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Special Report 1: Negative Rates are killing Australia’s $700bn Term Deposit Market - is Gold the Answer?

13 August 2014

On the 8th August 2014, Christopher Joye wrote a typically insightful piece in the AFR, titled “Cash sacrificed on the altar of easy credit”. The article didn’t mince words, nailing the problem caused by the RBA’s ultra stimulative monetary policy in its first sentence, stating; “Deposit products have been murdered as viable investments and conservative savers are being compelled to absorb much more risk than they ordinarily would to meet their income needs.”

The article also included the following chart, which show that, after accounting for inflation (and especially if factoring in taxes), that cash rates are effectively negative in real terms.


I would agree wholeheartedly with this assessment, and with many of the other criticisms the article carries (there is a link at the bottom of this blog to the piece)

In fact I think the reality facing Australian investors, SMSF trustees, young Australians saving to buy a home or retirees trying to protect their capital is even more dire than the official statistics.

That is for the simple reason that I don’t believe official inflation statistics accurately capture the cost of living increases everyday Australians are really facing, with Roy Morgan research indicating that the average Australian is seeing their cost of living rise at above 5% per annum.

I see no reason to believe that an independent survey of a cross section of the Australian community would come up with a less accurate read on cost of living pressures than a spreadsheet maintained by a handful of bueracrats, no matter how hard they strive to perfect the methodology.

Either way, the data is conclusive, and that is that cash as a long term savings asset is dying, and going forward, the situation could get even worse for three key reasons

• Record debt levels (relative to incomes), and an economy struggling to rebalance away from the mining boom will prevent the RBA from raising rates meaningfully in the future, and we could in fact see rates head lower later this year and into 2015

• A potentially lower AUD in the future, which is very much the hope of the government and the RBA, will add to inflationary expectations through rising import costs

• Inflation on aggregate is likely to rise in the coming decade, for despite the recent up-tick, and the annual volatility, it has been on a more or less declining trend since the 1980s (see image below). All trends eventually end and then reverse


This poses a huge challenge to the incredible volume of term deposits that Australians have sitting in the major banks and credit unions around the country.

And this is not a small pool of wealth, for according to an ASIC paper published in July 2013 (using data effective June 2011), there is some $700 billion sitting in term deposits across the nation, representing just shy of 40% of the $1.86 Trillion in total deposits held with Australian Authorised Deposit Taking Institutions (ADIs).

The following table gives a good breakdown of the term deposit market, and indeed total deposit market in Australia.

There will be no surprises to see that the major banks dominate the TD market, but some people might be interested to see that, in percentage terms at least, TD’s are clearly a much bigger share of the total deposits held by building societies and credit unions, at least relative to the banks themselves.

It’s also probably not a huge surprise to learn that that 45% of this money belongs to Australians aged 65 or over, with the average balance sitting at $77,000 and the median balance at $29,000.


The slow and painful death of this money, which is only likely to get worse in the coming years, has led to a boom in asset prices in this country, and indeed the world over.

In the 12 months to June 2014, Sydney home prices have skyrocketed by over 15% (the total for the nation as a whole was just over 10%), whilst the Australian equity market, when factoring in dividends, has also more than recovered its GFC high.

This stock boom has of course been led by a boom in financial services stocks, which are some 30% more expensive than they were before the GFC hit.

There is some irony in the fact that Australians are so frustrated with the lack of income they can earn lending their money to the bank via a TD that they’re being forced to become shareholders in the banks, hoping for a higher income stream via a dividend payment.

Going forward, whilst we can expect this trend to continue to be somewhat supportive of Australian property, and of companies who focus on rewarding shareholders through consistent and higher dividends, we also expect it to be a huge boon to physical gold investors.

There are 3 reasons for this

1). “Low to negative” real interest rates settings are the perfect environments for gold prices to appreciate

In a terrific research piece titled “Demystifying Gold Prices”, PIMCO highlighted how low to negative real interest rate settings (i.e. the environment the entire developed world is stuck in) are the perfect times for gold prices to appreciate substantially, as returns on cash are by definition constrained, and there is minimal “opportunity cost” of holding gold.

Indeed since the 1970’s, in years where the real rate of return cash has been 2% or lower, the average return on gold for Australian dollar investors has been 25% per annum, nearly double what equities have done, and more than triple what the bond market has delivered.

2). Gold is generally uncorrelated to equity markets - especially when it matters

The average SMSF Trustee has close to 60% of their portfolio in Australian shares and in cash. If they’re looking for a new home for a portion of their cash holdings, then more equities will only further concentrate their risk.

Gold on the other hand will be a diversifier, as the following chart, from the World Gold Council shows. As you can see, gold has minimal correlation with the equity market at the best of times, especially so when the market is correcting.

That provides great balance for an investor.


3). Gold is the most liquid ‘safe’ alternative out there

Typically, the two safe havens investors run too are cash itself, and the bond market. But cash is dying, and the negative real returns themselves are what Australians are trying to get away from.

When it comes to the bond market, yes there are some higher returns on offer, but they’re nothing to write home about, with the benchmark US 10 year government bond paying only circa 2.5% per annum, whilst the Australian equivalent is less than 1% higher.

And that’s after a nearly three-decade bull market, with substantial downside risk from higher inflation or rising yields ahead.

If lending at 2.5% short term isn’t ideal, then lending at 3.5% or less for 10 years is no solution for investors either.

Gold is also highly liquid like these other assets, has a track record as a safe haven that literally dates across the millennia, and as per the earlier comments, tends to substantially outperform other defensive assets in the type of environment we’re living through today.

Every cloud has a silver lining as the saying goes. Astute investors looking for that silver lining in this era where their cash is being sacrificed will no doubt find it in gold.

Further Reading

Chris Joyes article on the “sacrifice of cash” can be viewed here

The ASIC paper reviewing the Term Deposit market is viewable here

The PIMCO piece on Demystifying Gold Prices is viewable here


This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.