As I cycled to my office this morning I passed a billboard advertisement for Halifax ISAs, offering tax-free savings accounts. For non-UK readers, ISAs are a form of savings account into which you can deposit up to £3600 in each tax year and earn interest tax-free. Normally, higher-rate taxpayers pay 40% on any savings interest, while those in the basic-rate band pay tax at 20%.
Unfortunately for savers, the interest rates on offer from Halifax (and from the other banks involved in the ISA business) are pitiful. Their basic variable rate ISA pays an annual interest rate of 0.5%, while, according to the company’s website, the limited offer ISA direct reward account (which is subject to a minimum balance and allows only four withdrawals a year) offers “a great tax-free interest rate of 2.6%”. Great, I suppose, compared to the standard 0.5%, but not on any other grounds.
Whichever way you look at it, you’re losing money as a saver. The latest retail price index release showed a year-on-year increase of 3.7%, so you’re not keeping up with inflation, even if you are able to reclaim that portion of your interest that you normally lose to tax.
Can switching into other currencies help to protect the value of your savings? Yes, to some extent. While, surprisingly, sterling has actually appreciated against the U.S. dollar over the last year (by 9.2%), it’s down by 3.6% against the euro, by 2% against the Swiss franc and by 11.5% against gold.
The advent of exchange-traded currencies, ETFs offering exposure to money market rates in other currencies (i.e. giving both currency and local interest rate exposure) and, of course, precious metals ETCs, has been of great help for those seeking to protect their assets from the counterfeiters in charge of our central banks and governments, whose sole objective appears to be to inflate their way out of the previous mess caused by uncontrolled, debt-fuelled expansion.
The other options available to savers seeking to avoid negative real (inflation-adjusted) interest rates – to pick up equities offering higher yields, to buy longer-maturity bonds with higher yields or to buy corporate fixed income bonds – are all fraught with danger.
The credit strategists at Société Générale sent an email yesterday in which they highlighted that the iBoxx corporate bond index yield spread is now within 1% of pre-crisis highs. It’s almost as if the credit crunch never happened. Meanwhile, chasing yield in other asset classes has a record of leading to disaster. Wasn’t it a combination of low U.S. interest rates, loose underwriting standards and poor credit evaluation by investors that led to the sub-prime crisis in the first place?
In short, this seems a particularly risky time for investors seeking to protect themselves from those sub-inflation interest rates on offer at UK banks. Perhaps gold still seems the safest bet. While it’s trading near all-time highs in sterling terms, when measured in terms of share prices it has been treading water for the last year, as shown by the Dow/Gold chart from Fred’s Intelligent Bear site.
This chart, when combined with central banks’ stated policy of keeping rates low for the foreseeable future, suggest to me that gold’s bull market is still far from its peak. For the under-fire saver, precious metals are still the place to be.