MoneyWeek roundup: The central bank gold rush
James McKeigue Jun 30, 2012
Bankers have been caught cheating the financial system – again. Thursday’s headlines probably won’t have come as much of a surprise to most of you, but the story behind them was shocking enough. Barclays Bank was fined a record £290m after it emerged its bankers had been manipulating a key interest rate called Libor. Several other leading UK banks were almost certainly involved.
John Stepek got to the bottom of exactly what’s been going on and how it affects you in Thursday's Money Morning.
(For the vital facts about Libor and why it’s a rate everyone watches like a hawk, check out this short video tutorial from MoneyWeek’s deputy editor, Tim Bennett.)
“The reason it matters”, says John, “is because lots of financial products and loans are priced off Libor. And the reason Barclays has been fined is because its traders tried – and succeeded, judging by the many emails floating around – to get the people who submitted the banks’ Libor estimates to put in figures that were either higher or lower than they should have been.”
Why? It’s all about leverage, says John. They would borrow big and make massive bets on a slight change in Libor. So if they could even push it a few hundredths of a percent they would make big money. Another motive for pushing Libor down is that it gives the impression that a bank can get its hands on money easily. That’s important in a financial crisis when markets are looking to punish distressed banks.
On a practical level, Libor rigging won’t have affected you, says John. The shifts in rates were so tiny that it wouldn’t have affected the interest you paid on your credit card or mortgage. However, it is still damaging. “Libor-fiddling by banks means we can’t trust that rate. And money-printing by governments means the ‘risk-free rate’ (the yield on gilts and US Treasuries) is meaningless too. So the building blocks of our financial system are looking very shaky to say the least.”
As for the banks, it’s just another reason not to invest in them, says John. And “if we can’t trust the banks to do their job honestly – as Barclays shows – and we can’t even trust them to do it competently – as RBS shows – then why do these pathetic, complacent, self-serving dinosaurs have any place in our society at all?
If you are looking for an alternative to the traditional banking sector you should read Merryn Somerset Webb's piece, For better returns, ditch traditional investments.
Legal isn’t the same as right
Meanwhile, in her blog this week Merryn tackled tax avoidance. A vaguely libertarian idea, popular with many of our readers, is that it’s OK to avoid paying tax as long as you don't break the law. The argument goes, says Merryn, “that getting involved in convoluted film and loan schemes is no different to setting up a SIPP with Hargreaves Lansdown, and all thinking people should do all they can to avoid all tax.”
This is nonsense says Merryn. “Living in a liberal democracy comes, as ever, with responsibilities and rights. That means that we should all feel obliged to pay the taxes the government we have voted in intends us to pay.”
After all, “if a rich man can reduce his tax bill to a mere 1% of his income, I wonder who he thinks makes up the difference. If he pays less (and avoidance by individuals now adds up to around £4.5bn a year), who pays more. Me? You? His children via debt repayments? I wonder too why those who refuse to pay tax think it is OK to live in and benefit from an infrastructure and legal system financed by people who mostly earn significantly less than them.”
The comparison between Isas and the complicated tax arrangements of celebrities like Jimmy Carr also doesn’t stand up, says Merryn. Quoting HMRC, she notes that one involves “contrived, artificial transactions that serve little or no purpose other than to reduce tax liability [resulting in] a tax advantage that Parliament never intended”, whereas the Isa scheme was planned by our elected politicians.
The consequence of tax evasion could be dire warns Merryn. “It isn’t much of a step from thinking loans from Jersey, K2 and dodgy film partnerships are OK, to being a country in which only 30,000 people declare incomes of over €100,000, to being a failed state. And I don’t imagine that the UK’s tax avoiders want to live in one of those any more than the rest of us do.”
Needless to say this proved a popular topic on our blog.
Richard Williams opened the debate by complaining that “the most unacceptable thing about such tax avoidance measures is that they are usually only available to the already rich. I am not sure that there would be a lot of interest from expensive tax advisers in my £5k investment, or from the dodgy film partnership itself. Which makes it all even less acceptable”.
However Max Stirner completely disagreed with Merryn. “The reality is that every Pound saved from the bureaucratic system can be used productively in the real economy. And that is what really benefits society, not paying taxes.”
Meanwhile Shinsei1967, summed up the debate about the legality of tax evasion with an excellent analogy. “The "it's legal" claim does sound odd coming from those who would be the first to complain if they were fined for doing 34mph in a 30mph area at 2am and the law didn't show any sensible "common sense". Well, Carr's K2 scheme may have been legal… but it clearly broke the "common sense" rule that income is taxed at 40 or 50%.”
The debate is still going on, with Merryn responding to commenters so read the piece and have your say.
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A tech firm with a great future
One of our most successful stock pickers is Dr Mike Tubbs, author of the Research Investments newsletter. He’s got a pretty good track record of picking up and coming tech winners and this week he’s got another great find.
“This company is already a world leader in advanced wireless chips for devices like smartphones. And it’s developing strong positions in several other markets including optoelectronics (the combined use of electronics and light), solar power and the next generation of superfast microprocessors.”
Of course, warns Mike, just because a company makes hardware for a flash-sounding sector, doesn’t mean it’s definitely going to be a success. “I know there have been great success stories from the sector. You may think of the gains made by Apple, for example, which has grown 20-fold in the last decade. But there have been many more losers. Since February last year Research in Motion (RIM) (maker of the BlackBerry) is down 86%, Nokia down nearly 80%, ST Microelectronics down over 55% while Wolfson Microelectronics & AMD are both down 37%. Even ARM is down over 18%.”
But Mike has a strategy to avoid picking losers. “If you invest in a company making one or other of these devices, you may be choosing a RIM or a Nokia rather than an Apple. That’s why I think it’s a much better idea to invest in the company supplying many makers in all of the market segments with the key material in the wafer form that they need to make their chips. That’s what the company we’re looking at today does.”
Indeed, a quick look at the sales figures shows that the firm is already well established in its field. It “supplies all 12 of the top wireless chipmakers globally. And the demand for wireless chips grew 11% last year. High growth will continue since smartphones are predicted to rise from 16% of all mobiles in 2011 to 43% in 2014. And each smartphone uses multiple compound semiconductor chips. So with this stock, we’re buying into a serious growth market”, says Mike.
If I gave away the tip here I’d risk a lynching from Mike’s subscribers. However, he’s just released a free investment report, which I can show you. Grab a pen and paper and watch this video – it could be the most profitable few minutes you’ve ever spent.
Be your own central bank
Not many people can see an investment opportunity coming out of the eurozone crisis at the moment, but Bengt Saelensminde, author of The Right Side, thinks he’s found one.
Right now, says Bengt, the bail-outs and loans being made to save indebted countries don’t come with much collateral. Of course, there are contractual rules, but as we’ve seen over the last few years governments can rewrite them as they please. But as the demand for new bail-outs grows, so does the demand for some meaningful collateral.
“That has many people talking about gold. After all, historically it was the gold standard that provided this security for currencies. So are we, ultimately, heading back to a gold standard?”
There are few things that can compete with gold as collateral. Buildings and machinery are messy and not mobile enough, while even Greece’s beautiful islands have failed to find a buyer.
“Luckily the Germans have a solution”, says Bengt. “An influential report by a group of German economists, the so-called 'German wise men', has come up with a cunning plan to securitise any new bonds coming out of the southern European states.”
Euro rules state that nations should not have debts of more than 60% of GDP. “So, the wise men say that any borrowings over and above this amount should be collateralised by the nation's gold holdings. They say that if they want nations like Germany to stand behind any new bonds to help finance nations like Italy, or Spain, then they must pledge their gold as collateral.”
This could work because “these countries actually do have gold to pawn. Unlike us, they didn’t flog half their gold at the bottom of the market”.
Central banks around the world are already acting on this and snapping up gold. Now, Bengt isn’t saying that we will go back to the gold standard. “Frankly, the world has moved on from the days of gold ducats, florins and sovereigns. If anything, money is going virtual. Soon all manner of things from phones to thumb-prints will be used for transactions of digital money.”
But holders of gold can do well. “In my opinion Britain’s fortunes are on the wane. The manifestation of this will be a falling currency. We will continue to lose purchasing power – relative to earnings, things get dearer and dearer.
“This is where gold comes in. Gold gives you a chance to maintain your personal purchasing power. You can put your money into the same asset as the wealthy central banks of the emerging nations. You can be your own, private central bank.”
Making money from the eurozone
For other ideas on how to make money from the ‘euro-shambles’, read this week’s magazine. We invited a panel of European equity experts and bond vigilantes to share their views on the single currency. Despite the gloom they manage to find some interesting companies to invest in so it’s well worth a read. If you're not already a subscriber, get your first three copies free here.
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