– Hold physical cash “including gold and silver” says manager in one of largest mutual fund and financial services groups in the world
– “Systemic risk” threat to deposits says respected Fidelity fund manager
– Record global debt unlikely to be sustained by higher interest rates
– Banks may not be prepared for “shock” of defaults
– Guarantees to depositors unlikely to be honoured
– Savers and investors should hold “physical currencies” “including precious metals”
A fund manager for one of the largest mutual fund and investment groups in the world, Fidelity, has warned investors and savers to have an allocation to “physical cash,” “including precious metals” to protect against “systemic risk”.
Ian Spreadbury, who oversees the investment of over £4 billion of clients’ money in bond markets for Fidelity, told Telegraph Money
“Systemic risk is in the system and as an investor you have to be aware of that.”
He believes that the record debt that has been ballooning since the crisis of ’08 due to interest rates being forced down to near zero by central banks. This debt, particularly where mortgages are concerned, would likely become unsustainable if, and when, rates rise to realistic levels.
“We have rock-bottom rates and QE is still going on – this is all experimental policy and means we are in uncharted territory.”
He points out that in such an environment banks would be unable to sustain the losses caused by defaults on unserviceable debt which would lead to a systemic crisis.
Spreadbury is not the first high profile financial expert to warn of an impending systemic crisis. We recently covered how Stephen King, chief economist at the world’s third largest bank, HSBC, likened the global economy to the Titanic. Andrew Wilson, Goldman Sachs Asset Management’s chief executive in Europe recently gave similar warnings.
Spreadbury highlights that the £85,000 guarantee to UK depositors by the Financial Services Compensation Scheme is largely unfunded and that the government has said it will not intervene to rescue failing banks in the future – leaving deposits to be bailed-in.
The EU and other supra-national institutions have been agreeing the architecture for bail-ins in recent years. Just this month, at the start of June, the European Commission has ordered 11 EU countries to enact the Bank Recovery and Resolution Directive (BRRD) within two months or be hauled before the EU Court of Justice.
11 countries are under pressure from the EC and had yet “to fall in line”. The countries were Bulgaria, the Czech Republic, Lithuania, Malta, Poland, Romania, Sweden, Luxembourg, the Netherlands, France and Italy.
The new bail-in system is largely in place and emergency resolutions can be brought forward in the event of banks failing in the interim period. The “bail-in” will require that shareholders, bondholders and importantly now depositors will all suffer ‘haircuts’ or be burnt if a financial institution is in trouble.
The European parliament confirmed that depositors with more than 100,000 euros ($137,000) would be bailed in after shareholders and bondholders. It is important to note that the 100,000 figure is an arbitrary figure and there is a possibility that this figure could be reduced by an insolvent government faced with an imploding banking system.
To deal with these risks Spreadbury advocates a well-diversified portfolio. Cash should be spread out in different banks. Savers should hold physical cash outside the banking system – a remarkable suggestion coming from somebody so well acquainted with the workings of the financial system.
He also suggests that investors hold gold and silver. He says that the unravelling he foresees is more likely to happen in “the next five years rather than ten”.
Mr Spreadbury concluded
“The message is diversification. Think about holding other assets. That could mean precious metals, it could mean physical currencies.”
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Today’s AM LBMA Gold Price was USD 1,193.70, EUR 1,052.14 and GBP 752.53 per ounce.
Friday’s AM LBMA Gold Price was USD 1,198.15, EUR 1,058.86 and GBP 755.65 per ounce.
Gold closed at $1,200.06 an ounce on Friday and silver was down 0.4 percent and closed at $16.10 an ounce. Palladium lost 1.9 percent to $705.25 after touching a 16-month low.
Gold climbed 1.8 percent in dollar terms last week, its second successive week of gains. Silver prices surged 1.8% last week and increased their year-to-date gain to 3.4%.
Gold in Singapore for immediate delivery ticked lower 0.3 percent to $1,196.60 an ounce near the end of the day, while gold in Switzerland was lower and fell to $1,193 an ounce.
Greek Prime Minister Tsipras submitted a new list of reforms last night in a last ditch attempt to appease creditors. Crisis negotiations are taking place today in Brussels with Greece’s creditors to see if a deal can be reached after 5 months of stalemate. Greece owes 1.6 billion euros to the IMF by June 30th.
Euro zone leaders meeting in Brussels later on Monday are unlikely to be able to take a formal decision on whether to provide aid to Greece but there is still time this week to finalise an agreement, German Chancellor Angela Merkel said earlier.
“There are still a lot of days in the week in which decisions can be taken,” Merkel said, speaking to reporters in the eastern city of Magdeburg. She noted that without an agreement between Greece and the so-called institutions – the EC, EBC and IMF – the summit on Monday evening could not be more than a discussion forum.
The markets are irrationally exuberant again this morning on hopes for a Greek deal and European stocks have surged higher despite continuing uncertainty.
Chinese markets are closed today.
Platinum and palladium saw losses last week which have been extended today. Platinum is down another 1.3% and edging back towards last week’s more than six-year low at $1,066.50/oz. Palladium has reached its lowest in 18 months, at $696.47/oz this morning.
In late morning European trading, gold is down 0.44 percent at $1,194.53 an ounce. Silver is up 0.50 percent at $16.17 an ounce and platinum is down 0.68 percent at $1,075.68 an ounce.
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