18 June 2021
EOFY: Some opportunities and important regulatory changes impacting on gold and borrowing
End of Financial Year Opportunities
We are quickly approaching 30 June which as we all know is the end of financial year. Just a reminder to make if you can:
A concessional contribution - This is the Superannuation Guarantee Levy at 9.5% plus any salary sacrifice amount up to $25k which is the maximum allowed, subject to having unused concessional contribution caps.
A non-concessional contribution – This is a contribution from your after tax or from your take home pay up to a maximum of $100k, or $300k, if you use the 3 year bring forward provisions which allows you to make 3 years contribution in one year.
It is important not to inadvertently breach these maximum amounts as the ATO may penalise you. If you wish to make a contribution and unsure how to do it, or whether you should or not, please feel free to reach out.
On the debt management side, if you have an investment property loan you can pay 1 year’s interest in advance and gain 2 years interest tax deduction. Again, we are available to discuss if you want to re-structure your debt. You may wish to hear about our Aspire product (debt/investment) that we have been successfully running for a number of years now. If so, please contact us.
July is an important dividend and distribution month, so we may be in touch in August to check the proposed re-investment.
Asset Values – Property Prices
We emphasize that we are continually monitoring economic developments in Australia and internationally. As you know the current historical low interest rates have resulted in the residential property market globally taking off and of course it makes folks feel wealthier (wealth effect); however the downside is the locking out of the next generation from some residential property markets. Our Aspire program is also designed to help younger clients save and invest so they can get onto the property ladder.
There is minimal media attention being given to the declining fertility rates of males and females caused by toxicity in our foods from chemicals used and also micro elements in plastics leaking into packaged food. Combined with an aging population and choice by women in OECD countries to defer motherhood will impact on all asset prices as the world’s population will start to decline (not immediately), if this increasing infertility trend continues. This is something we should all watch closely.
Bitcoin – Legal Tender
We note that El Salvador has become the first country in the world to accept Bitcoin as legal tender. Given its ranked 103rd in the world in terms of GDP and its international debt is in USD we see this as a hedge on their debt. As you may be aware a Bitcoin transaction takes time to execute using significant energy and the value of each coin means it can only be used for the largest transaction. We still see Central Bank Digital Currencies as playing an important role in both monetary and fiscal policy in the coming years, as governments globally have no intention of allowing private digital currencies replacing their fiat currency.
Basel III – Implications for Gold and Borrowing
After many years postponement Basel III is scheduled to start on 1 January 2022. This is a global prudential standard that central and commercial banks must adopt. We believe there are some important implications at a monetary policy level and bank lending, i.e. borrower level that we will outline below.
Monetary Policy and Central Banks
As previously outlined in earlier newsletters some countries central banks have been aggressively buying gold, e.g. Russia, while others ban its export, e.g. China. Moreover, central banks main assets on their balance sheets are their own cash and bonds, US treasuries and other foreign government debt, and gold. Basel III allows central banks to carry gold at a zero risk weighting. What does this mean? If a Central Bank owns $100 of gold previously it could only recognise $50 on its balance sheet. Now it will be able to recognise its full value and in this example that being $100, i.e. it can revalue its physical gold reserves by 50%.
Furthermore, as we know central banks, including the RBA have been engaged in Quantitative Easing where they are buying bonds (liabilities) from the market so their debt levels have increased. With central banks being able to revalue their gold holdings by 50% this means their balance sheets will look more healthy. Therefore, it is likely there will be continued buying of gold by central banks. The ongoing pressure on the USD because of the US’s high national debt to GDP ratio, should mean the holding of gold although priced in USD continues to act as a hedge to the debasement of the USD. From an investor perspective we support increasing gold holdings as part of a diversification strategy.
An objective of Basel III is to address liquidity issues that could impact the financial system through the banking industry. Specifically, most banks “borrow short and lend long”. Basle III will oblige banks to finance long term assets with long term money, i.e. greater than one year in order to avoid liquidity failures. Simply, this means that banks will have limited ability to use short term deposits and short term debt, i.e. less than 12 months to fund a mortgage (a 30 year contract) with an average mortgage life of between 3-10 years. In the ideal Basel III world it wants banks’ assets and liabilities to be match funded, e.g. 10 year fixed term deposits to fund a 10 year mortgage (estimated life).
So what are the implications for a borrower? Banks will be constrained in the amount of debt they can take on, so they will impose tighter lending standards and borrowing money from banks will become harder and the cost (interest rate and fees) will increase.
In conclusion, we need to plan for these forthcoming changes as they will have an impact on the global investment and lending worlds.
As always please feel free to reach out if you have any questions or need help.
Warning: Any advice or information in this newsletter is general advice only, and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any General Advice provided, you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. If you wish to discuss the contents of this newsletter, please do not hesitate to contact us.