How to protect your wealth against currency debasement

2 mins. to read
How to protect your wealth against currency debasement

The 2008 financial crisis may seem like a distant memory, but the ongoing ramifications are still a massive threat to your wealth. Concerted intervention by the world’s most powerful central banks managed to avert an immediate global meltdown, although we’re all going to pay the price in the form of higher inflation.

The historically low interest rates and massive programmes of Quantitative Easing in the UK, US, Japan and the Eurozone were designed to stimulate economic growth and inflation so as to make it feasible for these governments to continue to service their debts.

It has taken the best part of a decade, but in the UK – helped by the fall in the pound following Brexit – we are now beginning to see the impact in the form of higher inflation that is now around 3%. This may not sound much, but if your cash is in a deposit account and you spend the interest it is enough to reduce your capital’s purchasing power by about 14% over five years.

If you want to protect your wealth against this slow but deadly form of erosion you need to move your money out of reach of the central banks. One way to do this would be to invest in alternative currencies that cannot be debased in the same way.

The most obvious example is gold. Unlike a paper currency, gold has an intrinsic value and acts like a store of value as there is limited supply. The central bank can easily reduce the value of the pound in your pocket just by printing more of them, but it can’t conjure up more gold.

It’s perfectly possible to buy gold coins or bullion, yet for most people the cheapest and most convenient option would be to invest in a physically backed gold ETF. These track the spot price and can be bought and sold at any time that the stock exchange is open for business.

ETFs such as ETFS Metal Securities Limited Physical Gold (PHAU) and db ETC plc Physical Gold (XGLD) are backed by gold bullion stored in a secure bank vault and held by an independent custodian.

Another option would be to invest in a crypto-currency such as Bitcoin. Bitcoins are lines of computer code that are digitally signed each time they travel from one owner to the next. They are free from central bank control and to ensure their value no more than 21 million can ever be created.

The value of bitcoins fluctuates wildly according to the supply and demand, but over the last year they have risen from around £500 to almost £2,000, which makes them a lot more valuable than an ounce of gold. Bitcoins have only been around since 2009 and there’s a lot that could go wrong with them, but if you are happy with the risks there are a couple of straightforward ways to invest.

One such is the new XBT Provider AB Bitcoin Tracker One (BIT-XBT), which is an exchange traded note that can be bought and sold on the stock exchange and is available via the broker Hargreaves Lansdown. Alternatively, there is the Bitcoin Investment Trust (GBTC) that has almost $400m of assets under management.

Comments (1)

  • Good article Nick, you can also spread bet Bitcoins also the CBOE is currently applying to approve futures and options on BTC so expect more products and ways to trade BTC long and short.

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