As Money Funds Tighten Rules, Gold Begins to Look Better

Safe havens for cash are quietly disappearing, under new rules for money market funds that go into effect October 14, 2016–just two months away.

Redemption fees and restrictions on fund withdrawals will make prime money funds less attractive to investors who want ready access to their cash during periods of high market risk. Many will look toward gold as a more liquid alternative and a historically strong store of value.

The new rules have already had an impact on the money market fund landscape. Tax-free institutional money funds have started to disappear from the market. According to iMoneyNet, the number of tax-free institutional funds is down from 95 in July 2014 (the month when the new rules were announced) to just 38 this past June.

Fund companies have had two years to prepare for these changes, and many have already changed their money fund lineup in advance of the new rules.

Lets look at these primary changes that are coming this October, and how the simple diversification into a gold position could alleviate the growing risks involved in your cash positioning

Redemption restrictions

Starting that day, prime money funds–defined as those that invest in corporate and municipal bonds along with government and agency debt–will be permitted to enact temporary withdrawal restrictions or charge fees for fund redemptions in times of market stress.

The purpose of this rule is to prevent a run on a money market fund similar to the one that crippled The Reserve Fund during the 2008 financial market crisis.

Money market funds have traditionally been used as a safe haven for investor cash and to provide ready liquidity should investors need to make withdrawals.

The new redemption fees and withdrawal restrictions mean investors may not be easily able to access their funds when they may need them most.

Fee and withdrawal restriction rules apply to both retail and institutional prime money funds. Those money funds that invest exclusively in government and government agency debt (known as non-prime or government money market funds) are exempt from this rule.

Floating NAVs

Another significant change coming this October is floating net asset values (NAV) for certain money funds. Historically, money funds strive to maintain a per-share price of $1 to provide capital preservation for investor deposits. It was never guaranteed that money funds would maintain stable net asset values. But all money funds sought to avoid breaking the buck to preserve investor confidence.

Under the new rules, prime institutional money funds (those that cater to large investors and invest in corporate and municipal securities) will have to allow their net asset values to float or fluctuate in value. Thats a significant change from the traditional objective of stable value that these funds have long sought to achieve.

Gold is a traditional holding of true wealth holders and comes under no threat of government rules change. Controlled by you, the investor, gold allows you real freedom to control your wealth management and is a growing advantage desired in this turbulent financial age.

How bad can a fund run be?

Weve already seen how devastating a run on the money market fund can be to investors. A run may start small, but redemptions can cascade and create an avalanche that leaves existing shareholder to wonder how their stable money fund suddenly became unstable.

Thats what happened in September 2008 to The Reserve Fund, one of the oldest and largest money funds in the marketplace. The Fund held about $800 million in Lehman Brothers securities when the investment bank went belly-up. That investment represented around 1% of the total fund assets.

But when that $800 million dropped to zero due to Lehmans bankruptcy, it was enough for the The Reserve Fund to break the buck and trigger a shareholder stampede for the exits. $40 billion of the funds $62 billion in assets was gone by the day after the Lehman collapse. The Reserve Fund halted withdrawals for seven days, then eventually cashed out the remaining shareholders at 99 cents per share.

Money funds will soon be able to slow redemptions and control future runs on their assets. But money fund investors will bear much of the burden, either through redemption fees that reduce the value of their cash holdings or withdrawal restrictions that prevent ready access to capital.

Thats why gold may become more appealing to investors look for an alternative to money market funds for their cash. Gold can be easily and readily sold in the marketplace, providing adequate liquidity when investors need cash. Plus, gold has traditionally been a strong store of value over the long term (although values fluctuate often within short-term periods.)

A new money fund world

If you currently have cash in a money market fund or are considering a money fund as a stable value alternative, do your homework first to understand how these new rules affect fund pricing and redemptions. And remember, gold is an excellent store of value and offers readily liquidity in all market environments.

Founded in 1975,Blanchard and Companyhas been the premier source for clients who invest in precious metals and rare coins. To join the more than 450,000 clients already investing wisely, give us a call today.