Thursday, February 16, 2012

Got to Put My Money Somewhere; But Not Gold

The Fund Managers lament: "So much liquidity, so many options. Where do we park this money? Where is it safe? Where are the decent returns? Oh the muddle, Oh the stress. And please, do not mention gold. You bugs just don't get it. Gold does not earn a return."

The world is awash and drowning in counterfeit money. Not only is new money being printed with gay abandon (can I say that?) it is losing value through financial repression, aka negative interest rates. Fund managers are moving large amounts of money through the system at an ever increasing pace. Looking for returns, seemingly without too much thought. Increasingly leaving the decisions to computer algorithms that move in and out of markets in miliseconds. Flash in, flash out; flash crash?

The latest incarnation of 'debt to woo' is the Local Government Funding Agency debt here in New Zealand. Yesterday it attracted bids worth NZ$1.32 bln, equivalent to 4.4 times debt sold. Funds managers were falling over themselves to get into LGFA door.

Makes you wonder if these investors are factoring in a possible bailout from the NZ Government when this debt defaults in the future. Maybe. This new issuance also makes you wonder how long this game of musical chairs can continue. This ever faster moving paper-game.

Honestly, just look at what is being offered here. Local Council debt. Let me repeat that. Local Council debt.

Debt issued by beaureucrats. Even worse than debt issued by politicians. This debt will be used for large infrastrucure projects, general running expenses, pet projects and, let us not forget, repayment of existing debt. Yes, that's the ponzi bit. As long as investors see a return and they believe they are in quick enough, they will invest. But ponzi schemes always end and the last sucker always loses.

Remember also, many kiwisaver retirement funds will have been a part of this orgy of bidding. Savers in their 30s think they will see this money when they hit 65. Good luck with that. Not that they have any control anyway. Many were just happy to think they were getting $1000 from the NZ Government kick-start. The real kicker is coming.

But not gold. Well, yes, gold does not give you a return. You cannot live on the interest. But, if you study gold, that's not why you buy it (physical gold that is). Gold is the curency of last resort. A value net when all other values fall. Buying physical gold isn't even a ponzi scheme. If you buy gold, you always have it, always have wealth preservation. Simple.

I can understand why these debt instruments are attractive to institutional investors. They have little option. But look out when the paper ponzi begins to crack and splinter. Where will they rush?

I'll leave that to your imagination.

Gold in New Zealand dollars: $2071.87 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $40.05 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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