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Toby Birch

The Inevitable Trek to Tyranny

Blog by Toby Birch

‘It is a mistake to look too far ahead. Only one link in the chain of destiny can be handled at a time’.

This quote from Sir Winston Churchill is something of a surprise given that he was a lone voice opposing the appeasement of Nazi Germany prior to WWII. He did have a point about forecasting though. Few leaders seem capable of considering the consequences of their actions – especially the unintended variety. Reaction rather than action appears prevalent. While we are not all blessed with investment insight or prophetic visions, we can at least take time to look at the past. Comparisons with the 1930s are highly valid but there is little reason to expect an exact repetition. A domino-effect is too neat and orderly a description for events over the last 5 years that resemble a slow-motion motorway pile-up.

Others have kindly described my book as one of the most prescient predictions of the credit crisis when I published it in 2007 (The Final Crash: Addictive Debt and the Deformation of the World Economy). It compared the build up of debt to drug dependency, dividing the phases into three parts, namely Party Time, Hangover then Detox and Rehab. With a little knowledge of history it was straightforward to run through a dress rehearsal of how the crash would evolve and escalate into other crises. At the time it was understandable to be belittled by doubters or worse still, ignored. At least one can hope that the author has credibility to make some comment on the future. The chapter entitled 2020 Vision ran through a scenario where a crash led to higher taxes, inflation and greater protectionism. It made the case that in times of economic distress politics will tend to swing to the far left and right and of course a common enemy must be pin-pointed and persecuted. Leaders down the ages have used such tricks to crush dissent and unite the populace through scaremongering. Little has changed.

While President Roosevelt may justifiably be criticised for banning the public ownership of gold before devaluing the dollar during the Great Depression, he was at least correct in implementing banking reform, following the Wall Street Crash of 1929. Modern investigative committees appear to be a pale imitation of interrogators of the day like Ferdinand Pecora who exposed the double-speak of financiers with utter determination. The subsequent implementation of the 1933 Glass-Steagall Act clearly delineated retail banking from its much riskier investment banking cousin. After many attempts this was repealed in 1999 with the naive tech-bubble view that modern folk were far more sophisticated than their ancestors. We can now appreciate the shallowness of this philosophy as banks once more mutated into speculative monsters. The lending mechanism is now broken; why should banks bother to lend money to real businesses when they can borrow cheaply from the central bank (a right not extended to governments) and use funds to buy bonds for a risk-free ride, funded by the tax payer.

History shows us that the very act of allowing reckless financial institutions to collapse is far healthier than allowing zombie banks to drag down the rest of the economy. Whether by lobby group pressure, Party funding or a simple lack of knowledge, politicians of all hues have fallen for the mantra that saving the banks will save the economy. This is best illustrated through humour than vitriol. In one episode of BBC’s ‘Blackadder’, an Elizabethan quack doctor recommends continued bleeding by leeches for a pallid patient. The doctor cites counsel from the highest medical authority; who just happens own the largest leech farm in Europe. A similar quality of financial advice has been provided for the last 5 years by a clique of central banks, regulators and ‘industry experts’ from the same stable. Interestingly, one of the best success stories of bypassing the banking system occurred in Guernsey, transforming the island from debt-trap penury into a model of prosperity. The States committee consisted neither of lawyers nor bankers but entrepreneurial merchants who used interest-free finance for the benefit of the Bailiwick.

Other echoes of the Great Depression centre on the emergence of trade tariffs and nationalistic behaviour. With the break-up of the Gold Standard, free-floating currencies caused chaos as every country adopted beggar-thy-neighbour policies of devaluation to gain a competitive pricing edge. Now, as then, the race to the bottom for currency weakness will eventually generate significant inflation; temporarily masked by a lack of credit creation in the banking system. World trade thrives on currency and financial stability which is what the Gold Standard delivered for much of the Victorian Age, albeit with some crises along the way. So why is this relevant today? If you mix the same ingredients together you will usually get a similar-tasting cake. In other words, by combining protectionist policies with political polarisation, tension and commodity-driven conflict are the likely end-result.

Many would argue that the lessons have been learned and that the prospect of totalitarian era is incomprehensible. After all, our children seem to study little else apart from Hitler in history lessons. While it is all well and good to analyse at the end result of tyranny, unless one understands its cause then dictatorship it is destined to be repeated. If anything we are in a worse position than the 1930’s as we have the perfect infrastructure to control, monitor and isolate individuals both financially and physically. The one-way extradition flow of Britons to America is a good example of such injustice where anti-terror legislation is routinely abused and applied to alleged financial, corporate or cyber crime. Our freedoms have been utterly subsumed with reams of legislation justified by the War on Terror. Just as regulatory institutions are riddled with conflicted financiers, politics is dominated by the legal fraternity determined to legislate ad infinitum to the detriment of the law-abiding and entrepreneurial class. Where it gets really scary is when one imagines a scenario under severe economic duress. This is when nationalist parties come to the fore of popularity and the apparatus of the state is hijacked and used to target whatever or whoever the common enemy happens to be.

The economic and social implications are likely to herald a period of greater self-sufficiency and isolation along national and lingual lines. The emphasis will be on job creation through major infrastructure projects and a return to domestically-driven industries. The inflationary implications of a de-globalised world are substantial from the physical aspect of scarcity and delivery plus the financial side from money-printing to fund such projects. This is where the Chinese and Russians have been so smart in dealing with resource-rich countries over the last decade in return for funding infrastructure development. The western model has for many years centred on military dominance or a debt-dumping exercise, forcing countries to export their raw materials to pay usurious interest bills. It doesn’t take a genius to work out whom developing countries would prefer to supply in future.

It will be fascinating to see what imagery will be paraded by future dictators. The word for fascism stems from a symbol of Roman power; a bundle of rods wrapped around a magistrate’s axe designed for punishment. The illiterate Ghengis Khan was likewise famous for demonstrating that one arrow could be snapped whereas a combination of several was unbreakable. The message in both cases is clear; unity is strength. In an era of government spin and media euphemism, we should be truly terrified at the prospect of despotic rule. While there is little any one of us can do in an age where demonstration has been sanitised by aggressive policing, we can at least take out some personal insurance. Not in the form of a policy from your friendly broker but by way of precious metals, offering a hedge against inflation, currency crises and catastrophe that is portable and globally acceptable.

Toby Birch

Guernsey Gold Limited

toby@guernsey-gold.com

07781 136 534

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Toby Birch

Investing in Megatrends: Green, Gold and Agriculture

Blog by Toby Birch

Titanic Centenary

It is sheer coincidence that the tragic sinking of the Titanic a century ago marked the point at which Britain’s economy was officially overtaken by America’s. A similar power shift is underway in modernity, albeit from West to East. It is likewise poignant to take stock and look back over the last 5 years. In 2007 I published my book forecasting of the credit crisis, called The Final Crash: Addictive Debt and the Deformation of the World Economy. As well as calling the year of the crash, it also examined its cause, effect and consequences well into the future. We are witnessing an unprecedented confluence of 5 key megatrends namely: population growth, resource scarcity, environmental degradation, currency devaluation and a rebalance of power referred to earlier. Appreciating commodity prices are escalating the speed and scale of resource extraction and subsequent destruction of the environment. This is the critical clash of theory versus reality; where infinite money creation meets finite supplies of natural resources.

Leading by Example

To lead by example, Oppenheim & Co has launched the Luxembourg-based Gaia Opportunities Fund investing in liquid assets that benefit from these megatrends. Given the clear manipulation of equity, bond and precious metal markets one may wonder if securities are the right vehicle to effect reformation in the real world. Although markets are being artificially moulded it does not mean they have mutated for good. They will undergo a transformation of ‘swords to ploughshares’ but for now are swelled by printed money and the assumption that asset prices are officially guaranteed from falling by central banks. In the meantime we can utilise market mechanisms to concentrate capital toward the right areas which for once will benefit the real world rather than the banking sector.

The Gaia Opportunities fund is designed not just to be ethical but to offset risks that are endemic in this post-bubble economy. It invests in areas that are beneficial to mankind today and more importantly for generations to follow. This need not be sentimental or socialist; it is using a key component of capitalism whereby price changes spawn solutions that can never be achieved politically. In my book I stated that rising oil prices would be like a flash flood in a desert; areas that once seemed barren and hopeless are given life. The same is true of alternative energy, agriculture and forestry. Rising oil prices will change our behaviour and also make alternative energy cost-effective, attracting capital in the process. While ‘Peak Oil’ is hotly debated it appears unlikely that we will run out any time soon; it will just be far more expensive to extract, process and distribute fossil fuels.

1930’s Parallels: Protectionism and Polarity

Sadly, the parallels with the 1930’s are becoming more disturbing by the day and leave one convinced that our leaders have little notion of historical precedent. Like the Book of Revelations, key events are unfolding that appear pre-determined and obvious to those with understanding. Nationalism has most clearly been shown with the 2010 wheat shortages in Russia as exports were banned as the fires blazed. This is a clear dress-rehearsal of things to come when national interests are put before a failed ideology of globalisation. A period of polarisation and currency wars is pending, fomenting energy and resource nationalism, with heightened protectionism and political tension. Just as markets correlate closely during a crash, seemingly unrelated factors are being drawn into this vicious vortex including population growth, pollution and detrimental weather patterns. Analysts and economists struggle to encompass such big-picture events outside of the latest earnings figures or neutered inflation numbers. This is why so many fail to comprehend the kaleidoscopic changes underway.

Taking advantage of Megatrends

The Gaia Opportunities Fund will seek to provide long-term, sustainable growth of capital deriving from these themes whilst limiting downside volatility. The Fund will focus on green investments, precious metals and commodities, especially those related to food production and fertilisers, hence the title ‘Green, Gold and Agriculture’.

Toby Birch
Managing Director Oppenheim & Co Limited (Guernsey)

Toby Birch (t.birch@oppenheim.gg) is the Managing Director of Oppenheim & Co. Limited in Guernsey, the boutique wealth manager for institutions and family offices. He is a Chartered Fellow of the Chartered Institute for Securities and Investment and also holds the Islamic Finance Qualification. He has 20 years’ investment management experience and is the lead manager of the new Gaia Opportunities fund, a multi-asset, long-only fund with no leverage. A quarter of the performance fee will be donated to sustainable projects and Foundations aligned to the Firm’s philosophy. The minimum investment is €125,000 or currency equivalent and is only suitable for Well-Informed or Professional Investors.

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Gaia: Financial Survival in a Finite World

Blog by Toby Birch

23rd September 2011

In Greek mythology Gaia is the goddess of Mother Earth, the namesake of our Gaia Opportunities Fund. The combination of ethical and environmental investing is of course a familiar theme of recent years. However, the unspoken association with green investing is that of underperformance, high volatility or at best one that carries an opportunity cost. In extreme cases, such as Sino Forest, it may even encompass deception leaving the world’s greatest investors shame-faced following its suspension.

Since abandoning the Gold Exchange Standard forty years ago we have pursued a failed philosophy of chasing infinite growth on a planet with finite resources. Few in the investment community comprehend that exponential activity is not a panacea but pre-cursor to collapse, as evidenced in nature by yeast and cancer cells. The so-called credit crisis may prove a blessing in disguise as we are yanked from danger like a disorderly dog on a leash. We lash out with the pain without recognising the ultimate benefit. Many green investment products have overtones of guilt, with the emphasis on obligation rather than satisfaction. Human beings may well be motivated by noble deeds and duty but the pursuit of gain is undeniable and it is disingenuous to ignore one of our foremost emotions.

While it is fashionable to flagellate banks, they do at least know a thing or two about marketing. Through credit cards, loans and speculative products they are tapping into our desires for the accomplishment of dreams and aspirations. While we are not endorsing principles that promote selfishness and consumption there is nothing to stop investment being lucrative, fulfilling and fascinating. The Gaia Opportunities fund is not just about sustainability but is designed to offset risks that are endemic in this post-bubble economy. It provides leadership by example through investment in areas that are beneficial to humankind today and more importantly for generations to follow. This need not be sentimental or socialist; it is using a key component of capitalism whereby price changes spawn solutions that can rarely be achieved politically. Rising energy prices will act as a catalyst for alternative energy, like a flash flood in a desert; technology that once seemed barren and hopeless will be given life.

While ‘Peak Oil’ is hotly debated it appears unlikely that we will run out of black gold any time soon; it will just be far more expensive to extract, process and distribute fossil fuels in future. Commodity protectionism is already with us only it is taking the form of local taxes on multinationals rather than outright trade tariffs. Nationalism has most clearly been shown with last summer’s wheat shortages in Russia when exports were banned as the fires blazed. This is a clear dress-rehearsal of things to come when national interests are put before an out-dated ideology of globalisation and liberalisation, so aggressively promoted by the World Bank. This is one of the most overlooked aspects of climate change, population growth and resource scarcity which when combined creates a highly inflationary cocktail.

The Fund is one of the few to encompass a broad range of asset classes and special situations related to climate change and tangible investments. Most green funds invest heavily in equities related to specific topics such as solar energy or in illiquid (albeit vital) private equity projects. We have taken the Gaia principle further by holding natural resources that offer long-term protection against inflation and currency debasement; namely precious metals and commodities. While mining may not be the cleanest activity on the planet, investors have little choice in protecting their wealth other than buying bullion. It is one of the many dilemmas of living and investing in modernity; no one is entirely innocent and no solution is perfect. We do not invest speculatively nor do we engage in leverage as this is an extra risk factor that benefits the manager at the expense of the investor. The Fund is about balance and equity, sharing risk and reward. It meets two natural human desires that act in concert as the yin and yang of investment activity. The first is to endow the fruits of one’s labour into new ventures to yield greater returns. The second is to act communally which has been repeatedly witnessed in studies of behavioural finance. Investing in earth-related activities enhances the positive aspects of trade that reward measured risk-taking while combining it with our innate sense of stewardship.

This may sound noble in theory but one could still be accused of hypocrisy by died-in-the-wool capitalists or ecologists alike. This is a small price to pay to benefit future generations who may judge us with disgust in decades to come, should we choose the default option of doing nothing. The trick here is to emphasise that climate change is a way to make money for those from the agnostic or sceptical school of thought. For those in the latter camp this is the sales pitch for investing in the interconnecting themes related to climate change and inflation, catered for by the forthcoming fund launch:

• Natural Resources: commodities, rare earth metals, forestry, water
• Food Chain Disruption: fertiliser, agriculture, soft commodities, infrastructure
• Population Growth: healthcare, biotech, waste management, emerging markets
• Currency Devaluation: precious metals & mining stocks to offset currency dilution
• Green Revolution: clean technology, renewable energy and strategic assets

If, like us, you believe that climate change has a financial element within the cause and effect then one can propose that the problem is also the solution. What we need across this range of industries is long-term capital investment. This will not come from governments (other than China) but from financial markets. After all, this used to be the whole point of stock markets; to match entrepreneurs with money. This ‘wisdom of crowds’ generates the most efficient form of pricing and allocation of resources. In the past speculators were a necessary evil for liquidity. Now that volume is dominated by High Frequency Trading it is clear that markets have mutated with their decade-long lame performance. Nevertheless they are not beyond repair. In an environment of sound money backed by precious metals, equities became dividend machines and show their worth through compounding, like the fable of the tortoise and the hare. It is still possible, even preferable, to aim for stability over growth as equity investment offers transparency and sustainability over the falsehood of interest-bearing leverage.

One could still be accused of profiteering so we have decided to act as a role model. Instead of hoarding profits we will recycle capital by investing a significant portion of the management fee into sustainable communities, especially in those countries that will suffer further from climate change in future. At the risk of sounding naïve, this is no marketing ploy but a genuine attempt to prove that financiers can be positive contributors and not simply profiteers. This can be achieved through interest-free loans to stimulate work and self-sufficiency rather than microfinance and charity. In summary, the solution to climate change lies in correct allocation of capital away from speculation, consumption and debt-fuelled ‘growth’ to useful production and economic equilibrium. Government intervention and regulation is a poor substitute for the wonders of the price mechanism that draws investment to areas that are profitable. A sustained rise in the oil price will be the tipping point for better things to come. In the meantime the holdings will offer a degree of protection from the continued dilution of paper money that will impoverish many through inflation.

Toby Birch, Managing Director, Oppenheim & Co Limited
Telephone +44 1481 721 981 t.birch@oppenheim.gg

Oppenheim and Co Limited is regulated by the Guernsey Financial Services Commission in the conduct of investment business. The Luxembourg-based Gaia Opportunities Fund is launching in October 2011 for professional or well-informed investors only.

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Toby Birch

Islamic Wisdom will Save the West

Blog by Toby Birch

23rd September 2011

Very few Westerners are aware that much of the written knowledge of the Ancient world was saved from destruction then copied and enhanced by Islamic scholars. An academic powerhouse of the day known as the House of Wisdom was established during Europe’s Dark Ages. Much of the groundwork for modern medical, mathematical and scientific advancement can be credited with this institution. There is now a real possibility that the ancient wisdom embedded in Islam will ascend once more, ironically to save the West from self-destruction.

Since the break-up of the Gold Exchange Standard forty years ago, the perceived wisdom has been that never-ending growth could be funded by an ever-expanding money supply. Once free from the restraint of precious metals, governments in tandem with banks could fund military expansion and a merry-go-round of populist policies for the baby boom generation. It was convenient to treat the resulting appreciation of asset prices as a ‘boom’ and to nurse the myth that one’s house was a pension pot. There was however a catch to the process; the dual devilment of interest and inflation. The mathematical genii (or even djinni) that work in financial markets overlooked the juggernaut of compound interest that snowballs debt into an avalanche of liabilities. Creating yet more interest-bearing bonds is the surest form of financial suicide yet this is the same solution served out for every crisis; to buy more time. We cling to a failed financial system through want of familiarity combined with a fear of the unknown.

While it is popular to demonise bankers they are simply symptoms and servants of a philosophy that is widespread in the West. Its tenets dictate that mankind is master of the Universe, unconstrained by greater forces that operate around us. The concept of economies lying fallow for a period of respite is an intolerable. We should instead accept and appreciate the cyclicality and seasonality that are an indelible tapestry of our being. Whether it is our own lifecycle or the recurrence of Fibonacci numbers, there is clearly ebb and flow all around us. Anyone who studies chart patterns will be familiar with the expansion and contraction of volatility as seen in Bollinger Band analysis. Reversion to mean is a powerful force that regulates and restrains many excesses that would otherwise engulf us. The beauty of the credit crisis is that it has shown that mankind is not in control and that the growth-at-any-cost model has been exposed as a sham. Recent years have been needlessly wasted in an attempt to resurrect a flawed financial system, with unintended consequences of spiralling food prices as the US dollar devalues.

Such ponderings may seem alien or even irrelevant to an article request for Islamic hedge funds. Rather than indulging in the tired debate whether such funds are an oxymoron or innovation one can instead ask more fundamental questions about the role of money. Hedge funds have been subject to a witch-trial by the media and by European politicians accusing them of causing the credit crisis. One can sense a whiff of jealousy in targeting a group of wealthy people who apparently made fortunes as others suffered. Headline examples of hedge fund folk raking it in were very much the exception as many suffered crippling losses and major outflows of capital. After all, unlike investment banks, hedge funds were not the beneficiaries of the public purse.
Nevertheless, speculation is not a guilt-free pastime, nor is leverage a zero sum game. The lame euphemisms about ‘price discovery’ and ‘liquidity’ seem heavy price to pay for their de-stabilising effect on financial markets. As highlighted in Dr Sami Suwailem’s book ‘Hedging in Islamic Finance’ the use of derivatives increases systemic risk as investors take ever-bigger bets because they think they are protected. In practice, the risks accumulate in the hands of those who cannot afford to take them and the liabilities end up with the government by way of bail-outs. Instead, Dr Suwailem proposes risk sharing which goes back to the fundamentals of the Islamic approach to trade, money and community. This cannot be brushed aside as Muslim propaganda against speculation, which is of course forbidden. In ‘A Demon of Our Own Design’ Wall Street risk manager Richard Bookstaber makes a similar case. In the study of both industrial disasters and financial crises, common themes emerge. Speed, complexity and over-regulation lead to tight coupling that in turn increases the vulnerability and volatility of the system. In the case of financial markets we have high frequency trading, excess leverage and ever-more complicated algorithms which increase correlation; the ‘flash crash’ will become a regular event.

It then begs the question as to why Muslims would want to buy hedge funds, even if they brandish a scholar’s stamp of approval. Is it just a case of seeking the best return and reducing risk or is something more fundamental at play? For one thing it is hard to find out the facts on how large or popular these funds are. The opaque world Islamic fund statistics is a stumbling block as they are only available to paid subscribers. For now we shall overlook the irony of a financial industry based on principles of transparency that fails to share data freely available for conventional funds. One suspects that Islamic hedge funds are being promoted and purchased because they appear to be glamorous, sophisticated and Western. If there is indeed a desire for such funds then it may well be a symptom of human behaviour that has been prevalent for centuries. When dominant nations form empires, the conquered countries often adopt the fashions, architecture and lifestyles of the leading power. In the case of America, the empire is a financial one with the US Dollar as a form of tribute which everyone must buy for commodity transactions. The IMF in turn has used debt as a conduit of Colonial power to extract cheap raw materials from developing countries. Sovereign Wealth Funds of many Muslim nations accumulate interest-bearing debt seemingly without question, as though Islamic principles need not apply to institutions. However there is also a practical aspect in that there is little outside of conventional bond markets than can cater for the size of such investments. As ever, the wisdom of the Prophet echoes down the ages when he informed his companions of a time “when not a single person remains except that he consumes riba” or at the very least “its dust will reach him” (reported by al-Hakim and others from Abu Huraira).

It is easy to become despondent when looking at history but there is also scope for optimism. Maturing empires have a tendency to import ideas as well as impose them. In the Roman era what was once deemed Barbaric became fashionable as beards festooned previously clean-shaven faces and togas were discarded for trousers. Christianity likewise became the State religion having been suppressed on pain of death in earlier centuries. While the chance of the West converting wholesale to Islam is rather unlikely, the power of its financial principles may well take root. After all, the spread of Islam was not necessarily about conquest but about the respect gained when dealing with Muslim traders, renowned for their honesty and dependability, if not for their hard-bargaining. We may now be on the verge of a new era where the mutual risk/reward of equity topples the iniquity and imbalance of interest-bearing debt. The first rumblings of such an approach have been proposed by the world-renowned economist Professor Kotlikoff who has recommended that European banks convert to mutual funds.

The famous Victorian-era playwright and one-time Guernsey resident Victor Hugo said ‘There is nothing more powerful than an idea whose time has come.’ The fundamental message of Islamic economics is that of recycling capital into real assets for productive, communal improvement. The hoarding of wealth (in the form gold and silver in the time of the Prophet) was viewed as selfish and destructive. Scholars liken money to water; only useful when flowing, otherwise stagnating if uncirculated. Zakat is of course the charity tax on liquid assets that are not invested in productive ventures, acting as a form of negative interest rate; a case of use it or lose it. Many investors are sensibly buying bullion as a means of protecting themselves against the devaluation of mainstream currencies. However, gold is simply a measure of the malaise of modern money, like mercury in a thermometer. Other than boosting the profitability of mining companies and bullion dealers, there is little benefit to humankind, let alone the environment, as prices surge. Commodity appreciation is feeding a frenzy of resource depletion and associated pollution we will later come to regret. Swathes of capital are being allocated to passive lumps of metal locked underground, which could otherwise fund industries starved of finance.

In the meantime, we are failing to see the wood for the trees concerning the on-going credit crisis. Investors face greater threats from a range of natural and man-made disasters. We believe that population growth, environmental degradation and the mutation of financial markets are closely correlated. We are witnessing an unprecedented confluence of factors caused by climate change and resource scarcity, exacerbated by currency devaluation. The public face severe inflationary pressures from diminishing supplies of raw materials combined with an exponential escalation in demand. As investment managers we see our roles in a more holistic light than many of our counterparts. We have gone beyond the tedium of money making for its own sake and now seek to benefit our clients as well as the companies we invest into by following the recycling approach to capital. We are therefore launching a multi-asset fund called Gaia Opportunities investing in 5 themes from our proprietary ‘Gaia Filter’:

• Natural Resources: commodities, rare earth metals, forestry, water
• Food Chain Disruption: fertiliser, agriculture, soft commodities, infrastructure
• Population Growth: healthcare, biotech, waste management, emerging markets
• Currency Devaluation: precious metals & mining stocks to offset currency dilution
• Green Revolution: clean technology, renewable energy and strategic assets

Inevitably we could be accused of hypocrisy by purchasing futures contracts to gain exposure to food and other commodities. Likewise the holding of precious metals may well be exacerbating the upward price trend. Where we seek to be different is that we will be donating a portion of our performance fee to promoting sustainable communities in developing countries. This is not the same as charity but an attempt to promote the work ethic through interest-free loans. We would also welcome the opportunity to create a Sharia’a compliant version which would be difficult but not impossible with the correct guidance. The challenge is to find a willing Islamic bank to form a partnership and a scholar who will share the risk and reward without charging a large, flat fee. Great change happens through small episodes of leadership by example. At the risk of sounding naïve we hope that an investment fund which helps investors escape the effects of inflation while promoting sustainability can be a catalyst for financial reformation.

Toby Birch is the Managing Director of Oppenheim & Co Limited in Guernsey. He is author of one of the most prescient predictions of the credit crisis called The Final Crash: Addictive Debt and the Deformation of the World Economy, published in 2007. He has been a fund manager for 20 years and is a Chartered Fellow of the Chartered Institute for Securities & Investment and holds the Islamic Finance Qualification. Oppenheim & Co Limited is the investment manager of the Gaia Opportunities Fund, a Luxembourg Specialised Investment Fund suitable for Well-Informed investors with a minimum investment of €125,000 or currency equivalent.

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Fiddling with the Thermometer

Blog by Toby Birch

As the author of The Final Crash: Addictive Debt and the Deformation of the World Economy (published 2007), one is often asked for further forecasts. Investors are swiftly directed to two specific chapters: ‘2020 Vision’ and inevitably one about precious metals. Instead of the usual hysterical titles like ‘Become a Bullion Billionaire’ the latter bears the more moderate heading of ‘Antidote’. Some seem disappointed with such conservatism with gold and silver as the best buy of the previous decade – and possibly the next – but they are missing the point. An antidote’s role is a remedy against a poison; not the cure for the underlying cause of toxicity.
Gold’s appreciation is simply a measure of the malaise of money, like mercury in a thermometer. Other than boosting the profitability of mining companies and bullion dealers, there is little benefit to humankind, let alone the environment. Commodity price rises are feeding a frenzy of resource depletion and subsequent pollution that we will later regret. Swathes of capital are being allocated to passive bars of metal locked underground rather than funding industries starved of finance.

Many call for a return to financial discipline by way of a Gold Standard given that fiat currencies have inflated house prices, food and energy beyond affordability. The evidence favours such an approach as the greatest debt over-hangs in history (post-Napoleonic and WWII) were countered by the resumption of gold-backed currencies. These periods brought about prosperity as a natural by-product of competition and efficiency in a sound money environment.

Nevertheless, it is easy to be rose-tinted when promoting precious metals as money; after all every Gold Standard has eventually buckled thanks to war-related expenditure. Likewise the constraints or surplus of mining supply in the Victorian era triggered several boom and bust episodes. It ultimately comes down to stewardship, a commodity that is sadly lacking in this modern era. The institutions designed to protect the public are riddled with lobbyists determined to protect the status quo. This can be seen with recent moves to raise margin requirements for precious metal futures contracts designed to contain prices. Artificial manipulation seldom works, especially when trends reflect reality. Rather than curing the disease, we see how the symptoms are suppressed by fiddling with the thermometer. Only when gold forms parabolic chart patterns and taxi drivers are telling you to buy, will it be time to exit.

Toby Birch is Managing Director of Guernsey Gold Limited, a wholly owned subsidiary of Oppenheim & Co Limited, a boutique asset management company regulated by the Guernsey Financial Services Commission. E-mail t.birch@oppenheim.gg or telephone +44 (0) 1481 721 981.

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Bullion: throwing out the baby with the bathwater

Blog by Toby Birch

23rd September 2011

Unless one has been climbing Mount Everest or relaxing in a Retreat, investors will doubtless be aware of the wrenching sell-off in financial markets this week. This is having a contagion effect on the likes of precious metals which until a few days ago had been touted as a safe-haven asset. Anyone who had held them in 2008 would disagree but financial memories are short. The reason for the pulverization of precious metals is three-fold:

1. Investors are fleeing to the US dollar, erroneously called a flight to quality. Now that the Swiss have tied the Franc to the sinking ship of the Euro, there is little choice for institutional funds.
2. Historically there has been an inverse correlation between the price of commodities and the US dollar so when the latter is strong, the former are weak.
3. Because precious metals are liquid, financial institutions have a tendency to sell the good to offset the illiquidity of the bad; a case of throwing the baby out with the bathwater.

Bullion investors who understood the buying rationale in the first place will appreciate why they should maintain their holdings; looking to accumulate while others panic. Should a similar scenario as 2008 emerge then holders of gold can be comforted by the fact that it was one of the few assets to end the year positively, albeit with a 33% correction from peak to trough in the interim. In any case it is not subject to the credit risks of the vulnerable banking system, assuming one holds physical bars.

Looking at the sequence of naturally occurring Fibonacci numbers, gold may well fall below $1,600, albeit temporarily. To put this into perspective that was where prices stood two months ago. As a Sterling investor the pain will be eased because the metals are of course priced in dollars and will offset some of the losses when translated back into Pounds. From a personal point of view I have today used the sell-off to accumulate silver as I have been overweight gold and will seek to redress the balance. Needless to say, silver is much more volatile but potentially rewarding. Think F16 versus jumbo jet for the relative movement of silver to gold.

It is all-too-easy to be sucked into the vortex of short-term thinking and instantaneous media coverage. Standing back from the crowd is a lonely business, especially if one is wrong for a period of months. The key factor to comprehend is that we are undergoing a major transition in finance (as predicted in my book, The Final Crash, published in 2007). Eventually we will look back at the last 40 years as a blip when we experimented with so-called fiat currencies that had no backing with precious metals. I believe that the time is approaching when we will return to sound money. Not in the form where the money supply is fully backed 1:1 by bullion (it never used to be that way, even during the era of the Victorian Gold Standard) but perhaps on a fractional basis. The upside potential for precious metals is enormous but this is missing the point. The return to sound money will eventually crush the curse that is monetary inflation and help us into rehab where the addiction to ‘growth’ can be kicked in favour of sustainability.

It’s been quite some time since wise men came bearing gifts of gold but the markets are doing just that. So if you have no bullion under the bed or in the bank vault, it may be time to go bargain hunting while others dispense with the proverbial baby.

Toby Birch is MD of Oppenheim & Co Limited (investment management) & Guernsey Gold Limited (bullion dealing)

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Toby Birch

Gold and Silver: The Sale of the Century

Blog by Toby Birch

26th September 2011

The last week has witnessed one of the greatest tests in living memory for investors in precious metals. Gold endured its worst two-day slump since 1983. Silver likewise took its biggest tumble in 31 years. To put this into context, 1980 witnessed a spectacular price collapse once the Hunt Brothers’ plan to corner the physical silver market was thwarted.

As one who had accurately predicted the credit crisis (at least to the correct year) and had been promoting the accumulation of precious metals since 2002, it is incumbent on me to make a statement on where we go next. While it looked like some dollar strength was on the cards and commodities might be squeezed, even I was caught out by this plunge in prices. Allow me to go on record in saying that that the current sell-off has set up the sale of the century for precious metals. This is not just a price factor, after all, the market only fell to levels that were first encountered at the end of April this year This time we have the fundamentals on the side of precious metals like never before, yet a dash for dollars and cash has hammered the very market that is traditionally a safe haven against inflation, banking crises and global tension.

It should be remembered that precious metals are not an immediate hedge against danger and do not behave like an options contract that is highly sensitive to volatility. Instead they are a long-term form of protection but can suffer in the short-term as we have just experienced. Having seen a plunge of almost 8% this morning from peak to trough, it looks like gold has completed its climactic sell-off. It fell just shy of a key Fibonacci level and also bounced straight back from the 200-day moving average. This does not mean that we will see a rally back to previous highs though. No matter what the market or asset, when you have a disorderly decline like we have witnessed over the course of just a few trading sessions, there will be lots of sellers on the way back up so progress will be slow. While it is good to shake out the weak investors it will take time to recover, even for the faithful who have been flabbergasted by the move. Nevertheless, this now forms a significant base for a more substantial up-leg.

Many echoes of 2008 are apparent with mainstream banks reducing their exposure to eachother and cutting the maturities of fiduciary deposits. Much like that year, every asset bar government bonds was sold in a panic move to liquidity yet this proved to be a great time to buy gold. True connoisseurs will be eyeing the expansion of the gold:silver ratio and will be switching gold for silver but mainstream investors can simply buy silver with fresh cash to re-balance the precious metal element of the portfolios.

Many who purchased precious metals in the last 6 months may well be feeling dazed and confused this morning, but for those willing to learn the lessons of the past, it is time to accumulate rather than ditch those lustrous bars.