The Bong of Forced Risk

By: Adrian Ash | Wed, Apr 7, 2010
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If you're queuing up for a lug on the bong of forced-risk, just take a moment before you inhale too deeply...

THE LONGER that interest rates stay below inflation, the more people will be forced to take more risk to defend what money they've got.

Just look around you...

Currency speculation, high-end collectibles, junk bonds with junk-bond default risk...we've been here before - and not that long ago. Yet from retail investors looking to juice their savings with a little 100-to-1 leverage...to ultra-rich art buyers bidding by phone...and onto institutional managers hoovering up anything that pays better than zero...it's like the crash never happened.

This is only to be expected. Coutts private bank - bankers to the Queen of England, no less - announced in a quiet little press advert last Thursday that it's cut the rate of interest it pays. Cash deposits of £3 million and above now earn 0.55% annually. Anything below that ($4.5m) gets 0.40% per year before tax and inflation.

And people still need to ask "Why is gold going up?"

Real Rates of Interest on 6-Month US CDs

Cash savers in the US have been underwater - after inflation - for 46 of the last 90 months. So to repeat: It's no wonder that cautious people, risk-averse people...the kind people who never inhaled and who now check their tire-pressure before driving 3 miles to work...are choosing to buy gold and silver, open a forex account, or scout local foreclosure sales for a bottom-picking bargain in bricks-n-mortar.

They'd choose cash-in-the-bank if they could (it's what we all mean by "savings", remember). Because cash-in-the-bank is supposed to be the nearest thing to "risk-free" you'll find. Northern Rock, Bear Stearns and Kaupthing gave the lie to that con, of course. And even with FDIC insurance, "risk-free" now means a sure-fire loss instead.

So the longer that interest rates stay below inflation, the more people will in fact be forced to take more risk, pushed out of cash-in-the-bank to speculating in physical assets, leveraged betting and "high risk-reward" contracts. Ever more brokers, shysters and shills will look to help them, too.

In our own market here at BullionVault, we've seen more "me too" gold dealers set up shop in the last 12 months than in the previous seven years' combined. Over in Washington, regulatory plans to cap retail forex leverage at 10-to-1 have drawn a massive 10,000 objections from the industry, says EuroMoney. The Financial Times reports on a new attempt to commoditize the diamond market, targeting investors with spot-market dealing in those not-so-rare lumps of carbon. Hell's teeth, real-estate seminars are back, at least here in Britain, and barely two years after the jokers behind them went bust!

If you're queuing up for a lug on the bong of forced-risk, just take a moment before you inhale. Because there's no sense exposing yourself to anything other than price-risk where you don't need to.

Know what you're buying. Check your counterparty's standing, credit and default risks. And check to see how deeply you can cut costs - keeping hold of more of your gains, should you pick the right speculation - rather than just boosting profits for the low-rate racketeers.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

© BullionVault 2006-2014

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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