Diversification of Cayman Islands Reserves

| 09/09/2009

Gold was trading at $865.00 and US$1.29 = 1 Euro on April 19, 2009. On 29 May 2009, I sent this Gold study I had prepared in 2007, to all the newly elected UDP officials and to the director of CIMA, urging them to diversify the US$99.8 million in the Cayman Islands reserves.

Today, Gold has gone over $1007.00 and the Dollar is down to US$1.45 = 1 Euro.

We are on the verge of another sharp drop in the value of the US Dollar, as the US is facing multi-trillion deficits for the foreseeable future that are now substantially financed through printing more dollars at the bargain cost of 2.4 cents for every $100 Dollar bill. It should soon plunge through previous strong support at $1.65 = 1 Euro with an intermediate target of around $1.90 = 1 Euro. However, none of the main fiat currencies, including the Euro are in good shape, nor do the best of them last much longer than a couple hundred years before disappearing into oblivion.

Gold on the other hand has been a proven store of value for millennia with some 95% of all Gold produced still in existence today: in 1971, Gold was worth $35.00 an ounce when its peg with the Dollar was ended by Nixon: in 38 years, it has risen 2,857% to $1000.00 in relation to the Dollar, which has lost 96.5% of its value in the same time frame.

This information was originally posted on a financial forum back in late 2007 when Gold was trading around $650.00, so it’s a bit dated. However, fundamentals have continued to get worse for the US Dollar and much better for Gold.

Gold hit $850.00 in 1980 and just recently again, as up-trending precious metals have a habit of revisiting previous high. If we agree that Gold will make new highs in this climate of financial uncertainty, blatant expansion of money/credit out of thin air by most countries and soon to come rampant inflation, what would be the equivalent of last Gold’s high in today’s currency?

The money supply in Fiat currencies is exploding worldwide: in 1971 there were 776 billion US dollars in circulation. Today there are over 12 trillion. Around the world the supply of paper money is growing at a stunning pace. In the last seven years alone, the supply of British pounds grew by 99%; Euros grew by 78%; Indian Rupees grew by 234%, Chinese Yuan grew by 227% and Russian Rubles grew by 1,508%. Because central banks create money at virtually no cost, its supply tends to grow without constraint.

Once the relative difference of Growth/Expansion between both the Dollar and Gold supply is established, one only need apply the corrections to the $850.00 high to obtain the target for Gold in today’s currency…

The Expansion of the total US Dollar money supply has exceeded 500% between 1980 and 2006, while the total supply of Gold has only increased by 70%, from 2.6 billion ounces to a total of 4.4 billion ounces. In fact, worldwide production of Gold has been in decline since 2001.

Adjusted Gold price Target: $850 x 500% = $4,250 x 70% = $2,975.00…

Since these calculations were made, the supply of Dollars has greatly accelerated, while Gold production continues to decline steadily, so it would not be surprising if Gold actually reached $5000.00 at its peak.

Just as Peak Oil occurred in the US in 1970, with its production in steady decline ever since, Peak Gold production is also taking place: South Africa, which used to mine 68% of worldwide Gold production in the 70’s is now down to 11%. Today, China is the top producer, but hoards most of its production to increase its reserves that have recently doubled to 1,054 tons. Chinese citizens now have access to the precious metals market and are encouraged to purchase by the government.

To support the Dollar, the US government has made every effort to suppress the price of Gold and this time around won’t be any different. So, substantial price fluctuations and retracement of recent gains should be expected: the advice of an experienced financial adviser is essential when deciding to invest.

Even though Gold prices have increased nearly four fold from $255.00 an ounce, the overall production has continued to decline steadily. With the Dollar being debased at the rate of 18% a year, the Yuan 19%, the Euro 14%, etc… and all the sovereign countries competing against each other to print more worthless bills, it’s just a matter of time before confidence in the fiat currency system falters. Gold then, the only real money that has proven itself over several millennia will regain its full status.

I firmly believe that CIMA’s reserves, instead of being all denominated in US Dollars, should be promptly diversified and include a physical Gold holding of at least one third of their total value.

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Comments (23)

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  1. tim ridley says:

    Although it is also included in my longer response to Mr. Goelo, I must emphasise that the currency reserves DID NOT SUFFER a loss due to MBS held in the portfolio. The prudent rebalancing of the portfolio carried out by the investment manager on the express direction of CIMA did not result in the portfolio taking a hit, as suggested by Mr. Goelo. The reason why the reserves declined between December 2007 and June 2008 was due to surplus properly being tranferred out of the portfolio!

  2. anon1 says:

    I have followed this thread with great interest and quite frankly (pardon the pun) it reminds me of a dog chasing his tail around a table leg.


    Oh yes …..  and do what I, and many other Caymanians, have been telling successive Governments for years …….. cut the spread of US$ to CI$ to 0.01% and charge a 0.1% tax on ALL transactions these banks are making. This will pull you out of this mess faster than you can blink an eye and you won’t have to raise the duties on milk and cigerettes to the poor Caymanians. The customer will not bolt, as you will be told, because they will benefit from a smaller spread and instead of the banks robbing the money for their shareholders, the Government will be able to fund the defecit without putting more preassure on the poor Caymanians in the form of import duties.

    This my friend is not me stealing Tim’s and Frank’s idea …. this idea has been around for decades ………. just have the balls to do it Mac.

    Now let us see if CNS will print this post.

    CNS: A lot has been deleted (See Moderating the Comments). Attack the message not the messenger, especially if you take advantage of our policy towards anonymity.

    • anon1 says:

      Or I can stop posting altogether.

      I was simply supporting my contention that these two individuals are not necessarily the best advisors the Government could be using, based on how well they stack up against their peers in the real world industries in which they chose to make their money, by compareing them to other local giants in their respective fields.

      I also sought to tell the Government what it would stop getting my support if it appeared that they were continueing to take advice from these two individuals. No problem for me to tell McKeeva or Kurt my feelings directly to their face instead of through posting on CNS. I have and will continue to do so.

      For the first time I detect a double standard here. It is OK for posters to state their true feelings about polititions, Caymanians and Expats however, post your opinion about one of your contributors and you get sensored.

      Then again, it is your ball and your playing field. If I want to play in your game I have to play by your rules ………… and yes I have read your "moderating the comments" and still stick with my comment there…….. it is a tough job.

  3. tim ridley says:

    The matter of the exchange rate, changing the spread and levying the fees on that spread is a matter for Cabinet, not CIMA. Recommendations and suggestions are regularly made by CIMA to Government and, indeed, to the banks themselves. Whether any action is then taken, is for the Cabinet and the banks.

  4. Anonymous says:

    I can relay from painful personal experience that buying any commodity at the peak of a short squeeze is never a wise idea.

    "Barrick’s news has the ‘look’ of a top, made all the more disconcerting in light of the huge media interest in gold of a sudden in the past three or four trading sessions. Tread lightly then, or tread not at all, in gold… Tread very,very lightly"  Dennis Gartman 09/09/09

    • Frank says:

      I could quote you the exact opposite view from Gold experts who believe Gold  is now poised to break through the resistance band at $1010/$1030.00 and perhaps you should read the writings of Jim Willie, who has reviewed my Gold study and found it much more accurate and credible than that of Sinclair, another Gold expert from way back…


      However, the issue is not whether CIMA should be buying Gold at today’s price, but whether it should buy Gold at all, not so much to make a profit as to avoid losing  portfolio value against stronger currencies, such as the Euro and Yuan – both potential future reserve currencies – to use it as an HEDGE against such losses…

      Btw, Gold is not a commodity, like copper, for instance, which is used up in industrial processes and vanishes into various products, such as electrical wiring…

      Gold is the purest, safest and oldest form of MONEY and this is why 95% of all Gold ever mined is still existing today…

      I see that nobody has yet countered any of the solid arguments made in my  response to Mr. Ridley’s comments and I wonder why, as having the last word by default is somewhat anti-climatic…


  5. Anonymous says:

    The prior observation on the inflation-adjusted gold price and negative real returns since 1980 was not an attempt to ‘forecast’ the future, it was a simple statement of fact.

    The use of shadowstats’ inflation figures would only serve to push the real return even further into the red.

    In nominal terms, $850/oz in 1980 to $1,000/oz today represents a compound annual average return of about 0.5% per annum, which probably would have been negated by storage and insurance costs.  Over the same time frame, T-Bills would have returned about 4.5% per annum, and short-dated governments likely more.  From where we stand today, if inflation soars, as you fear, interest rates will have to rise taking returns on rolling short-dated governments along for the ride.


  6. Tim Ridley says:

    The suggestion that the Cayman Islands dollar currency reserves be invested in assets other than US$ debt securities of the highest quality (predominantly US Government securities  and deposits with the Federal Reserve in New York) has been mooted on a number of occasions over the years and considered by Government and the Cayman Islands Monetary Authority. Superficially, the suggestion may appear attractive. But it requires closer analysis.

    The legislation setting up the Cayman Islands currency was very carefully crafted and provides for a fixed rate of exchange with the US dollar (it used to be tied to the poundsterling). It ensures that the reserves must always more than cover the amount of Cayman Islands currency in circulation. It also prevents “printing of money” as a means of Government using and devaluing the currency to fund its operations. This is achieved by providing that no Cayman Islands currency can be issued except to banks who pay in full in US$ for that currency. So if a local bank wants new Cayman Islands dollars it has to pay the Monetary Authority for them. Likewise, a bank may cash in its Cayman Islands dollars for US dollars at any time.

    The total currency in issue as at 30th June 2009 was CI$83.536 million and the reserves were CI$100.446 million (as per the CIMA website). The reserves produce a conservative and rock solid risk free income of several million US$ per year for the Cayman Islands Government.

    The great bulk of the Islands public and private revenue and expenses is denominated in US dollars. There were major problems locally when the Cayman Islands dollar was tied to sterling. The US dollar is also still the world’s reserve currency (that may change over time if and when an acceptable alternative can be agreed by the major economic world powers). The risk of investing the currency reserves in non-US dollar assets, such as gold, is considerable. For instance, gold has only recently re-attained the highs set in 1980. Those who bought at US$870 an ounce in 1980 would have suffered a fall in value of half by 2001. And in the meantime, it generates no income and, if in physical form, actually costs money to hold in custody. Hedging such a risk (and any other currency/liquidity risk) would be very costly indeed.

    The reputation of the Cayman Islands would be in tatters if it defaulted on the obligation to redeem the currency on demand because it had insufficient reserve assets. So while a gold holding may be appropriate for the private investor (who accepts and can carry the downside risk), it is not appropriate or prudent for the Cayman Islands currency reserves.

    There may be the occasion to revisit the issue of changing the currency peg and the diversification of the reserves if and when the world adopts a new reserve currency and/or the Cayman Islands is generating revenue and expenses in a currency other than the US$. We are nowhere near that now. So whether we like it or not, we are tied to the coattails of the US Federal Reserve for the foreseeable future.

    In the meantime, a better suggestion to help raise revenue would be to ask the local retail banks to benefit the community by narrowing the US$-CI$ exchange rate spread and/or paying a portion of their guaranteed no-risk forex profit to the Cayman Islands Government.

    • Frank says:

      Thank you Mr. Ridley for explaining CIMA’s point of view…

      With all due respect to a person of your stature, I have a few questions for you:

      – Denominating the Reserves all in Dollars minimizes the risks to some extent: but then, how do you explain the 10% drop in value from $110.15 million in December 2007 to $100 million now, a 10% haircut in less than 2 years?…

      Could it be that these conservative investments in US Dollars were not that safe?…

      – You seem to recognize that the US Dollar status as a reserve currency may be challenged in future. If the US Dollar loses another 20% or more against the Euro and/or a basket of alternative currencies, which seems likely, as a result of a loss of confidence by the large holders of US securities, such as China and Japan, how will the value of the Treasuries in CIMA’s portfolio be affected?…

      – Cayman does not have a Central Bank, so CIMA is the closest thing we have: all Central Banks diversify their Reserves into various stronger  currencies and precious metals, mainly Gold for hedging purposes. China has just doubled its Gold reserves to 1,054 tons: why isn’t such a prudent hedging policy followed in Cayman?… 

      – The Swiss have done very well for themselves and until recently, their entire money supply was 100% backed by Gold: so what’s wrong with suggesting that CIMA should hedge its Dollar position with a 33% holding in Gold?…

      – You wrote: "Those who bought at US$870 an ounce in 1980 would have suffered a fall in value of half by 2001." To which I answer: had CIMA put its $100 million reserves into Gold at $255.00 in 2001, it would now have $400 million in assets! We both picked time frames and prices to suit our arguments, ignoring the longer term view which could not be any clearer:

      "Gold was worth $35.00 an ounce when its peg with the Dollar was ended by Nixon: in 38 years, it has risen 2,857% to $1000.00 in relation to the Dollar, which has lost 96.5% of its value in the same time frame." So, what is wrong with the long term picture that so clearly favours Gold against the US Dollar?…

      Yes, I do agree with you that the profits made by local banks on the riskless $CI-$US exchange rate transactions are nothing short of obscene and should be replaced by a flat fee – the cost of execution is the same regardless of the amount – most of which should accrue to the government coffers… to be often spent foolishly, unfortunately…




    • Anonymous says:


      As the past CIMA Chairman your statement below is accurate and blows me away that it would come from you:

      "In the meantime, a better suggestion to help raise revenue would be to ask the local retail banks to benefit the community by narrowing the US$-CI$ exchange rate spread and/or paying a portion of their guaranteed no-risk forex profit to the Cayman Islands Government. "


      The $0.04 spread on the US$ to CI$ is nothing short of bank’s robbing again, you know it and have just about said it. 

      But then you knew that was bank’s robbing when you were CIMA Chairman, so why when you could have done something about this bank’s robbing you did nothing?

      The US$ to CI$ spread should bo no more that 1/4 of a cent buy/sell either side of the .83 exchange rate.

      Now how do you suggest that this bank’s robbing stop, it will immediately improve the CI economy, reduce the cost of living, leave more money in peoples pockets to spend, to put more duty payments into customs, resulting in improving governments revenue. 

      Is that not what Government needs at this time – MONEY?

      If we do not make this urgently needed change then all that will occur is that the banks will continue to make and take more than they should from the C I economy.

      What say you Tim?


  7. Anonymous says:

    Frankie could IPO CIMA

    That would immediately double their assets. Then instead of diversifying into a physical holding of gold, he could use one of his penny stocks like Bre-X with tons of gold in the ground somewhere for CIMA to invest in. Felderhof was given status at the same time and under the same circumstances as Frankie, so they probably know each other well already.

  8. Dennis Smith says:

    Frank, I like your analytical thinking and I thought that your piece on the Water Authority was stimulating. Keep up the good work. Your argument for gold sounds appealing but it deserves a counter argument that I would love to put together at some point. But for the moment I will touch on a couple of points.

    Gold, unless you lend it, manufacture it or trade it is a passive asset. Its just yellow metal that doesn’t earn anything. It is often touted as an investment, which it is not, since it doesn’t earn a profit (in gold). As a hedge against inflation sound interesting but presumes that at some point you will sell it and get back into those worthless inflated dollars. Which would defeat the whole point of staying out of currencies in the first place.

    The gold pundits pick price performance to argue their case. Proof by numbers always depends on which numbers you choose. For example I bought gold at $850 in 1980, if I had kept it for 29 years I could have sold it at 2:41pm today for $990 per ounce, (just checked KITCO.com) Since I could have bought just about anything 29 years ago for a quarter of today’s price, (7 mile beach or a brand new Porsche) I don’t think that the $140 per ounce profit that I would have made over my original gold “Investment” is a profit at all and certainly it is just the opposite of my understanding of an inflation hedge. (I finally sold my $850 gold at $550 then watched the price fall into the $250 to $350 range where it traded for over 20 years)

    Don’t get me wrong I love that yellow metal, nothing like it in the world, but that’s a love affair, not an investment.

    • Frank says:

      Hello ex-goldbug…

      Thanks for your kind comments…

      You have to smooth out all the spikes and take a long term view, which is perfectly adequate when discussing Reserves and the 38 year view really boggles the mind…

      "Gold was worth $35.00 an ounce when its peg with the Dollar was ended by Nixon: in 38 years, it has risen 2,857% to $1000.00 in relation to the Dollar, which has lost 96.5% of its value in the same time frame."

      This actually illustrates more the weakness of the US Dollar – which also applies to most other fiat currencies being over-printed – than the strength of Gold, which I picture as a solid rock buffeted by tides and currents of waning and waxing fiat currencies. Hundred years ago, an ounce of Gold bought you about  the same quality suit and pair of shoes than it does today… 

      Gold is the ultimate store of value and the benchmark against which all fiat currencies ultimately fail, due over-issuing and over-printing and this why the Swiss Franc eventually stopped being 100% backed by Gold…

      You see, Gold production is totally inelastic, even declining since 2001 and countries need to expand their money supply to at least match their  GDP growth to avoid liquidity problems. With the price of Gold going up and the Swiss printing more money than dictated by their GDP growth, they had to eventually drop the 100% Gold backup of their currency, just like Nixon did in 1971 for the Dollar and for the exact same reasons…

      Look at the chart that led to the brief 1980 peak and  the current one and you’ll notice many differences, the main one being that we now have a slow and powerful build up that has consolidated many times from the pivot point at $650.00 and should go through the $1010/1030 resistance band at any time: http://tiny.cc/uAKFS

      Finally, Gold, indeed is not interest bearing and may even cost some money to store, but in the current deflationary investment, interests on deposit are barely worth the bother of putting your capital at risk by lending and run the risk of not getting it back if a bank or institution collapses…

      One of the factors igniting Gold now is the perception that high inflation is around the corner when the multi-trillion stimulus money gets hit by the X10 multiplier of fractional banking, as money gets lent out, deposited, lent out again, etc…

      The other one is China accumulating Gold and trying to get rid of its ~$2 trillion Dollars holding by buying tangible assets…

      We can’t blame them and should imitate them with at least some the US Dollars in the CIMA Reserve…




  9. Anonymous says:

    For what it’s worth…gold’s last peak, as you state, was around $850/oz in 1980.  When one adjusts for inflation since then, $850/oz in 1980’s dollars equates to around $2,200/oz in today’s money. 

    Those buying at the past peak (almost 30 years ago) have yet to see a positive return on their investment.

    Gold at around $275/oz in 2000/2001 is something (with the benefit of 20/20 hindsight) I imagine we all wish we’d backed-up the truck for.

    I am not familiar with the specified intent for the $110 million of reserves you cite.  If it relates to the Currency Board, where as I understand it, Cayman holds at least US$1.20 for each CI$1.00 in circulation to maintain the peg, then there’s a strong argument for keeping it simple.

    • Frank says:

      Adjusting the Gold price for Inflation is meaningless for several reasons:

      – Since 1980, inflation has been grossly under-reported in the US , so as to slow down the adjustment of the pensions and rents pegged to the CPI. The only reliable independently kept US statistics is provided by shadowstats.com and is usually twice as high as the official massaged figures: so which inflation figures do you use?…


      – Not only the monetary mass is growing rapidly, but so is the Gold stockpile, since little Gold is consumed and about 95% of all gold ever mined still exists…

      That’s why the only accurate way to forecast future Gold price in today’s currency, based on its last high of $850.00 in 1980, is to take into account the difference between  the relative growth of the Gold and Dollar mass, a study I had to do from scratch, simply because it did not exist before…

      And that’s why I am confident that when the US government can no longer contain the market pressures pushing the Gold price higher – it is manipulated by the bullion banks through leasing, put options/futures, etc… – then it should eventually find its way to the $3000.00 mark, even if it takes several years…




  10. Not a good idea says:

    We are tied to the dollar.  Let’s stick with the dollar.  Let’s not turn Cayman into a trading portfolio.

    • Frank says:

      Reserves are in a Portfolio…

      In December 2007, the reserves stood at $110.15 million and now there is only $99.8 million to be found: the difference is clearly caused by investment trading losses, likely as a result of the Mortgage Backed Securities, which were part of CIMA’s portfolio till recently and were thankfully divested before they tanked further…

      Even though there is good sense to have some of the reserves tied up to the Dollar, there is also a need for a conservative hedge, otherwise the value of the reserves will sink with the US Dollar for the foreseeable future…

      The best and safest hedge is Gold and this is why several  clever Central Banks – those of Russia and China in particular – are increasing their Gold holdings, while the dummy Central Banks, like that of England dumped most of their gold holding at the low of $255.00, thus missing out on a four-fold appreciation…

      The Swiss have done very well for themselves and until recently, their entire money supply was 100% backed by Gold: so what’s wrong with suggesting that CIMA should hedge its Dollar position with a 33% holding in Gold?…

      If you look again at the historical appreciation of Gold against the US Dollar over 38 years, the way to go  should be very clear:

      "Gold was worth $35.00 an ounce when its peg with the Dollar was ended by Nixon: in 38 years, it has risen 2,857% to $1000.00 in relation to the Dollar, which has lost 96.5% of its value in the same time frame."

      • Anonymous says:

        You certainly give food for thought, Frank, and we need to consider all our options. Coincidentally, (I am no financial expert) I have been thinking for the past couple of years that Cayman should consider pegging its dollar against the Euro rather than the Dollar but of course the rational is that most of imports are from the US and so are most of our tourists.     

        • Frank says:

          Thanks for your interest…

          Long term, the US Dollar should see its importance as a world reserve currency diminish and possibly vanish altogether to be replaced perhaps by a basket of stronger currencies, such as the Yuan, Euro, Brazilian Real, etc…

          Large countries that have a light debt load and can manufacture goods cheaply in large volumes and those having large reserves of prime commodities, such as oil, copper, bauxite, etc… will continue to have strong currencies: Brazil, Russia, India, China, also nicknamed the BRIC…

          I suggested to CIMA to split its reserves 1/3 in US Dollar, 1/3 in a basket of strong currencies and 1/3 in Gold, since no sane Central Banks keep all their reserves in the same currency…

          It does not matter if most of the Cayman trade takes place in US Dollar, as this has no impact on the Reserves which back up the CI Dollar bills  issued with about 20% over coverage at present. While a portion should certainly be in US Dollars, the rest could be invested in readily saleable assets, such as Gold or other currencies with a brighter future than the US Dollar…

          Just imagine: had CIMA put its $100 million reserves into Gold at $255.00 in 2001, it would now have $400 million in assets!…



  11. Anon says:

    We have reserves?

    • Anonymous says:

      Of course we have reserves, but they are restricted (cannot be used for expenditure) and maintain the value of our currency.  We would be much worse off now if actually had no reserves.

      • Anonymous says:

        Yes, we have reserves and they are all in nearly wothless US$.

        Diversify the CI $ Reserves now.

        To be forwarned is to be forearmed.

        Sleep in the road and get crushed, the cruncher of US$ devaluation is rolling.

    • Anonymous says:



      But they are only allow on if somebody gets injured.