Debt: How high can we go?

Mounting debt

Debt is on the rise. The economy seems to be quickly and quietly spiralling out of control. The feelings of Nostalgia overwhelm us as the prospect of European states falling into default catch us off guard once again. The Federal Reserve has committed to injecting more than $40bn into the economy every month with no upper limit on this printing frenzy. Japan and China are now going through the motions in order to follow suit. Confidence in financial markets is diminishing owing to weak growth prospects, high inflation and ineffective controls.

This shouldn’t be a zero sum game and fortunately for our clients it’s not. As all of the above escalates, gold has been steadily rising. Gold has extended the biggest quarterly gain in more than two years on speculation central banks’ stimulus will spur investor demand. The questions from investors constantly change but at the moment it’s not a question of “when” it’s, “how high?”.

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As more currency is printed in the global Quantitative Easing programs, the value of traditional (or Fiat) currency is diminished. Along with reduced value, is falling preceived value as both individuals and institutional funds managers realise more money doesn’t equate to more value.

As a safe haven asset, gold benefits in times of falling currencies, especially the US Dollar. Investors flock to buy gold during these periods and it’s easy to see why. As a precious metal, gold cannot simply be printed like paper currencies. So while their value is undermined, gold simply cannot follow suit. It has to be discovered and mined. The fact that all the gold discovered in the entire history of the earth would fit into a cube the size of the Eifel Tower, demonstrates how lack of supply acts as a support mechanism for its value. Sadly for paper currencies, the central banks can simply continue to print more, further undermining the value.PHYS01_Animated_Gif_2_MPU


QE3 -Talking telephone numbers

QE3 – where will it stop?

Over the last 30 days the value of gold has increased by over 10% with many analysts pointing out that we have only seen the tip of the iceberg.  Whilst the fed has announced its intention to inject another $40bn every month – the real worry is that this particular prescription is an unlimited one.  Some refer to this stimulus topping more than $1.5 trillion and with no end in sight the dollar could lose significant value.

“Even when the unemployment rate begins to come down decisively, we’re not going to rush to remove policy,” Bernanke said at a press conference

Japan has now joined the United States and Europe in mounting more stimulus measures to boost its economy.

As the world continues to print more and more money, currencies will depreciate and inflation will trickle upwards. The two effects together will mean that people’s cash held in bank accounts or otherwise will need to yield more and more interest to break even with the cost of living. Do you see banks increasing interest rates any time soon?

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The relevance this has with gold investment is that the dollar has an inverse relationship with gold; as the dollar loses value – it takes more of it to buy the same ounce of gold thereby making gold more valuable. Furthermore as inflation pushes up the cost of goods and services it also pushes up the value of gold and people rely on this trend in order to keep up with the rising costs of living.

As other central banks follow the lead set by QE3, gold’s appeal will strengthen and people will exchange their depreciating cash for gold that’s increasing in value.Insider's Guide to gold and silver


That’s Tax Free Sir

Tax free options can increase returns

An interesting trend to note especially during our current economic climate is tax avoidance. With people generating less income from various asset classes, they are constantly seeking tax free solutions to minimise their overall tax liabilities to offset their losses.

In July 2012 the French government announced it was to increase taxes on foreign-owned second homes. Capital gains tax (CGT) on property sales would rise from 19 per cent to 34.5 per cent. The extra in each case was being labelled a “social charge”.

Clearly – Governments that are cash stricken are clutching at straws.  Increasing taxes is only one way that a country can raise finance. The other prescription offered by the Fed is to simply print more money! But the two together is a way of the fiscal system having two bites of the cherry.

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Ben Bernanke suggested last Friday that the bank might inject more money into the economy

PHYS01_Animated_Gif_2_MPU via so-called quantitative easing (QE). As a result the dollar suffered further deterioration and this affected a 3 % rally in the gold price. People can see that any further QE will devalue currency thereby enhancing the value of gold and with the likes of Bank of America Merrill Lynch predicting that gold will reach $2,000 before year end   – people are rushing in to pick up these price increases.

Demand for tax free gold

Some analysts refer to gold’s increase as a forgone conclusion, a question of when as opposed to if.  These people of course expect to maximise growth but they also want to legitimately minimise tax exposure. What if in addition to QE, governments start to mimic France’s latest CGT ploy?

The most noticeable trend amongst Physical Gold Ltd’s (PGL) clients is the overwhelming demand for Sovereigns and Britannia’s over the last few months. Both of these coins are “investment grade” which means that no VAT is payable but the real distinction between these gold coins and all other gold is that they’re CGT Exempt!

Investors have found a way of not only using gold as a saving mechanism and an insurance policy but also as a further guarantee if gold continues to rally – No Tax liabilities!

A further trend demonstrates that owing to the tax implications of these coins, the increase in value can sometimes be higher than the rising price of all other gold. Who now has two bites of the cherry?