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Is cash still king?
Despite most people thinking banks are through the worst of the credit crisis, 279 banks have collapsed since 25th September 2008. That was the day Washington Mutual become the largest bank failure since records began. In fact bank collapses over the past two years eclipsed the previous six year period when only 35 banks were wiped out.
What can we learn from this? Well firstly we should realise that the banking crisis is far from over. While many of the UK high Street banks have been rescued by the UK Government, the Treasury are now under the rating agency spotlight to reduce the national debt. Any future cash injections will be far less forthcoming. So next time one of the lenders goes cap in hand for cash they may have to look elsewhere, or learn to become self sufficient.
During previous economic downturns the traditional stance was that cash was king. If stock markets and property prices were choppy, simply keep the money in the bank. There was never any doubt over the safety of that money. However the world we live in has changed. As a UK saver you are now only protected for £50k in each bank. If the bank goes under, you could lose money. A ridiculous notion 10 years ago but very realistic now. Indeed for those who invested into Icesave a couple of years back, they eventually got lucky and were repaid by the UK Government. The Treasury were convinced they’d be reimbursed by the Icelandic Government but the money never came. Such a future failure may this time fall on deaf ears.
Secondly due to the squeeze on the money markets and record low interest rates, returns for UK savers are around 1% or less. That is then taxed at their prevailing rate. When inflation of over 3% is taken into consideration you are actually making a negative return for the risk you hold that the bank may not survive to repay your capital!
That’s why we are now hearing more and more that cash is no longer king, gold is the new king.
One way of avoiding exposure to the banks, to Sterling, and to any counterparty at all is to move some of your savings sideways into physical gold. We’ve been trained throughout our lives to put money away in the bank but with changing times comes the need for changing strategies. There’s simply no need to hold all your liquid assets in Sterling based bank accounts any more.