Dangers of having lump of cash in bank?

Scooby_Man

Hi All,

Lets say I have 50k cash and chose to keep it in the bank (e.g. 2 year fixed bond) - is there a danger given the new economy? I am aware of the 50k limit, but I am thinking more along the lines of:

- Should there be hyperinflation, the 50k in relative terms will be more and more worthless and therefore I am better of investing in Gold

- Currency devaluation gets to a point that my 50k has less power in the future

- Interest rates remain low while inflation is relatively high (not good for a saver!)

I am looking at this from a more strategic viewpoint and would value any input...

ses6jwg

If you are worried about inflation what about index linked bonds from NS&I.

I believe they pay the rate of inflation + 1.5% and are 3 or 5 years.

purch

Should there be hyperinflation, the 50k in relative terms will be more and more worthless and therefore I am better of investing in Gold

Of course there might not be hyper or even high Inflation, Gold goes to $500 oz and your 50 grand becomes 25 grand.

It's not a one way bet.

P.S. This is not meant to be argumentative. I personally think Gold will appreciate in price, even from here, but sometimes when reading posts about Gold I feel people fail to appreciate that the downside risks can be as great as the possible upside.

Scooby_Man

purch wrote: »

Of course there might not be hyper or even high Inflation, Gold goes to $500 oz and your 50 grand becomes 25 grand.

It's not a one way bet.

P.S. This is not meant to be argumentative. I personally think Gold will appreciate in price, even from here, but sometimes when reading posts about Gold I feel people fail to appreciate that the downside risks can be as great as the possible upside.

Hmmm...Mr Brown sold UK gold - 40% of it I believe at 200 US and now its what 1000? The problem with printing so much money (QE) is that there is not anything to support it and my concern is that there is a real risk that the value of paper money will fall rapidly. So the hard effort to put together 50k may become meaningless...

psychic_teabag

ses6jwg wrote: »

If you are worried about inflation what about index linked bonds from NS&I.

I believe they pay the rate of inflation + 1.5% and are 3 or 5 years.

I think the current issue is 1.0% + index-linking.

gozomark

Scooby_Man wrote: »

my concern is that there is a real risk that the value of paper money will fall rapidly..

there is a risk of that, but I believe very small - as soon as the economy starts improving, taxes will rise, govt spending will be cut, and the QE will be unwound. To me the risk is that this will happen too soon and not too late, so the real risk to me remains deflation.

purch

So the hard effort to put together 50k may become meaningless...

Yes, as will always be the case if you choose and aggressive investment strategy and are wrong.

Gold is not a perfect hedge against Inflation, despite what some try to preach.

If we do have Hyper-Inflation then buying £50k of Gold now will probably not save you 100% from the effects, and if we don't and only experience normal levels of Inflation, even if you have only hedged 10% for your £50K into Gold you will struggle to break even.

Scooby_Man

gozomark wrote: »

there is a risk of that, but I believe very small - as soon as the economy starts improving, taxes will rise, govt spending will be cut, and the QE will be unwound. To me the risk is that this will happen too soon and not too late, so the real risk to me remains deflation.

Interesting.
If QE is unwound fast - say through tax increase, that would reduce consumer spending - so interest rates would be kept low (so no savings), putting pressure on banks (who wont be able to lend)...we end up in another vicious circle!

perhaps its all down to where the tax rises hit...or which party comes in. I think tax rises are going to be worse under labour...

Scooby_Man

purch wrote: »

Yes, as will always be the case if you choose and aggressive investment strategy and are wrong.

Gold is not a perfect hedge against Inflation, despite what some try to preach.

If we do have Hyper-Inflation then buying £50k of Gold now will probably not save you 100% from the effects, and if we don't and only experience normal levels of Inflation, even if you have only hedged 10% for your £50K into Gold you will struggle to break even.

Thinking aloud....if we do get hyper inflation, wont the interest rates rise to keep in touch? therefore the 50k would grow, right? And therefore maybe I should not put into a 2+ year fixed - maybe a 1 year fixed with clause to withdraw?

Good discussion guys

gozomark

Scooby_Man wrote: »

Interesting.
If QE is unwound fast - say through tax increase, .

unwinding QE requires the selling of the assets that have been bought, and then the cancellation of the money - nothing to do with tax

Scooby_Man

gozomark wrote: »

unwinding QE requires the selling of the assets that have been bought, and then the cancellation of the money - nothing to do with tax

Wasn't QE just printing money rather than purchasing assets? And this money needs to be recouped through raising money (or was it technically the BoE bought Gov Gilds or something?)