Savers Flock to Gold to Beat Stealth Taxation
In the news, we occasionally hear how ideal it is to be a debtor in the current economic climate with consistently low interest rates. Money can be lent cheaply and paid back even cheaper over time. For example, take a 10-year bond issued with an annual 0.6% coupon. A conservative estimate of inflation is around 1.4% (CPI), so the debtor of the bond would pay back less in real terms* than the bond is actually worth. This is because inflation erodes the value of fiat currency over time.
This bit of economic gymnastics is fantastic for the government as it means they can raise cheap money today and pay less of it back in real terms in the future. Is it any wonder then that the chancellor, Sajid Javid, is so keen to take advantage of this by increasing government borrowing?
But what about lenders, in specific bond holders and those investing into pension pots? Fund managers have traditionally bought up government debt due to their reputations as safe investments offering a sustainable yield. These investments now receive rock-bottom coupons and interest rate payments, so much that inflation levels exceed the rate of return on the debt. This is also the case with annuities. Now it’s the opposite to what was mentioned previously; savers and investors make a loss in real terms. Put another way, it is a stealth tax. This analysis is reinforced by the words of Frank Appel in Davos (author's emphesis):
“Who pays the bill? The citizens. So it is a hidden tax. If you start with that language, you probably get to different conclusions about what is going on.”
It has caused enough concern that the incoming governor of the Bank of England, Andrew Bailey, has warned that savers and investors in Britain are dangerously exposed to any economic downturn. Clued-in investors have been looking into different assets in order to secure their retirement funds, such as exchange traded funds (ETFs), real estate, fine art, shares, and precious metals. In particular, gold is becoming an increasingly popular part of investment portfolios as a result of these fascinating economic conditions, because gold has a strong reputation as a safe haven asset which protects wealth over time.
Further Reading and Notes
*In economics, real means adjusted over time, usually in reference to price level inflation.
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