The markets have had a couple of good days off the back of news from Greece. But let’s not get ahead of ourselves here.
Things still look pretty unstable to me. QE might have spurred markets for the last couple of years but it’s now running out. And I don’t think we’ll see any more QE until we hit a panic situation.
So what should we do while we wait for the panic? Well, I recently advised upping cash allocations. And over the coming months I expect to realise more readies.
But that strategy leaves me with a conundrum.
What currency should we be stockpiling?
It’s a question I’ve been asked by several Right Side readers. And it’s an important one.
You can view cash in two ways. First, it’s a means of exchange, ie it’s for spending. And in that sense, I’m happy (and in many ways forced) to hold sterling. I’ve got no problem holding sterling in my SIPP and ISAs even though it doesn’t earn interest.
The reason I’m happy to take a hit on interest is that I’m not expecting to leave the money there for too long. I reckon the markets may have an ‘interesting’ summer.
So for the next six months, I’m happy just to de-risk my portfolio. If some opportunities crop up I’ll be in a position to seize them.
I can’t say for sure, because like you I don’t have a crystal ball. But I’ll continue to follow the macro-economic situation and make my play accordingly.
The point is, in the short-term I’m happy to sit on some good old British pounds. Sterling will do as a medium of exchange.
But when it comes to a store of wealth…
The second use for cash
Cash is also a store of value. Or at least it’s supposed to be. But modern central bankers seem to have changed the rules here – using cash to save wealth seems a luxury of a bygone era.
And in the medium term you’d be a fool to ignore that. We often forget quite what a miserable store of value sterling has been because of what we compare her with.
The usual suspects: dollar, euro and yen are of course all ugly currencies. So where else should we look?
Several readers have pointed to Norway as a great place to bank your savings. And they’ve got a good point. Here’s what the decline of sterling looks like against this stalwart currency.
Sterling versus Norwegian krone (NOK) over five-years
(Click on the chart for a larger version)
At this point I ought to state an interest. Though, I haven’t mentioned it in the annals of The Right Side, I am in fact a Norwegian. It’s not just a made-up name!
The Norwegians, it has to be said, are a blessed race. They are endowed with a geography that not only yields great beauty, but also affords them all manner of other natural advantages.
They get 98-99% of their power from hydro-electric; they’re the world’s second largest exporter of fish and they’re the 5th largest oil exporter.
And yet, there’s only about five million of them. That makes them extremely rich. In fact they’re so rich that they literally don’t know what to do with all their money. In 1995 they put together a sovereign wealth fund (SWF) to deal with all the excess cash coming through the door.
It’s now worth around €400bn, that’s around €80k for each citizen. And that’s on top of any other savings. That’s diametrically opposite to the situation in the UK.
And the Nordic SWF is still growing. Oh, and the government runs a budget surplus each year.
No wonder the currency looks safe! In the medium to long-term, I’m quite happy holding Norwegian kroner and I can see why some readers are too.
How to take advantage
I’m not saying the krone is right for everyone.
For starters, its price tends to rise and fall with the oil price. If oil backtracks, then the kroner normally follows.
The other problem is opening an account. To open an account in Norway (where your money is safest) you’ll need a personal ID number. And unless you move there, you’re unlikely to get one.
I hold currencies through my CFD broker and they’ve been a brilliant way of shifting money from country to country. With my broker I can buy currency practically at spot rates and they’ll do the transfers to my local bank account for free (though this is only on amounts over £15k). But interest rates aren’t as good as I can get in the bank, so I don’t hold it with my CFD broker long-term.
I understand that some of the UK banks offer NOK accounts. HSBC and Barclays offer the service to private banking customers, for instance. And your foreign currency holdings will still be covered by the FSCS scheme should the bank fail. But be careful when it comes to doing the exchange – high street bank commissions offer notoriously bad deals.
I’m not sure what sorts of interest rates the UK banks offer, but given that the Norwegian policy rate is 2.25%, it’s likely to be better than the UK equivalent.
But the real reason for holding NOK is as a hedge against a deteriorating pound over the medium to long term. It’s a store of value.
Other currencies often touted for safety are the Swiss franc, Hong Kong dollar, Singaporean dollar and possibly even the Chinese yuan. When it comes to investment, it’s all about diversification, and that applies as much to cash as it does to stocks.
And in fact, probably the best way to pick up a diversified cash account is to buy a UK listed fund. We’ll take a look at that soon.
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