14 May 2013
Over the past month British savers can’t be blamed for feeling a little smug. With very little news regarding UK high street bank bailouts, we were left to read how Cypriot banks were raiding their own clients’ savings to fund a bailout. Sure, our savings return well below inflation but at least our principal amount is safe – isn’t it?
Unfortunately, this temporary respite was shattered last week when top ratings agency Moodys downgraded the Co-Op bank to junk status. Rumours are that the Co-Op will need a bailout due to huge potential losses on property loans. Regardless of the extent of these possible real estate losses, the junk status means it becomes impossible for the Co-Op to riase funds at a reasonable price.
Don’t forget that it was the Co-Op who were suggested as the possible buyers of a portion of Lloyds’ business so the knock on effect is wider spread than merely Co-Op customers. It will put the brakes on other high street banks looking to rebuild after the devastation of recent years.
What it tells me is that customers simply aren’t compensated for the risk they now take by depositing cash in a bank. Investments and savings should reflect a simple equation, the more risk you have, the higher the reward. That being the case, I’m not sure that a 1% savings return is fair to leave your money with a ‘junk rated’ institution.
It always makes sense to leave some money as an emergency fund in cash. However, diversifying into physical gold means that you don’t have any counterparty risk. This means it doesn’t matter if the banks go under, the Pound is destroyed or even if the UK itself is downgraded, you own the tangible metal so you’re protected. Gold has returned more than inflation over the years and if bought in the form of UK coins, is also tax free.
It’s always tempting to hope that the economy is out of the woods if you don’t hear any bad news for a few weeks. However, common sense tells us that there is still pain to come, perhaps with further bank closures or even the UK banks raiding our savings to bail themselves out! Therefore gold remains a decent hedge in these turbulent times.