Is Deflation around the corner? Are we the next Japan? Are commodity prices entering a bear market?
The S&P GSCI Index fell to the lowest level since July during the week, led by silver, gold, lead and copper amid signs of surplus in the commodities and concern that China’s economy will slow. Silver, down 24 percent, is the worst performer this year. Gold slid 13 percent over April 12 and April 15, the biggest two-day retreat since 1980. Both of the precious metals entered a bear market this month joining sugar, soybeans and coffee.
“Commodities are on the brink of a great rotation in price performance and market leadership, Barclays Plc said in a report on April 19. Gold and silver will be among the weakest over the next few years, according to the London-based bank.” If this is true, then it could greatly affect the upside of the TVI which is the main index of the Security Benefit Total Value Annuity (TVA) as Gold and Silver are part of the 24 different future contracts inside the Trader Vic Index (TVI)
“Excess supply is the biggest issue so this was a necessary correction like we saw in gold,” Michael Strauss, who helps oversee about $25 billion of assets as chief investment strategist at Commonfund Group in Wilton, Connecticut, said in a telephone interview. “It will take a strong economic cycle to push prices higher.”
If this is true, and we are moving towards a deflationary period for an extended period of time, then products based on increases in the cost of commodities will be a strict disadvantage. The TVA (Total Value Annuity) from Security Benefit main crediting method uses the TVI. For those not familiar, the TVI (Trader Vic Index) is a crediting method that links annuity returns to the 5 year return of the index. The index itself is comprised of 24 different futures contracts based on commodities, US interest rates, and global currencies. The idea is that the product is not correlated with the market and therefore could outperform in certain situations.
The TVA from Security Benefit has now been on the market for just over a year so the agents that were adopters of the product are seeing their clients for their one year reviews. As you can see from the graph below that the money that was allocated towards the TVI is down about 7% over the last year and that’s not accounting for the allocation fee and rider fees. Since this product has a 5 year reset instead of a one year reset, the product needs to make up for those losses before gains can be credited.
The question becomes how will this affect sales going forward? Will advisors shy away from selling the product because of difficult client reviews? Or will advisors think that now is a better time to sell the product as they try to “time” the market.
Disclaimer: Any and all material on this blog is for informational and educational purposes only, and is not financial advice by a certified financial advisor or financial professional. Retirement Think Tank is not a licensed insurance entity, it does not receive any commissions or monetary gains from the sale of annuities, and it does not give financial advice, tax advice, or investment advice.