- Money Morning Australia

Attention Savers: Is Your Money Safer in Cash or Gold?

Written on 10 May 2012 by Kris Sayce

Attention Savers: Is Your Money Safer in Cash or Gold?

In a week where commodity prices have hit the skids, it seems crazy to ask if a commodity is safer than cash.

In just over a week…

Oil has fallen 8%.

Copper is down 5.6%.

And gold priced in US dollars is down 3.9%.

Yet those falls are nothing compared to the 10.5% cut many savers have suffered over the past six months. And odds are that, if you’re not careful, the news is about to get worse…

Savers Take a Pay Cut

Let us explain. Eight months ago, we took out a six-month term deposit using spare cash from our retirement fund. The interest rate was 6%.

Two months ago, we rolled it over for another six months. This time we only got 5.8%. Today, if we wanted to take out a six-month term deposit with the same institution, we’d only get 5.5%.

That’s an 8.3% ‘pay cut’ for savers.

And goodness only knows what rate we’ll get when we roll the cash over again in four months. Our guess is 5.2%…if we’re lucky.

It’s even worse in our online savings account. Last September we earned 4.75% on our savings. Today, it’s only 4.25%.

And no doubt that rate’s heading lower too.

That’s a 10.5% ‘pay cut’ for savers.

Anyway, you probably don’t care what interest rate we get. The only reason we’re telling you this is to show you a real-life example of how governments and central banks are robbing savers blind.

Look at your own savings accounts and you’ll see a similar story.

And the sad truth is it’s set to get worse.

Lowest Rates in 60 Years

As The Age reported yesterday:

‘Even as stresses swept through Europe’s credit markets overnight, Australian 10-year bond yields fell to record lows. They were last quoted at $120.43, implying a yield of 3.36 per cent, down five basis points overnight, to levels not seen since the 1950s.’

This morning the yield is even lower. It’s just 3.33%. And as the chart below shows, yields almost across the entire line from short-term to long-term bonds have slumped since 2009…

yields almost across the entire line from short-term to long-term bonds have slumped since 2009..

Data Source: Bloomberg

That’s great news if you bought bonds three years ago (bond prices rise as yields fall).

But it’s not so great if you’re an ordinary investor who doesn’t buy bonds. Most ordinary investors have cash in the bank. And thanks to the manipulation of interest rates, savers are seeing their returns fall…and that’s forcing you to take more risks with your money.

Or is it?

In a way, yes.

But in another way, is it possible that investing in something that mainstream analysts claim is a risky asset could actually be safer than money in the bank? We’ll let you decide. But get this…

Gold Beats Cash

On 27 April last year our old sparring partner Michael Pascoe at The Age wrote:

‘A quick check of a gold chart site will show the yellow metal trading around 1,400 Australian dollars an ounce – which is what it was worth in the middle of last May and well off the $A1,546 peak of early 2009.’

Today, Aussie dollar gold is $1,590 an ounce.

So, in one year (from the Pascoe article) the price of Aussie dollar gold has gained 13.6% – that’s better than money in the bank.

Of course, you’re right if you say we’ve cherry-picked dates. Just four months after the Pascoe article, Aussie dollar gold hit $1,806.

So if you bought at that sky-high price then you’re well under water on your gold investment. But things were different back then. Many saw Australia as a miracle economy, China was booming and the Aussie dollar was soaring.

Today? The miracle is over, China is stuttering and the Aussie dollar is back on par with the U.S. dollar.

Hence, the Reserve Bank of Australia has cut interest rates to prevent an Aussie recession.

So expect lower interest rates for some time. And lower interest rates mean that you will need to take more risk with your savings. 5.5% on a term deposit looks good today, but don’t assume it will last long.

When Money Printing Makes a Comeback
Savers Can Suffer

You only have to look at the latest financial reports from the major banks. This morning National Australia Bank Ltd [ASX: NAB] reported a 15.5% drop in first half profit compared to last year.

And just as importantly, NAB’s interest margins (the difference between the interest it earns from borrowers and the interest it pays to savers) slipped too.

That tells you the banks have two choices: either raise interest rates for borrowers or cut interest rates to savers.

With the Aussie housing market falling off a cliff (two prime-position St Kilda apartments we walk past every day have been on the market over six months) banks won’t want to risk a complete collapse by jacking up mortgage rates…so the only option is to stick it to savers.

So, what’s a saver to do?

The important thing to remember is that the global economy is on the edge of an almighty cliff. Anything, at any point in time, could push it over the edge.

If (when) that happens, traditional safe investments such as cash may not be that safe. And the kind of investments you’ll have been forced into to chase higher returns will take a walloping (shares and bonds).

Even if shares recover on the back of more central bank intervention, the ride in between will be very volatile.

And according to Bloomberg, you may not have to wait long for central banks to act again:

‘Pacific Investment Management Co.’s Bill Gross and Jan Hatzius at Goldman Sachs Group Inc. say investors should prepare for additional bond purchases by the Federal Reserve to combat a slowing U.S. economy.’

More money printing should be good news for the gold price…but bad news for cash savers.

So in short, our long-term advice remains the same. Buy gold for security and wealth protection against central bank and government intervention.

Yes, the gold price can be just as volatile as shares (and bank interest rates), but at least it’s a tangible asset.

We’re not saying you should convert all your cash into gold, but we are saying is that cash in the bank isn’t as safe as it used to be.


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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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