As a rule, I tend to keep it general when writing about investing. Even drilling down into people’s attitudes towards retirement is extremely difficult given the myriad of choices, plans and options each person faces. But when non-investors like my wife for instance ask about our, or better yet my position on gold, perhaps it is time to look at why she would ask.
Gold is in the news and will remain a topic of conversation in the coming months. The whole of the world seems poised to step back several economic decades to a time when austerity was the only option. This will be a move to a time when life was what you had made for yourself, class distinctions were drawn by the economic ability of your personal wealth to get you through your later years – which ironically were not-so-later, and when the government was busy doing something that seemed to have little effect on the day-to-day activities of the average citizen.
The good ol’ days. We had pensions. We had Social Security.
Now we can’t live without entitlements and yet, we can’t really afford them. We can’t seem to save enough for a rainy day let alone invest enough for a future that holds more uncertainties than we had previously assumed. Our grandparents, if they are still alive could tell you how different things are today. But they secretly thank their good fortune that they won’t need to experience the future we face.
The reason: the world has a problem. As Sara Glakas recently pointed out, in spite of all the we have been through recently, the crisis is not quite over. She writes :”Make no mistake, the next crisis will be debt-related, too”. This debt is due to borrowing done by a wide variety of market participants based on potential.
This potential reached a fever pitch, noted by the sudden shock of 2008, and what we are left with is a situation none of the world’s borrowers was able to see at the time. Eventually you will have to pay it back.
in the past, debt could easily be rolled into new debt, sometimes with lower costs than the debt they were already carrying. But if the only option was to borrow at a much higher cost to refinance the old debt, the cost of the new debt increased. But if the underlying and assumed potential of what the debtor borrowed the money for in the first place no longer exists, meaning they will have no money to pay it back, the lender might balk. Then what?
Ms. Glakas points out some very troubling statistics in her recent article titled “The One Key Financial Statistic You Must Know”. The World Bank must borrow $5 trillion in the coming years due to their current loan’s maturities and when they do, they will be facing competition from the US, which is estimated to have $4.2 trillion of their own to refinance.
Some countries may seem to be in an enviable position. While the US and the EU can essentially print money to fix this issue, this opens the door for yet another problem. That of a lowered value for its currency often referred to as debased.
Its is the “other” debt that needs to be refinanced that could create the next problem. She lists the problems waiting in the wings from 2011 to 2014:
- $1 trillion in junk bonds and other high-yield debt, much of which financed the leveraged buy-out craze of 2005-2007;
- $2 trillion in commercial mortgages, most of which were used to buy malls, condos and office buildings that today aren’t worth even close to their original purchase price; and
- $1.2 trillion in debt issued by fairly stable, investment-grade companies.
Which leads us to the gold question. Is there any doubt that this commodity will go well beyond its current price? With a finite supply, purchasing gold is probably more than a good hedge against inflation (which is the net effect of printing your own money; goods made with debt will need to go up in price as your dollar is worth less). Yet it is still a risk. Priced in dollars, which we will know will be worth less, the potential meteoric rise in price – some have predicted $3,000 and ounce or higher, how much of the price is actually yield is less than what you might assume.
But it will still be hefty. Suppose everyone buys gold and because the price seems to be heading ever higher, borrowing to do so. Are the world’s debtors going to heed the siren’s call of yet another bubble or simply overextend as they chase the price higher?
So yes, I tell my wife, we have committed some of our portfolio to gold via an ETF that actually has gold as an underlying possession. You buy, they hold. Now I have been written in the past suggesting that some ETFs hold too much of a temptation for those who have access to them in their retirement funds. Much of the savings in these funds in the form of fees is often eaten up in the costs of trading. And I believe that ETFs are somewhat responsible for the wild swings in the market as investors retrench at the beginning and the end of the day. ETFs reprice throughout the day and today’s price might be the result of caution rather than conviction.
But in the case of gold and with such a small amount invested (less than 10% of my total portfolio, well within the range of diversification and with a stop sell at 5% should it fall below the purchase price), I can answer her question honestly. I am concerned. This site believes you can retire in 15 years or less which means between now and then, we will experience another, possibly larger shock to what we own and what we owe.
Oddly, retrenching with a more conservative approach will bring the whole, as Ms. Glakas calls it “looming tsunami” on all of us even sooner. Taking too much risk by believing that the worst is over will make the predictions come to fruition possibly even faster still. So if you are now more than a little scared, its understandable. What will still be key is how well you keep your house in order now in order to survive the oncoming storm. And its coming. We just don’t know how severe it will be. Buying gold is, for want of a better analogy, like carrying an umbrella on a partly cloudy day.
Ms. Glakas’ article can be found here.
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