MoneyWeek Roundup: The Great Distortion

This week, an amateur gold prospector in Australia managed to dig up a 177 ounce nugget, currently worth more than AU$300,000. That’s a nice way to start the New Year.

But should he sell up now? Or hang on to it in the hope the gold price goes up even further? Dominic Frisby might be able to help him out.

In his latest Money Morning, Dominic picked out two key levels that gold investors should be watching “like a hawk”.

In short, if gold goes below around $1,500, it’s time to worry. But if it goes back above $1,800 – as Dominic expects – means gold could be off to the races again.

How has he arrived at this conclusion? Dominic uses some simple technical analysis – also known as ‘charting’. You should read his piece – to my mind, it gives a very good explanation of exactly why technical analysis is useful to investors.

Germany is coming for its gold

My own view on gold is that everyone should have some as insurance, if nothing else. Around the world, central banks are competing harder than ever to devalue their currencies. The risk is that someone will try too hard and suffer a full-blown currency crisis.

One country is getting more jittery about this than any other – Germany. You can see why. The Germans historically favour a strong currency, because of their past experiences with hyperinflation.

So it’s little wonder that the Germans have decided to start bringing their gold back home, as my colleague Matthew Partridge pointed out last week. The Bundesbank is going to take back all the gold it currently has stored in France, and a big chunk of the stuff it stores in the US.

Some people argue that this is just “good housekeeping” and nothing to be concerned with. After all, the shift from France is going to be carried out over several years.

But I feel this rather misses the point. Germany could have moved this gold at any time it wanted. So why’s it doing it now? It’s got to be for political reasons.

The voters are worried that Germany is going to end up paying the bills of everyone else in the eurozone. Perhaps not directly, but instead through inflation – which is what will happen if and when the European Central Bank decides it has to turn the printing presses on. 

So at the very least, this move suggests that political pressure is mounting on the German authorities to take more of a stand against the ‘easy money solves everything’ brigade.

That sort of political tension – in a year when we have two major eurozone elections to face – does not bode well for the single currency. Matthew has some suggestions on how to play that.

How to cut the deficit – pay the workers more money

One of the reasons central banks are printing so much money is because governments are completely broke. My colleague Merryn Somerset Webb has an unusual idea about how to help governments cut back a bit: they should raise the minimum wage

Merryn’s basic point is that the minimum wage is not a “living wage”. So it needs to be topped up by the state, via a range of tax credits. In other words, taxpayers are effectively subsidising employers of low-income workers.

Instead of the government having to shell out like this, why not simply raise the minimum wage to living wage levels? That’d cut the deficit and wipe out much of the unwieldy tax credits system.

Merryn’s piece – as usual – raised both hackles and cries of “hear, hear!” On the one hand, many commentators argued that increasing the cost of employment for companies would simply penalise small companies, and encourage big employers to automate or shift business overseas.

Others pointed out that the real problem is not the minimum wage, but the British housing market. As ‘Nick’ put it: “Why isn’t the current minimum wage a living wage?
Answer: because rents are so high.
Why are rents so high? Because a) a large proportion of low-end housing stock has been bought in order to let, meaning there is no alternative to renting for a large minority of the population, b) the government is propping them up by paying ridiculous amounts of housing benefit to private landlords and/or c) they need to be in order for private landlords to pay their mortgage interest…

“Politicians reading this may want to note that the renter/owner split is largely along a fixed age line (I’d say about early/mid-30s currently) and those on the wrong side are an increasing proportion of the voting population.”

Agree? Disagree? Think the whole idea is “socialist nonsense”, as one commentator argued? Have your say here.

The carnage on the high street

The other big story this week was the sheer range of calamity on the UK high street. So far this year, we’ve lost Jessops, the camera shop; music shop HMV; and most recently, film rental company Blockbuster.

It doesn’t take a genius to see what’s done for these companies – the internet. Who needs HMV when you can download tunes instantly? Amazon and smartphones supply what Jessops did, and as for renting DVDs – you can stream films through almost any electronic device that hooks up to your telly these days.

But we shouldn’t be so quick to jump to conclusions. Any one of these brands could have changed direction. As far as Bengt Saelensminde is concerned, the real problems with HMV can be laid squarely at the feet of the management team.

The truth is, you can find opportunities in every industry: “it’s not the plight of the industry that matters, but how management deals with creative destruction. Because destruction clears the path for new growth.”

Bengt has successfully backed more than a few companies in ‘troubled’ industries in his free newsletter, The Right Side. You can learn more about them here.

Where can you get a decent return these days?

Back in the days when inflation was low, credit was bubbly, and Federal Reserve chief Alan Greenspan was using every excuse he could to keep interest rates low, the sycophantic fools who lapped up the ‘Maestro’s’ every uttering said we were living through ‘The Great Moderation’.

We suspect that future generations might look back and name the current era of financial history ‘The Great Distortion’. As we’ve pointed out, central bankers around the world are sitting on interest rates, printing money, buying bonds and generally doing what they can to chase savers out of low-risk assets and into riskier ones.

And unfortunately, says Phil Oakley, that’s making it incredibly hard to invest sensibly. That’s because the whole point of investing is to grow your money more rapidly than inflation, but without taking too many risks.

But that’s nearly impossible right now. As Phil points out: “Last month, prices in the UK were rising at an annual rate of 3.1%, as measured by the retail prices index (RPI). Now look around the investment world. Where can you get returns of more than 3.1%? And where can you get them without taking lots of risk?”

The simple fact is that all the relatively low-risk assets, such as cash, government bonds, and even high quality corporate bonds, offer returns that are below or barely above inflation.

But among the riskier assets that do pay better-than-inflation returns, very few appeal to Phil. They simply aren’t offering enough to offset the risk of holding them.

So what’s left? Equities, says Phil

And if you’re interested in trying to find an income, you can find more about it in my colleague Tim Bennett’s latest set of video tutorials. Tim’s recorded a series of four bitesize videos, all about the importance of dividends, and how to choose stocks with high, but safe, dividend yields.  

Better yet, you can now sign up to get Tim’s videos by email, completely free every week. Get on the mailing list here.

How to boost your dividend returns

Finally, still on the income idea – my colleagues over at the Fleet Street Letter have been looking at ways to boost your dividends even further using their ‘dividend multiplier’ technique. Take a look at their report here for more.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.

Have a great weekend!

Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
Matthew Partridge
David Stevenson

One Response

  1. 19/01/2013, MichaelL wrote

    How to boost dividends –
    i) go back in time and buy 10 years ago.
    ii) invest in stocks growing their dividend and re-invest the dividends.

    See point ii) 10 words. Thats all it takes 10 words not a 30 min video full of total rubbish to explain. Does Moneyweek think its subscribers are idiots?

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