May 262015

Sorry readers – you’ve got a temporary blogger in place for the next couple of weeks whilst Bron has a well-deserved break, during which I’m sure he’ll still post, tweet and work away…so no break at all really. As a bit of background, my name is Anthony and I have worked at The Perth Mint for just over 10 years as a Finance Manager (yes…accountant….don’t hold it against me).

Although the typical blog posted here is well researched, factual and informative, hence why we call this the Research section, the next couple of weeks are likely to be somewhat more philosophical in nature.  Fair warning then, factual and informative will be optional extras…  So without further ado: Insurance – do we really need it?

Most of us never bat an eyelid when purchasing insurance for our car, house and even our life.  When it comes to our investments, however, many fail to even consider it.  Yes, experienced and intelligent traders introduce stop losses for open trades and other such risk mitigation strategies but how many lay people seriously consider insuring against, for instance, financial calamity.  Or diversify cash holdings across multiple banks to minimise counterparty risk?

To state that many precious metal investors view their holdings as insurance, at least in part, is far from a revelation, but is there really a need for it?  And what exactly are they insuring against?

There is little doubt the geopolitical environment continues to look unstable with numerous potential flash points.  This includes ISIS in the middle east, as well as Saudi Arabia ‘involving themselves’ in Yemen.  In Europe you have the Ukraine scenario and all the finger pointing…and sadly loss of lives…that entails. Asia doesn’t miss out with the almost forgotten ructions in the South China Sea for a start, and all of this is but to name a very few.

The global macroeconomic environment looks little better with rampant money printing by Europe and Japan, the strengthening US dollar and little sign of the Feds wanting to pull the interest rate raising trigger.  And let’s not discount the whole Greece merry go round and Grexit threat, with the resultant sovereign bond market upheaval that could cause.

Additionally, the strengthening US dollar which is leading to significant issues within emerging markets, many of  whom leveraged themselves up on low interest US dollar debt when the currency was weak, leaving them perilously poised as they service debt in a strengthening foreign currency from a weakening economy. We’ve also got a slowing in China and the commodities rout that has resulted – albeit with some strong arming from the newly invigorated US dollar.

All of this economic and political uncertainity has had surprisingly little impact on the apparent stability of the global market place, as very loosely assessed by movements in the volatility (VIX) index.  Are we reaching a Minksy type moment…the stability leading to instability as it were?

Clearly that’s impossible to predict accurately, however there have been some clear warning signs out there with the recent reasonably significant bond market weakening flashing something a little red.  Additionally the unprecedented currency movement in the swiss franc when the SNB dropped the peg to the euro in the middle of January this year was a move statistically outside the risk algorithms employed by most institutions.

Are we due a Black Swan event?  Are global markets due a significant correction? Are we approaching a state of inflation or deflation?  Is financial calamity just around the corner?

If I personally knew the answer to all of those questions, I certainly wouldn’t be writing this as a 9-5 stooge (sorry boss) however given the recent reduction in the precious metal prices, insurance policies seem to be selling at a discount.

Purchasing precious metals as insurance is a great way to start, and certainly helps with the justification case for many new investors.  One important point to keep in mind is if you are looking at it as insurance, you need to consider the type of investment you make, and with whom.

You need to ensure you minimise counter party risk, whether purchasing ‘paper’ or  physical metal in storage.  Alternatively, you can eliminate it entirely by taking possession of physical metal however that can bring it’s own set of risks.

So, do we need precious metals insurance?  Only you can answer that in your own particular circumstances…but I’m personally getting some more.  Whoops…is that another debt bomb I just heard go off…gotta go….