What Cyprus Taught Me About Retirement Savings
In light of the events that occurred in Cyprus over the last couple weeks, many investors may be wondering if it’s safer to hide your retirement savings under a mattress. After all, what’s to say it couldn’t happen here?
In June 2012, Cyprus, like many members of the European Union (EU), sought a bailout after suffering heavy losses. The company’s banking sector was hit by the economic crisis that crippled Greece. Cypriot banks had made loans to Greek borrowers that were worth 160% of the country’s gross domestic product (GDP).
In mid-March, the EU and the International Monetary Fund (IMF) agreed on a bailout for Cyprus, which included Cyprus raising billions of euros of its own money by taxing bank deposits—essentially seizing money. The government said it would impose a one-time tax of 6.75% on savings of $26,000–$130,000, and would tax higher savings at 9.9%. Not surprisingly, this didn’t sit well with wealthy Russians who shelter their money in Cyprus. It also didn’t sit well with the rest of country.
As one would expect, Cyprus managed to cobble together an 11th-hour deal with the EU and IMF, taxing only those accounts with deposits over $130,000.
Could it happen here? What couldn’t? Since 2008, the U.S. and much of the Western world have experienced an economic implosion no one would have otherwise thought possible. In response, governments around the world have taken unprecedented action to “remedy” the situation.
Cyprus aside, there are many reasons why we shouldn’t stash our retirement savings under the mattress.
First, cold-hard cash provides little protection against inflation and increases in the cost of living. While the markets experienced deflation after crashing in 2008, there is the fear of inflation in the long run.
Since 2008, the Federal Reserve has printed roughly $3.0 trillion in an effort to stimulate growth. The extra dollars also have the reverse effect, shrinking the buying power of each dollar—which is the driving force of inflation.
Sitting on cash right now probably isn’t the wisest choice if you’re looking to increase your wealth. Keeping it in a bank with a 0.05% interest rate isn’t either. To hedge against inflation, you might want to consider gold—one of the world’s oldest, borderless currencies.
Before September 11, 2001, gold was trading below $300.00 an ounce. While gold is trading off its August 2011 highs, it’s still trading up over 435% since 2001. Thanks to continued uncertainty in Cyprus and the EU as a whole, gold continues to look good long-term.
Investors looking to add gold to a diversified retirement portfolio might want to consider these securities.
iShares Gold Trust (NYSEArca/IAU) is a trust that generally corresponds to the day-to-day movement of the price of gold bullion. The company has 6.8 million ounces of gold, or $10.99 billion in assets under management.
Goldcorp Inc. (NYSE/GG; TSX/G) is the fastest-growing, lowest-cost senior gold producer, with operations and development projects in politically stable jurisdictions throughout the Americas. It produces more than 2.5 million ounces of gold annually and has more than 60 million ounces in proved and probable reserves. It also owns 1.3 billion ounces of proved and probable silver reserves and 5.4 billion pounds of copper reserves.
It could be argued that a government that is willing to seize its citizens’ cash could also conspire to take its gold. It’s happened before. In 1933, Franklin D. Roosevelt, signed into effect Executive Order 6102, making it a criminal offense for U.S. citizens to own or trade gold anywhere in the world. While the law was obviously relaxed, it does illustrate that the government can do whatever it wants, whenever it wants.
Still, in this day and age, it would be easier to take money sitting in a bank than stock certificates or hard assets tucked away at home.