Money management tips from central bankers

Central banks manage huge pools of capital for their respective countries and are active in many global markets. Lately, the balance sheets of central banks have exploded into huge portfolios of assets that require constant management based on the macroeconomic events around the world. From recent events, we have gleaned some advice that should help financial advisers and registered representatives manage client funds as they were overseeing a trillion-dollar portfolio. Here are five useful tips from these central bankers that will help you navigate current markets:

1. Diversify outside of U.S. bonds. Daniel Mminele, deputy governor of the South African Reserve Bank, recently gave his view on the impact of the U.S. Federal Reserve’s signals that it will begin tapering its bond purchases in the medium-term future. He believes that asset purchases by the Fed have significantly elevated prices for U.S. Treasuries, and with more than 60% of South African foreign exchange reserves held in U.S. securities, he has a lot to lose if their prices fall. We saw a hint of this trend in May when Treasury prices fell sharply at the first suggestion that the Fed may reduce its official purchases. To lessen the impact of tapering, the South African Reserve Bank will look to diversify into new asset classes and new currencies outside of the U.S. dollar — and you should too.

2. Own some gold. Additional portfolio advice came from the European Central Bank’s Mario Draghi, when asked recently his thoughts on gold as a reserve asset. “I never thought it wise to sell it [gold], because for central banks this is a reserve of safety … it gives you a value protection against fluctuations against the dollar.” Useful advice. It would be almost impossible to completely divest yourself of U.S. dollar-denominated assets, so owning some portion of your portfolio in gold as a hedge makes sense.

3. Never disclose how much gold you own and never sell it. China has mastered a “no speak” policy when it comes to acquiring gold and is on pace to consume a record amount of gold this year. In the U.S., continued legislative wrangling and a possible debt default next year have only deepened concerns about the outlook for the dollar and Treasuries, but you won’t hear such comments from the People’s Bank of China. So how are they diversifying their holdings? While officials have vehemently denied adding to their gold holdings, trade statistics tell a different story.

As of September, China had imported a total of 826 tons so far this year, double that of the first nine months of 2012, and will become the largest consumer of gold in the world this year. It’s hard for us to believe that none of this gold has found its way to the People’s Bank of China as an asset to diversify their hoard of foreign exchange reserves, estimated at $3.5 trillion. In fact, further examination of trade statistics by Andrew Cosgrove and Kenneth Hoffman of Bloomberg suggests that Chinese central bank holdings are likely closer to 2,710 metric tons or more. They have likely tripled their gold holdings, last revealed in 2009, but no clarifying statements have been forthcoming.

4. Accumulate your store of gold slowly over time. The Chinese have been slowly and steadily adding to their gold reserves over the past several years, so as not to disrupt the market. However, they have been voracious buyers when the price of gold dropped, as we have seen this year. Precious metals can be volatile, so accumulating your store of gold over a period of time allows you to take advantage of dollar-cost averaging, which helps you maximize profits.

5. If you are ever asked direct questions about your ownership or intentions on gold, speak but don’t say a thing. The recent comments from central bankers in South Africa and Europe have been uncharacteristically clear on their portfolio management intentions, but the Chinese “no speak” policy may create too many curious onlookers intent on determining your actions. Instead, take a cue from Alan Greenspan and his masterful use of ‘Fedspeak’ and give the inquisitor opaque answers to straightforward questions. In the words of Mr. Greenspan: “Unless you are expert at it, you can’t tell that I didn’t say anything.”

As chairman of the Federal Reserve, Ben S. Bernanke has served as the chief architect of the U.S. central bank’s response to the financial crisis and the deep recession of 2008-09. By slashing interest rates to near zero and buying more than $2.5 trillion in Treasury and mortgage-backed securities, he has led and supervised the most radical changes to Federal Reserve policy in at least 50 years.

With Janet Yellen appointed to replace Mr. Bernanke, it looks like the easy money policies of the Federal Reserve are here to stay, despite all the talk of tapering. Regardless of the policy direction at the Fed, other central bankers have decided to shift their portfolios away from U.S. dollar assets and into alternative assets, including gold. Astute advisers can use these glimpses into their portfolio management to position their clients ahead of these massive shifts of capital. Don’t say we didn’t tell you.

David Franklin is a market strategist for Sprott Asset Management, a Toronto-based asset management firm.

Related Topics: Cash Management