Move To Cash Or To Gold? Foreign Exchange Risk, Counterparty Risk And More

Most investors have some of their portfolio in cash. It makes a lot of sense to have flexibility. If there’s a market crash you can probably…

by Simon Popple of the Brookville Capital Intelligence Report

Most investors have some of their portfolio in cash. It makes a lot of sense to have flexibility. If there’s a market crash you can probably buy your favourite investments much cheaper. Or perhaps there’s a need for cash you weren’t expecting. And you’ve got some.

The proportion held as cash varies enormously from one person to another….for some it’s 5%, for others it’s well over 50%.

But that’s not point.

Cash is normally held in a bank. In the UK £85,000 of this is insured. Re-assuring. Not so re-assuring could be what £85,000 would be worth if the bank went bust and you had to claim on that insurance.

Whilst cash is cash….it’s also a currency play. You may not think about it like that….but that’s what it is. If you hold your cash in a currency that depreciates, then when you come to spend it…the chances are your purchasing power will be less. At least over the longer term.

Let me be clear here. If you choose to hold some of your cash in gold, you would be taking a risk on the gold price. Just like you would be taking a risk on a currency movement. But you can convert gold into any currency you want. If the currency you’re in takes a real bath…that may be difficult….at least at the exchange rate you want.

The difference between gold and cash is that gold has no counter party risk. It doesn’t matter who is running the Treasury, or how much faith the public has in the currency. Gold is intrinsically valuable because of its scarcity, durability and desirability.

Cash on the other hand, does carry counter party risk. The Treasury could choose to invalidate all notes above a certain denomination – for example on 8th November 2016, Indian Prime Minister Narendra Modi announced that high value currency notes would be withdrawn from the financial system overnight.

Which brings me on to gold. Take a look at this table below.

As you can see, with the notable exception of 2013, holding at least some of your cash in gold could have worked out well.

Now I appreciate there are some storage costs. These vary but assuming around 0.65% plus VAT of the value of your gold is not a bad benchmark – but what I like about this strategy is that providing the gold price holds up, not only might you be able to protect your purchasing power when you convert it back into cash, but given it’s such a global asset, there’s likely to be many different currencies you can convert your gold into.

In short, it’s a diversifier.

What I like about gold is you can’t print it. Right now, there’s a lot of printing going on.

Which brings me on to my final graph.

What is M2? 

M2 includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while “near money” refers to savings deposits, money market securities, mutual funds, and other time deposits – which are less liquid than M1 but can normally be converted into cash relatively easily.

And my point.

As I’ve said, given I’m expecting more money to be printed, then it’s not unreasonable to expect the gold price to go up. If that happens, then holding at least some of your cash in gold…may be a smart move.

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Simon Popple is the Author of the Brookville Capital Intelligence Report – further information about this weekly report can be found at www.brookvillecapital.com