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Asheron

If There Was Ever An Article That Should Spark Every British Citizen To Immediately Shift Their Savings Into Physical Gold This Is It.

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Is the UK About to Engage in a Stealth Default?

If there was ever an article that should spark every British citizen to immediately shift their savings into physical gold this is it. Basically, proposals are on the table to change the way inflation is calculated for bonds that payout based on the rate of change in prices. Unsurprisingly, they are purposely attempting to use an alternative measure of inflation that allows substitution (so when people can no longer buy a steak and must spend the same amount of money on spam this shows up as no inflation)! If this goes through, it is blatant theft. This is why owning TIPS in the U.S. is a total fool’s game. They will mark inflation to whatever level they want at the end of the day. To whatever is most convenient at the moment. You know, just like the banks mark their balance sheets. But don’t take my word for it…

Key quotes from the FT article:

Holders of some UK index-linked gilts could see more than 40 per cent wiped off the value of their bonds, according to M&G Investments, as a result of technical changes to the way the retail price index, which underpins these “linkers”, is calculated.

The mooted changes are designed to eliminate “unjustified” causes of the persistent gap between inflation as measured by the RPI and the normally lower consumer price index, narrowing the “wedge” between the two measures by altering the way the RPI is calculated. Some industry figures believe the gap between the two measures could be eliminated entirely.

“To eradicate the wedge altogether would be tantamount to an event of default,” said Ben Lord, portfolio manager at M&G.

http://www.zerohedge.com/news/guest-post-uk-about-engage-stealth-default

http://www.ft.com/intl/cms/s/0/8ef07ff0-ab2c-11e1-b875-00144feabdc0.html#axzz1wqAm0AyT

Edited by Asheron

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Is the UK About to Engage in a Stealth Default?

If there was ever an article that should spark every British citizen to immediately shift their savings into physical gold this is it. Basically, proposals are on the table to change the way inflation is calculated for bonds that payout based on the rate of change in prices. Unsurprisingly, they are purposely attempting to use an alternative measure of inflation that allows substitution (so when people can no longer buy a steak and must spend the same amount of money on spam this shows up as no inflation)! If this goes through, it is blatant theft. This is why owning TIPS in the U.S. is a total fool’s game. They will mark inflation to whatever level they want at the end of the day. To whatever is most convenient at the moment. You know, just like the banks mark their balance sheets. But don’t take my word for it…

Key quotes from the FT article:

Holders of some UK index-linked gilts could see more than 40 per cent wiped off the value of their bonds, according to M&G Investments, as a result of technical changes to the way the retail price index, which underpins these “linkers”, is calculated.

The mooted changes are designed to eliminate “unjustified” causes of the persistent gap between inflation as measured by the RPI and the normally lower consumer price index, narrowing the “wedge” between the two measures by altering the way the RPI is calculated. Some industry figures believe the gap between the two measures could be eliminated entirely.

“To eradicate the wedge altogether would be tantamount to an event of default,” said Ben Lord, portfolio manager at M&G.

http://www.zerohedge.com/news/guest-post-uk-about-engage-stealth-default

http://www.ft.com/intl/cms/s/0/8ef07ff0-ab2c-11e1-b875-00144feabdc0.html#axzz1wqAm0AyT

I'm struggling to see why that means I should shift my money into gold and only gold.

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I'm struggling to see why that means I should shift my money into gold and only gold.

Me too. Hardly catastrophic or going to cause total failure of the £

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They have been fiddling the inflation figure for years.

They will probably change the measure to reflect house prices

then tell us we have deflation

:blink:

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I'm struggling to see why that means I should shift my money into gold and only gold.

That's all he's selling.

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This will hit all UK public sector pensions if it goes through - they are linked to RPI

However, Mr Lord calculated that holders of a typical linker, the 4.125 per cent 2030, would lose 43 per cent of the current market value under the stipulated pricing formula. Holders of the more recent three-month linkers would not even have this protection.

Potential beneficiaries include the bulk of private sector pension funds which use RPI inflation to uprate future benefits and would see their liabilities fall.

“For the majority of pension schemes that are underhedged, in terms of their liabilities, it is good news,” said Laura Brown, head of solutions and liability driven investment at Ignis Asset Management.

Edited by oligotroph

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"However, Mr Lord calculated that holders of a typical linker, the 4.125 per cent 2030, would lose 43 per cent of the current market value under the stipulated pricing formula."

I would like to see Mr Lord's precise calculations and assumptions.

Very roughly, and ignoring the dividend payments, a bond with an expected growth rate of 3% p.a. over the next 18 Years (the time to redemption of the 2030 linker) has an expected redemption value of 1.7 times its current market value ( 1.03^18 = 1.7 )

Reduce this expected growth rate by 70 basis points to 2.3% p.a. as suggested in the article (average historic difference between RPI and CPI) and the multiplication factor drops to 1.5 ( 1.023^18 = 1.5 )

In percentage terms, the drop in expected redemption value from 1.7 to 1.5 is a drop of 'only' 11.76%.

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That's all he's selling.

Why? Because sterling the currency has a huge indebted country attached to it, sterling will be created to reduce the cost of that debt. Holding sterling based derivatives will be very risky, ask someone who lived through the Polish devaluations of the zloty!

Gold removes that counter party risk, Gold is not associated to any currency with debt, it is the purest form of money!

In terms of a 'stealth default', the UK has been doing that for years, RPI barely has any credibility, let alone CPI. Grand theft in my opinion.

Edited by Noginthenog

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Linkers down noticably today, though not a rout.

Keep a watch on the BoE pension fund, currently heavily invested in linkers.

If they offload then it's definitely time to sell.

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Why? Because sterling the currency has a huge indebted country attached to it, sterling will be created to reduce the cost of that debt. Holding sterling based derivatives will be very risky, ask someone who lived through the Polish devaluations of the zloty!

Gold removes that counter party risk, Gold is not associated to any currency with debt, it is the purest form of money!

In terms of a 'stealth default', the UK has been doing that for years, RPI barely has any credibility, let alone CPI. Grand theft in my opinion.

Central Banks across the Globe are accumulating significant amounts of Gold and if this continues supply will dwindle. Therefore I have taken note of James Turk who for some years now has urged people to be "your own Central Bank".The way events are playing out I believe he is correct.

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