Move now to protect your portfolio from grasping governments
By
Tim Price Feb 25, 2011
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During the darkest days of the financial crisis many investors experienced counter-party risk firsthand, for the very first time. The run on Northern Rock and then on Iceland taught depositors that simply having money in the bank came with its own risks.
The failure of Lehman Brothers in turn had all sorts of unforeseen consequences on structured products. Previously these were presumed to be largely without risk. The message? If a financial crisis strikes, it is not good enough simply to have the 'right' investments. They must also be held in the right way. Two recent developments set an ominous precedent that may cause investors to have to learn this lesson all over again.
Earlier this month, De Nederlandsche Bank (DNB), the Dutch financial regulator, took SPVG, a glass workers' pension fund, to court. The gripe was that it held 13% of its portfolio in the form of gold. DNB argued that the average Dutch pension fund had less than 3% of its assets in commodities, including gold. SPVG's scheme was therefore dangerously overweight in this asset. The court agreed, and gave the fund two months to make the requisite sales.
Meanwhile, consider House Bill 1716, and the state of Washington. If passed, it would require any purchaser of gold within the state with a value of more than $100 to supply their "name, date of birth, sex, height, weight, race, and address and telephone number". The US has form here. Executive Order 6102, signed on 5 April 1933 by President Franklin D Roosevelt, made "the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates" by American citizens illegal. The law stayed on the statute books until the end of 1974.
I'll take the Dutch case first. I've debated the point at some length with professionals familiar with the workings of Dutch pension schemes. Most of them agree that the regulator's action was heavy-handed at best. Ironically, their concerns tended to focus on the 85% of the scheme's assets invested in government debt, rather than the harrying of the fund's gold exposure.
Intriguingly, I'm told that it was the Dutch central bank that effectively forced the closure of the US gold window in 1971. Under President Nixon, that took the US dollar off gold and set in train the current fiat money system, whereby no currencies globally are backed by any form of tangible assets. Yet the Dutch central bank remains the ninth-largest sovereign holder of gold, with more than 600 tonnes – the equivalent of over 60% of its reserves. The word you're looking for is 'hypocrisy'.
It will come as no surprise to MoneyWeek readers that I find the Dutch regulator's position unacceptable. SPVG themselves acknowledged that "the fund has its formal obligations secured in euros. But the euro is actually secured by trust in government... the decision to invest in gold is actually an insurance".
Indeed, if the Dutch regulator really views the price of gold, denominated in euros, as volatile, how does it view the value of euros? No paper currency has ever persisted. The fate of all paper currencies is to deteriorate over time towards their inherent value, which is nothing. The question is not so much financial as existential: is gold a commodity (the regulator's view), or is it actually money (my view)?
The Washington Bill is no less alarming. I was told last year that it was impossible to buy securities in bearer form in America. Investments within a brokerage account must now be held solely in electronic format. If that makes life easy for the investor, it has additional convenience for the authorities, who can then effortlessly trace who holds what – and where.
Irrespective of whether House Bill 1716 passes, I think we owe it to ourselves to re-examine the risks inherent in our portfolios and savings accounts. I don't just mean in what form those savings are held – I mean where they're held, and with what calibre of institution. Ever since the banking crisis first broke in Britain, for example, it has made sense for cash investors to diversify their holdings. That's the way to benefit to the greatest extent possible from the terms of the Financial Services Compensation Scheme.
The danger has to be that the austerity measures proposed by the government fail to address our yawning budget deficit. We know from innumerable historic examples just how desperate cash-strapped administrations can become. It is not implausible, in other words, that Western governments, in extremis, in addition to raiding private pensions, might reintroduce capital controls and other draconian measures that will punish the financially prudent.
Western governments would evidently prefer not to drive domestic savings and investments offshore. The way they're behaving, however, makes such pre-emptive portfolio insurance almost essential.
• Tim Price is director of investment at PFP Wealth Management.
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