Over the weekend we received an interesting email from Vern Gowdie in the Daily Reckoning Australia, headed “Do You Hold Cash or Gold in the Coming Crisis?”
It gave a good run down of how gold performed in the 1970’s, during and after the 1987 crash and also during the 2008 financial crisis.
He explained how all the money printing since 2009 led many to believe that hyperinflation was just around the corner and that is what took gold up to its 2011 high. But how since then it has fallen 40% (in USD terms). He then went on to say how deflation has been the main issue in recent years.
Below is an excerpt from the article where he then makes the argument for being wholly in cash in the lead up to the crisis he sees coming. After that we’ll give our take for New Zealanders, where there are some definite differences to consider compared to his Australian audience.
(By the way if you get the chance, check out Vern’s book “The End of Australia”, as much of what he thinks will have happen in Australia has implications for us here in NZ too.)
“There is asset price inflation, but economic deflation — the world can make far more widgets than there is demand for those widgets.
Since 2008 countries, corporations and households (to a lesser degree) have all taken on more debt. And hell, why not? When central banks are giving it away in plentiful supply for next-to-no cost.
Therein lies the problem with the next crisis. A lot of this newly acquired debt is in US dollars. Emerging markets have US dollar based debts to the tune of US$9 trillion.
It’s reasonable to assume some of this US$9 trillion has been lent to a few ‘good time Charlies’ who really aren’t good for the money. When the next (and even more severe) credit crisis hits, the scramble is going to be on to pay back those US dollar debts.
Everything goes on the auction table in a crisis…everything except cash.
In my opinion gold will — rightly or wrongly — be sold off as borrowers rush to raise US dollars to satisfy the creditor demands.
This brings me to two questions:
- What about gold in Australian dollar terms?
- How safe is cash?
The Australian dollar got hammered in 2008/09 as investors rushed to buy US dollar base Treasury Bills. I expect the same to happen next time, but only a much harder fall. We could well see the Aussie dollar touch below 50 cents (which it has done once before in the early 2000s).
From our dollar’s current level that would be a fall of 30%.
If the US dollar price of gold also falls 30% (back to the US$700 to $800 range), then it is a zero sum game as far as the Aussie dollar price of gold.
You can play with those percentages but the falling Aussie dollar will soften the impact of a falling US dollar gold price.
If you think this is a probability, then in my view it is simply better to own US dollars and pick up the entire 30% currency depreciation gain.
How safe is cash? Will there be a bail-in? Will cash be made illegal? Will we be limited as to how much the ATM can dispense on a daily basis?
The simple answer is, I’m not sure. Until the system is tested we do not know the level of pressure it can withstand and what the policymakers’ responses will be.
As it stands today, we have a Government guarantee to protect deposits up to $250,000 per taxable entity per approved deposit taking institution. Personally I think the government will honour that guarantee — for no other reason than if the government wants to restore calm and maintain any shred of confidence in the banking system, it must stand behind the guarantee.
Will there be cash controls? Probably. So make sure you have a few dollars tucked away somewhere safe.
However the bigger issue for me is not whether I can get my hands on actual dollars but whether I’ll be able to electronically transfer money to say the Perth Mint to buy gold, CommSec to buy shares or a Solicitor’s Trust account to buy property.
I think electronic transfers will still exists — otherwise no one will be able to buy or sell anything and the whole system comes to a grinding halt.”
These are some excellent points he makes. If we get a similar crisis to 2008, there will be a rush back into the US Dollar.
Also just as Vern says if this happened the Aussie Dollar will tumble, and so will the NZ Dollar. And so gold in NZ dollars will also hold up much better than gold in US Dollars, much like gold in Aussie dollars.
So then how about the point that “it is simply better to own US dollars and pick up the entire 30% currency depreciation gain”.
There are two factors to consider here we reckon:
1. Verns case that we may yet see another fall for gold and silver in the “deflation before inflation” phase, is a similar position as author Mike Maloney takes. However Maloney also notes that while that paper price of gold may drop below US$1000 and silver could plunge to single digits on the futures market, you won’t be able to actually buy any physical metal at this price as it’s likely demand will sky rocket and premiums will rise as they did in 2009.
So while you might have made a gain on holding US dollars versus NZ dollars, you may not then be able to buy gold (or silver) here in New Zealand at prices anywhere close to the paper spot price of gold or silver. (We recall silver selling for well over 30% above the spot price back in 2009 here in NZ).
2. The second factor to consider are the differences between Australia and NZ in considering the points he raises such as “How safe is cash? Will there be a bail-in? Will cash be made illegal? Will we be limited as to how much the ATM can dispense on a daily basis?”
Unlike Australia New Zealand does not have a $250,000 bank deposit guarantee. In fact NZ has no bank guarantees at all. At any level. Whatsoever. Rather the Reserve Bank of New Zealand already has bail-in provisions in place. This means if a bank fails here depositors will receive a “hair cut” on their deposits and would only get back a percentage of their funds.
See this previous article and video of ours if you don’t know much about the RBNZ Bail in Scheme:
Therefore to us sitting completely in US dollar cash would seem too big a risk to take here in NZ. You may make say a 30% gain if the NZ dollar fell against the US dollar. But that gain could well be wiped out if the next financial crisis also caused bank failures, with no deposit guarantee to protect your savings.
So by all means it makes sense to have some cash. But we also prefer to hold the only assets with no counterparty risk – gold and silver.
Is Vern anti gold? No not at all – he finishes his article with the comment:
“Because I do think gold will come into its own after the next crisis.
When faced with a crisis, far greater than 2008/09, central bankers will literally go for broke.
Then it’s a fair bet we’ll see the inflation genie released from the bottle.”
So we merely disagree with him on when the time is to purchase gold (and/or silver). We don’t like the idea of being all in cash – particularly in a country with no bank deposit guarantees.