pipe dream a
couple of years down the line. Unfortunately, with equities in the doldrums and
the traditional haven of ‘bricks and mortar’ no longer a viable wealth
preservation option, cash seems to be the ‘best of a bad bunch’.
Unfortunately
though, another threat is looming on the horizon; a threat not only to our
cash, but to our very wealth as Sterling based investors…the rapid
decline of SterlingSterling is a sure bet, so this is
probably reliably indicative of worse to come. against most other
currencies. For instance, it has lost around one fifth against the US Dollar
since January, almost one tenth against the Euro and more than half as much
again against the Japanese Yen. The general consensus amongst professional
currency traders is that shorting
So
how do we protect ourselves against this?
Many
reliable analysts have come to the conclusion that the time for investing in
‘Gilts’ (Government issued Bonds) has returned, but additionally to also
protect against catastrophic drops in Sterling, Euro Government Bonds.
Interestingly,
I have personally noticed a piece of potentially corroborating evidence for a
move to bonds. A couple of months ago I noticed that a certain company’s share
price dropped by more than 50% in the course of three days. On investigation,
it transpired that the drop in price was not due to any fundamental decline in
the company’s fortunes, but to the fact that the company announced its
intention to repay a portion of its debt far in advance of its obligation.
So
where’s this leading to?
Well,
the debt it was repaying was to its bond holders. With bonds to be paid out at
a fixed ‘coupon’, in a deflationary environment this would have been an
increasingly burdensome obligation to the company and so it chose to pay a
large premium to its bond holders in order to re-purchase its debts. To not
have done so, could possibly have seen the company, for example, having to pay
its bondholders 5% coupon, when it could only earn say 2% at the bank’s open
rate.
In
former times, holding Bonds was a vital part of any balanced portfolio…it looks
like those times have returned. To preserve your wealth in the coming years,
‘Gilts’ and Euro Govt Bonds could very well prove the perfect vehicle to
achieve just this.
*As
usual DYOR (do your own research) and seek professional financial advice, if
required before making financial decisions. This article does not constitute advice
to buy or sell financial instruments.
