Y2K is getting steadily closer. Donna Block investigated how it may affect your money
Three-hundred-and-thirty days and counting. The millennium bug is upon us and no doubt you’ve heard the horror stories that could begin at the stroke of midnight on December 31 1999. Unable to cope with the year 2000, computer programs go crazy causing electricity blackouts, a global recession and perhaps the accidental launching of a nuclear bomb. Now add the possibility of a collapse on Wall Street triggering a breakdown in the international financial systems, reducing individuals’ access to their money and disrupting payments between businesses and banks and you’ve got Armageddon.
Nobody is sure what will happen on December 31 but for some the answer is simple: sell your possessions, stock up on gold and food, and head for the hills. Many might find that approach a bit extreme. But the so-called year 2000 (Y2K) computer problem has put investors, brokers and money managers on red alert, and some are rethinking their portfolios.
Some fearful investors think the answer to Y2K is as good as gold. Ordinary people are joining the more paranoid in turning part of their portfolios over to gold bullion, gold coins, rare coins and other precious metals.
James Halperin, co-chair of Heritage Capital in Dallas, the world’s largest rare coin dealer, says the rare coin business is picking up dramatically and attracting lots of investors who are afraid of the stock market.
Indeed, Halperin compares this year to two other crisis years that drove investors to rare coins and gold. The first was the Organisation of Petroleum Exporting Countries-induced oil crisis in 1973 when rare gold coins quintupled in price in 18 months. The second was the Iran hostage crisis in 1980 when “the rare coin market was even hotter”, Halperin says.
It isn’t clear how many investors are taking this route – statistics are not available. But maybe it isn’t a coincidence that the United States Mint, which makes bullion coins from gold, silver and platinum, had a record year in 1998, selling more than 1,8-million ounces of American Eagle gold coins.
The mint temporarily has had to stop making its one-ounce silver coin because the unusual level of demand has overwhelmed manufacturing capacity at the firms that supply the mint with blank coins.
However, all the speculation of the Y2K effect has done little for precious- metals prices. In the past two years the price of gold has fallen more than $120 an ounce to historically low levels. And although most of the gold buying related to the Y2K problem is coming from the US, analysts and traders are worried about the bigger picture. They say, Y2K investors could trigger a bear market in precious metals if the problem is averted and investors decide to turn a round and sell.
Prudent investors who feel they need or want gold or rare coins in their portfolios should investigate the investment options from two different perspectives. Firstly, as a defensive stance in the event the stock markets go critical and take a dramatic downturn; or on the expectation that demand for coins or precious metals such as gold, silver and platinum will rise sharply in 1999 as the Y2K hype heightens towards the end of the year.
One Y2K theory is that we may need gold coins as a means of exchange if cash becomes worthless, which most analysts see as extremely unlikely. The more likely scenario is one of inflation where some computers don’t work, inventories get backed up, and customers can’t get what they want, producing rampant inflation.
The purveyors of doom and gloom and, of late, many commodity and futures brokers have been touting the Y2K issue to their customers and suggesting investments in not only precious metals but interest rate futures and US Treasury bonds. They have been quoting from alarmists such as Edward Yardeni, chief economist at Deutsche Bank. In his book, Year 2000 Recession, Yardeni suggests cautious investors put at least 25% of holdings in cash and cash equivalents.
But most investment advisers are being fairly circumspect and are telling their clients to invest for the coming year based on their degree of concern about the millennium problem. If investors are confident that Y2K will pass somewhat uneventfully, they recommend keeping a diversified portfolio of large and small stocks, fixed-income securities and some international securities. Investors who are very concerned should focus on fixed-income securities and large market capitalisation companies.
Tony Keyes, a Maryland-based author and Y2K consultant, recommends giving up stocks altogether, putting 40% of assets in US government and zero-coupon bonds, 20% in precious metals and 10% on ” Y2K speculation”, such as options and commodity futures. The remaining 30%, Keyes advises, should be converted to cash.
With more cash at your disposal in the aftermath of Y2K, Keyes said, “you’ll be able to go do some great bottom- fishing for companies that will prosper in the recovery”.
It’s impossible to predict how fear of a disaster will affect Wall Street and the world’s market. But regardless of how severe the problems turn out to be, financial advisers say Y2K can present money-making opportunities for the shrewd investor.
“Whatever may come will probably be a phenomenal investment opportunity,” said one US managed-futures broker. “Those with the cash and the ability to react to it will probably do extremely well.”