Carney Inspires Gold Investment

In the last month or so I have noticed a pick-up in the amount of Canadians signing up to buy gold bullion or invest in physical silver.

It makes you wonder what kind of state Mark Carney has left the economy in, especially as he’s now over here charming the masses. To be fair to him he did not order any money printing whilst in Canada but he was a clear fan of low interest rates and the actions of other Western central bankers.

This is not good news for the UK’s savers, whom Carney has shown little sympathy to in the past.

Savers are a low priority

In a film produced just before Carney took his seat at the top table of Threadneedle Street he was questioned on savers who were watching their money devalue in line with QE.

He replied:

“There is a logic to some of your questioning which is that, ‘Wouldn’t it be better if interest rates were really high, regardless of the consequences.’ You want to talk about unintended consequences? I’ll give you intended consequences of that scenario. It is, let’s get interest rates back to historic levels so that the money you’ve saved and the return on that in your bank account is going to be commensurate with what you expected and we have double digit unemployment in this country, we’ve hundreds of thousands of people losing their homes and their businesses because we have deflation.”

So far there is little evidence of deflation, disinflation perhaps but no deflation. The money printing seen in both the US and UK has fuelled bubbles across a range of assets from house prices to bonds. Savers have been duped out of returns on their savings, whilst first-time buyers are struggling to buy a home. Quite simply bankers are setting us up for a bigger fall then we originally faced.

Also, Carney forgets that savers aren’t just concerned about interest rates, they are also closely looking at what they can get for their money and that is decreasing.

Monetary devaluation is a new challenge

So has Carney’s stance on savers changed at all since he arrived here? No, Carney has done little so far to reassure savers that he has taken their concerns into account.

Previously Carney has outlined three factors, known as ‘knock-outs’ which can change the Banks’ stance on loose-monetary policy. One of them is if “in the MPC’s view, it is more likely than not that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target”. The second? That “medium-term inflation expectations no longer remain sufficiently well anchored”.

So now the inflation target has unofficially moved from 2% (as it was under Mervyn King) to at least 2.5%. As inflation predictions go, the Bank of England has a shoddy record. Their projections are, without fail significantly lower than the actual readings. Should the inflation target reach 2.5% (as it has in the past) then it is likely that actual inflation will be around 4%.

This combined with 0.5% interest rates means you are losing money, rather than saving money.

There is little chance of these rates increasing even if inflation predictions change.

In early August Carney announced that he would keep interest rates at record lows until unemployment fell below 7%. In today’s speech he gave ‘reassurance’ that even if unemployment falls below this level this is merely a ‘staging post along the road to recovery. Unemployment must fall below this post before the MPC will even begin “to consider whether to raise the bank rate”.

He used today’s speech to reiterate that there were no plans to turn off the printing presses, unlike in the US where it is the topic of many FOMC meetings. Today carney confirmed that our central bank is no longer putting inflation as its top priority. Instead it is focusing on unemployment, unless inflation kicks in (as mentioned above).

The bank doesn’t expect the unemployment target to be reached until 2016. This is a further two years (after those since 2009) where savers will be losing money as they continue to see borrowing favoured over saving.

As we explained above, the Bank consistently misses and underestimates inflation targets, now it’s just throwing them out the window. Carney’s policies are, broadly, unchanged from those implemented in the years since the crisis. How will this be any different? Save Our Savers estimate that over four years of 0.5% interest rates have seen £220 billion stolen from savers.

Many savers feel powerless. They are afraid of keeping their money in the banks on account of almost annual banking scandals and whichever way they hold cash it has no chance of making returns.

Golden revolution?

Earlier today I spoke to a client who said that the British were too lethargic to cause a revolution. I disagree, I think that we can lead a revolution in the way we save our cash and allocate our pensions.

If this crisis and central bankers’ management of it has taught us anything it is that we should diversify our savings. Cash is clearly something you should hold, but it is not tangible and faceless.

Therefore, I believe a proportion of your savings should go elsewhere. One place you could diversify to is gold and silver bullion.

Unlike cash, gold and silver bullion carry no default risk. The value (not price) of your gold does not depend on a central bank or government’s decision. Gold is not issued by anyone, it is faceless and as a result it cannot disappear when banks fail.

When Carney announced his commitment to loose monetary policy, at the beginning of the month, the £/$ rate plummeted. The knowledge that a bank can create money does little for its value, but it helps gold a huge amount. Bullion cannot be multiplied at the flick of a switch, whilst all other currencies are printed into oblivion gold stays steady thereby maintaining its value.

As is so often said on this site, fiat monetary systems do not last. In contrast, gold is timeless. It comes as a shock when you realise that your gold sat in a vault will still be the same gold when you pass away, and when your children and grandchildren go that way as well.

Granted the downside of gold is that it does not yield anything, but it certainly doesn’t take your money either. This is in contrast to cash, which may pay out a dividend from a savings account but at present it is most certainly disappearing thanks to inflation and low rates.

Inflation is all very well, but Carney is most concerned about deflation and how it could damage the currency. Unlike sovereign currencies sold in a vault is untouched by deflation.

Gold is seen as one of the ‘most reliable hedges’ against inflation. This may be but I also see it as one of the most reliable hedges against the decisions of others. Your decisions no longer matter when you hold cash in a bank account as it’s not yours to decide upon anymore. But when it comes to gold and silver allocated bullion, the decision is all yours.

If Mark Carney and the rest of them have no time for looking after savers, perhaps it’s time to show them that we can just as easily turn our back on the pound.