Mary Holm: Step by step to avoid pounding

Currency headache

I have some money left in the UK that I don't need immediately, and given the current kiwi dollar high against the pound I am reluctant to bring it over at the moment. What is your opinion on the likely future of this exchange rate?

I don't know. Exchange rates are fiendishly hard to forecast, because many unpredictable factors feed into them - including government decisions and natural disasters.

In light of that, your best tactic is to firstly decide when you expect to spend the money. Let's say it's in five years. Plan to transfer one sixth of the money now, another sixth a year from now, and so on, so that the last sixth comes over in five years' time. If it's a small amount, make it just three or four spread-out transfers. Then stick to your timetable, whatever happens.

Five years from now you'll look back and see that you moved some of the money at around the worst time, some at the best time and some in between.

Clearly, that's not as good as moving the lot when the kiwi is at its five-year low against the pound. But it certainly beats the opposite - which is equally likely. In foreign exchange strategy, being halfway up the ladder is not a bad place to be.

Glorious gold

Just read with amusement your comments last weekend regarding the "gold bug". For every time there is an investment class, and today the precious metals are in that category.

Gold has produced 18 to 20 per cent of capital growth yearly for the last eight years (how much interest do you receive with paper money?). The NZ dollar and US dollar have fallen 80 per cent against gold over the last decade.

Gold and silver are used industrially. Silver in particular will be used more and more to replace metals such as cadmium in iPhones, computers, etc. The silver supply has been reducing for the last six years, and it's very costly to set up new mines.

We are now witnessing the US putting in another round of quantitative easing, which has the potential to drive the US and other western nations into high inflation, devaluing the currency and setting the stage for hyperinflation and then deflation.

Gold and silver will do well in both environments. The stock markets - with the exception of gold and silver mines - will collapse in the next 12 months, as well as property and bonds. Any major investments in these will result in complete loss.

A typical mining share such as OceanaGold is up 140 per cent in 12 months. (Yes I own them, as well as physical gold and silver for the last two years.)

Smart money as well as foreign central buyers are net buyers of gold and silver. The banks and government-sponsored financial writers such as yourself get it wrong 95 per cent of the time.

I am not a gold bug, I have just educated myself and seen the writing on the wall. A lot of your readers are sadly going over the financial cliff. It's a pity you did not look into this when the evidence was there, as your readers would be doing very well today. You could say time will tell. However, you have almost missed the boat and time has told.

And what has time told? Perhaps that forecasting not just exchange rates - see above - but the prices of gold, silver, shares, houses and so on is a fool's game. And I'm not playing - beyond saying that predicting a "complete loss" in shares, property or bonds is a bit silly.

Instead, I try to help readers invest in ways that keep them away from financial cliffs, regardless of what happens to prices. So where does this "wrong 95 per cent of the time" come from? Proof please. As for government sponsorship, nobody pays me to write this column but the Herald.

I said last week that I didn't want to revisit the pros and cons of gold investment. But several letters have made some new points, so we'll go a little way down the track.

Some of the letters contradict one another. More on that below. Meantime, I'm pleased to have amused you.

It is the weekend, after all.

Shining silver

In January last year (when the spot price of silver was US$11.32), I bought nine 1kg Perth Mint silver bars for $769 each on Trade Me. Now that spot has risen to roughly US$23, the same item is selling for more than $1100.

Why would you not therefore suggest that your "readers climb on board" as regards investing in precious metals?

I won't insult your intelligence by explaining the supply and demand fundamentals of precious metals, specially silver and the platinum group metals, which are indispensable to a wide range of industries. Nor need we point out that price volatility comes with the territory.

However, I believe that thanks to the revival of fiscal conservatism, precious metals - and in particular silver - comprise one of the most under-rated asset classes and should be considered as part of any balanced investment portfolio.

It is estimated that 95 per cent of all silver ever mined has now been consumed by industry. In 1900 there were 12 billion ounces of silver in existence. Today there is only 300 million ounces of above-ground, refined silver in the world - making it rarer than gold. It would be possible for Warren Buffett, Bill Gates - or even perhaps yourself - to purchase all the available silver in the world, for approximately US$4 billion.

Investing in tangible assets like gold and silver is an excellent way to maintain purchasing power in the face of the avalanche of fiat currency being created by governments desperate to extricate their economies from massive debt.

Consider, also, that the gold-silver ratio has historically been around 15 to 1, whereas today it is about 56 to 1. A restoration of the historical ratio would push the price of silver to near the $100 an ounce predicted by your justifiably optimistic correspondent.

The main reason I don't think readers should climb aboard - certainly not in a big way - is the very price rises you quote. Ever heard of a bubble?

For the benefit of others, a fiat currency - such as New Zealand's - has value because a government says so, rather than because of any inherent value.

Oh, and I'm not quite in the Buffett and Gates league yet. And something tells me precious metals won't get me there.

Cold facts on gold

Good answer on gold in last week's column. People like your correspondent argue that gold is a substitute for money. The real question therefore is would you invest in money under the mattress?

The answer is no. You would choose bank deposits, fixed interest or shares, etc, because you would get interest or dividends.

You might choose to speculate in gold in the same way that you might bet at the TAB, buy futures, trade derivatives, etc. But that is not investing, but running a business.

Gold, therefore, is an alternative store of wealth. It has an advantage currently because there is a lot of uncertainty in the world and there are some financial Armageddon scenarios. For some, therefore, having part of their wealth in precious metals protects their overall wealth from financial ruin.

No one knows what will happen. If I had to guess I would say that the US will print a truckload of money and debase its currency. Not against the euro, as Europe will do the same, but against Asia and Australasia.

Gold expressed in US dollars will therefore go up and may well exceed the levels stated in your last column. If you believe this, all that means is that you should not hold US assets unless they are hedged to the kiwi dollar. But holding traditional assets - such as shares or bonds - hedged to the kiwi would probably be better than gold.

Gold has no real purpose. I think the statistics are that if we stopped mining gold there is enough there already to meet demand for the next 200 years. Gold only has a value if someone will buy it off you to on-sell. It is not like copper, for example, where there is a demand for commercial use.

Oops! We're getting into predicting currency movements. You may be right about the US dollar. But, readers, please note the correspondent said that, not me!

Bitten by gold bug

As I used to invest and lecture in investments in gold, I find the comments from last week's reader rather revealing.

His comment, "there isn't enough silver and gold to go around", is absolutely nonsense. There is more silver and gold in store now than ever before.

The gold market does not work on only physical supply and demand. There is an investment market which is related to "good-for-gold scenarios" and "bad-for-gold scenarios", and these are in turn related to the human mental condition and the current environment.

If this individual thinks there's not enough silver supply they just need to read the story about Bunker Hunt, a Texas billionaire who tried to corner the silver market.

Secondly, if they think that fiat money has anything to do with gold then they've taken too much store by conspiracy theories in books like The Creature from Jekyll Island.

This person should read Lords of Finance by Liaquat Ahamed and The Ascent of Money by Niall Ferguson for a better understanding of our system. There are some very humorous, and rather sad, accounts of how gold was used - or not used - as a standard for money at the time.

Your writer is what one calls a gold bug. They appear when gold starts moving. None of the advice I or you can give will make one iota of difference to a gold bug. Once bitten always addicted.

Let me see now. We seem to have contradictory information on: how useful gold and silver are; how much is available; the feasibility of cornering the silver market; whether precious metals are the best defence against money creation; how much supply and demand matter; and probably more.

I suspect a lot that is written about precious metals is hard to prove either way. People believe what suits them - and as you say, nobody can budge an addict.

If other readers end up including precious metals - in the form of shares or bars - as a small part of their portfolios, I wouldn't be too critical. It's all diversification. But make it money you can afford to see slashed. It could happen.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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