Worried about savings in Euro - should I be?

[Marc]

If you had bought Sterling, Canadian Dollars and Yen in Jan 2001 you would have lost -3.10%pa in Sterling, -0.84%pa in Yen and only made 0.12%pa in Canadian Dollars against the Euro. The US$ would have lost 3.98%pa over this period against the Euro.

The worst one year return for the Canadian Dollar against the Euro since Jan 1999 was -16.33% for the 12 months ending Jan 2003.

Doesn't look like a safe haven to me.

 

[Duke of Marmalade]

My question is - would I be safer if I held (at least some of) my Euro savings in cash (Euro notes)?? Would this at least remove the risk that that portion of my savings could be changed to a punt nua, etc. I understand it would not help in the event of a depreciation, but at least, if Ireland leaves or is kicked out of the Euro, I will still hold these physical Euros which would be more valuable in my hand than being changed, magically, to punt nuas in my bank account.

The answer to that is yes, clearly holding the notes will protect you against freezes and devaluations of Irish deposits. But there is of course the opportunity cost of lost interest let's say 2% per annum after tax. There is also the cost of a safe and I do believe there is a demand for safes at the moment for this very reason. But, I hope I will have convinced you that the contingency you talk about is very unlikely and even in that very unlikley event you will get lots of warning - far too early to panic IMHO.

As to gold. It has increased dramatically against not only fiat currencies but against other commodities, goods and services. It cannot be that the intrinsic human appreciation of gold has so dramatically increased, there is clearly a large insurance premium against economic Armageddon. I guess nuclear bunkers became very expensive during the Cuban missile crisis but now that the Cold War has ended I suppose you couldn't give away your nuclear bunker these days. In any case what use would your nuclear bunker be if we really had WWIII? I ask myself the same question about gold should there be a complete economic meltdown. I would find it very hard to buy gold at these prices. If the crisis blows over it must surely fall back to more realistic levels and if the economic world does implode will your gold bullion be really that much of a saviour?

 

[MaxKolbe]

Thanks Duke. And Thanks Marc for putting some figures on currency movements.

On Gold, Duke - I think your argument is correct in the two extreme cases you mention (i.e. a wonderful recovery or a complete and utter meltdown) but isn't it far more likely that we will have a result that is somewhere in the middle, far less clear-cut. Where, I would imagine (hope), gold would retain some of the use it has served for the last few thosand years as a store of value.
I imagine (please correct me if I'm wrong) that holding gold would have been a good idea in Argentina in recent times and know that it was so in 1930's Germany.
This is a circular argument I think though.....gold is a question of faith really....you either have it or you don't

 

[Duke of Marmalade]

MaxKolbe

We value a brand new top of the range Merc these days the same as we would value a lump of gold the size of a Mars bar. 10 years ago the equivalence would have been 4 gold Mars bars. That doesn't make sense to me.

 

[Chris]

I think we agree that the Euro is better than the two major alternatives, the dollar and sterling. The quadrupling of the Gold price over the last decade is frightening and does suggest that there is at least a fear of hyper inflation. And yet index linked bonds tell us that the market expects very subdued inflation even over the very long term. All very confusing.

Yes indeed, so far the ECB has been a poster child of prudent central banking when compared to the BoE and FED.

If the crisis blows over it must surely fall back to more realistic levels and if the economic world does implode will your gold bullion be really that much of a saviour?

That's a very big if there. The world has never seen such levels of debt before, I for one, cannot see this crisis blowing over any time soon.

We value a brand new top of the range Merc these days the same as we would value a lump of gold the size of a Mars bar. 10 years ago the equivalence would have been 4 gold Mars bars. That doesn't make sense to me.

It makes perfect sense when you take into account that the ECB has increased base money supply by 260% over the same period, while also decreasing reserve requirements.

If you had bought Sterling, Canadian Dollars and Yen in Jan 2001 you would have lost -3.10%pa in Sterling, -0.84%pa in Yen and only made 0.12%pa in Canadian Dollars against the Euro. The US$ would have lost 3.98%pa over this period against the Euro.

The worst one year return for the Canadian Dollar against the Euro since Jan 1999 was -16.33% for the 12 months ending Jan 2003.

Doesn't look like a safe haven to me.

You are very conveniently cherry picking data there. You could just as well point out the following approximate fx rates (I don't have a charting tool at hand right now):
EURCHF: 1999: 158 current: 120
EURCAD: 1999: 170 current: 140
EURJPY: 1999: 130 current: 114

You are right though to point out that currencies are volatile, and some people will simply not be able to handle that kind of volatility. But you cannot conclude that this doesn't make foreign currencies a safe haven.

 

[farmerette]

I think your interpretation is a little off there. The Euro has weakened every time there was news about the crisis getting worse. Only when there was some sort of intervention that essentially kicked the can down the road did the Euro increase again. And it has only been increasing against other very bad currencies like Sterling and US$ in an ugly contest. Against currencies like the CHF, AUS and especially gold the Euro has been decreasing significantly.
I agree that forcing Greece into default would be very positive for the Euro, but the exact opposite is what is actually happening. It's like an alcoholic sitting at a bar saying "I'm serious bar man, I'm giving up drink tomorrow, and to prove it to you I will not have the whiskey chaser with my pints tonight."
While the ECB may not be printing money at the same level as the BoE or FED, they are still printing money. More importantly they are way ahead of other central banks in qualitative easing. It used to be the case that only investment grade bonds could be deposited with the ECB as collateral for loans. When Greece slipped into junk bond territory their bonds were first temporarily accepted and now Greece's bonds will be accepted no matter how bad their rating becomes.


The reason people are buying German Euro bonds has not so much to do with confidence in the Euro, but with confidence in the German economy and the fact that if the Euro failed the Deutsche Mark would once again be seen as one of the go to currencies.


I agree with your arguments that led to this conclusion. I think that leaving the Euro would be pretty much impossible at present unless there is a significant default on debt.


This is true, but remember that the Euro had nothing to do with providing that stability. If anything, you can argue that the EMU has made conflict, at least verbal and political, more likely.
The founders of EU project had specifically in mind to provide an environment in which war in Europe would not occur again. Their ideas were based on something French economist Bastiat said "If goods don’t cross borders, armies will". Thus the idea of free movement of people, goods, services and capital was born, and its success in fostering peace and incredible economic cooperation was immense.

despite the greek drama , the euro weakened ever so slightly towards the end of last week but is back at 89 pence sterling and 1.44 U.S dollars today

 

[farmerette]

hi guys,

i have been told that the canadian dollar might be a safe bet in terms of currencies? any thoughts ?

the canadian dollar more or less tracks the american dollar and has performed poorly against the euro this past year despite all the panic about the single currency , the swiss franc is the best bet , its about the only currency which has strengthened against the euro this year

 

[Duke of Marmalade]

It makes perfect sense when you take into account that the ECB has increased base money supply by 260% over the same period, while also decreasing reserve requirements.

I was taking money out of the equation. A new Merc today is probably a more enjoyable experience than it was 10 years ago and yet it is now valued at one quarter of the amount of gold it would have fetched a decade ago. Go figure

 

[dec1892]

Switching to other currencies is a bad idea as The Duke and Brendan point out in an earlier post the Euro has been appreciating recently.

A euro investor who held Sterling since 1999 would now be distinctly unhappy.

[broken link removed]

We have recently launched a safety first portfolio comprised of four funds invested in highly rated government and corporate bonds from four of the worlds largest fund managers who together manage more than $5 trillion.

[broken link removed]

Marc,

The following appeared in the link you attached: "The instruments purchased by the Fund will be denominated in Euros and mature in two years or less from the date of settlement." - so what happens if the euro collapses and is no more? How does the portfolio offer protection against such a scenario?

 

[Chris]

I was taking money out of the equation. A new Merc today is probably a more enjoyable experience than it was 10 years ago and yet it is now valued at one quarter of the amount of gold it would have fetched a decade ago. Go figure

But is that not like trying to solve the problem of flight while ignoring gravity?
Inflation works in very unpredictable ways. When the fiat money supply is inflated this affects different goods in different ways and not to the same extent and at the same time. Producer and commodity prices (higher order goods) are affected first and only later are consumer prices affected.

Compared to fiat currencies the gold market is tiny so any small increase in demand has a big impact on the price. Cars on the other hand are pretty ubiquitous with their manufacturers in huge competition.

Give it a couple of years to observe the effects of recent inflationary policies to slowly move down the order of goods. The world's biggest retailer Walmart has already said that prices for food and clothing are going to go significantly up this year. It will be only a matter of time for this to happen all along high street.

NB: I'm not anticipating hyperinflation but price inflation in the high single to high teen figures is very likely in the years to come.

 

[Duke of Marmalade]

Chris,

I can see that there can be different paces of transmission of the price level for different commodites. All the same, it seems to me that right now either new Mercs are "too" cheap or Gold is "too" dear.

To me the value of Gold is made up of two items:

1) Its intrinsic or utility value. Every one likes the look and feel of gold and its chemical nobility makes it jolly good for dental work.

2) It retains these intrinsic values more or less indefinitely and so it has an almost unique store of value aspect.

Now, I suggest that the intrinsic value relative to new Mercs has not changed much in the last 10 years maybe even declined as new Mercs get better and better.

So the quadrupling of its price relative to Mercs is due to a huge increase in its attractiveness as a store of value. What has happened is that the supply and attraction of alternative stores of value has hugely decreased. No one trusts any currency. Property, the traditional store of value for many folk, has been completely discredited and the same goes for shares. Where else can you "safely" store value but in precious metals or maybe oil paintings.

Some day, not immediately obvious today, property, shares and even currency will regain a confidence level as a store of value and surely then the supply and demand dynamics will unwind the relative dearness of gold which we currently observe.

 

[Marc]

How does this portfolio protect against problems with the euro?

This is a pertinent question.

I did a quick calculation based on the most recent holdings in the funds.
Rough country weights excluding the vanguard fund

USA 14.2
Supranational 11.67
France 19.58
Canada 9.3
Netherlands 7.7
UK 15.77
Germany 8.5
Norway 2.96
Japan 2.87
Australia 2.69
Italy 3.65
Other 1.14

Supranational is organisations like European Investment bank

This would seem to me to be a fairly good hedge against problems in the euro.

 

[rob67]

Marc, The expected return of the Safety First Portfolio is 0.5%. Is this after the costs, 1% portfolio implementation, .204% management, .85% advisory and 0.05% custodian? If not, is it the case that someone who might consider investing for a year or less because of the present uncertainty can expect to pay 1.604%?

 

[Godfather]

The Euro will die and we'll go back to local currencies... Just bet into currencies of AAA rated countries in my opinion and you would play in the safest way...

 

[Marc]

The expected return on the bond portfolio is approx. 3.5%pa currently. This is 1% above comparable credit rated bank deposits AFTER annual fees. This isnt guaranteed but is a reasonable and conservative assumption based on 110 years of bond Market data.

The actual return of the portfolio after annual costs over the last 12 months was indeed 3.5% in line with expectation.

The expected return after annual costs is therefore approximately the same as the highest paying demand accounts but with considerably less default risk (AA+ compared to BBB+)

However our portfolios are not intended for short term investors and our fund managers actively discourage short term "hot money". Investors should not have a time horizon of one year or less.

 

[Marc]

Godfather

The post at the top of this page reads


If you had bought Sterling, Canadian Dollars and Yen in Jan 2001 you would have lost -3.10%pa in Sterling, -0.84%pa in Yen and only made 0.12%pa in Canadian Dollars against the Euro. The US$ would have lost 3.98%pa over this period against the Euro.

The worst one year return for the Canadian Dollar against the Euro since Jan 1999 was -16.33% for the 12 months ending Jan 2003.

How do you reconcile your certainty about the collapse of the euro with the Market participants who a bidding UP the value of the Euro.

What do you know that everyone else clearly doesn't know to lead you to such a conclusion?

 

[Duke of Marmalade]

The Euro will die and we'll go back to local currencies... Just bet into currencies of AAA rated countries in my opinion and you would play in the safest way...

Like Germany...

 

[Marc]

Regarding the comments about gold and cars.

I did some research into this to test the hypothesis that gold maintains it's purchasing power over the long term.

In the 1920s a model T ford cost $290 or about 14 ounces of gold at the then fixed price of $20.67 per ounce. Source Ford Motor company/London Bullion Market Association.

Fast forward to 2010 and the best selling car in america according to AOL Autos was the Ford F 150 pick up truck which has a manufacturers recommended selling price of $22,415 or at the then ruling gold price of $1520 around 14 ounces of gold.

So we may not be able to explain why this is the case but it certainly seems that gold has maintained it's purchasing power historically. What we can't infer from this is that it is guaranteed to do so in the future.

 

[Godfather]

Godfather

The post at the top of this page reads


If you had bought Sterling, Canadian Dollars and Yen in Jan 2001 you would have lost -3.10%pa in Sterling, -0.84%pa in Yen and only made 0.12%pa in Canadian Dollars against the Euro. The US$ would have lost 3.98%pa over this period against the Euro.

In 10 years? Can we see what happened on a yearly basis? The AUD lost 40% agaist the Euro in a matter of weeks and now it's at a very high against Euro...

The worst one year return for the Canadian Dollar against the Euro since Jan 1999 was -16.33% for the 12 months ending Jan 2003.

Exactly, good old early 2000s when Greece was masking cooking the books, when rating agencies were giving a AAA to Lehman Bros etc

How do you reconcile your certainty about the collapse of the euro with the Market participants who a bidding UP the value of the Euro.

Hi Marc, call it just an opinion pls but since I was at university my teachers were warning us about the Europe of many different speeds. And of the fact that a currency without sense of nation and harmonized tax system cannot exist, should not exist. Because devaluation of a currency is a fantastic method of getting rid of some of the internal issues...

What do you know that everyone else clearly doesn't know to lead you to such a conclusion?

Sorry Marc, again just an opinion. I don't have any chrystal sphere and if I sounded rude in my previous post I am sorry then.

Like Germany...

No, I didn't write that. And if Germany will lose their AAA rating one day I'll move part of my savings somewhere else if you are referring to another post of mine.

The rating agencies have enormous power in a world dominated by anxiety... I hope you agree on that...

 

[Duke of Marmalade]

No, I didn't write that. And if Germany will lose their AAA rating one day I'll move part of my savings somewhere else if you are referring to another post of mine.

You recommended to "bet into" the currency of a AAA rated country. Germany, France, Luxembourg, Netherlands and Finland are all AAA rated. Their currency? The Euro.