04 February 2021

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Gold

Author: Luigi Campopiano

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According to Ray Dalio “if you don’t hold gold, you understand nothing of history or economics”. Which means: Dalio is the founder of Bridgewater, the largest hedge fund in the world, and says every portfolio should hold some gold, 10-20%. After 2008, the Federal Reserve and other central banks undertook an expansionary monetary policy to an extent never seen before that helped push stock markets higher and higher. This mechanism has induced investors – always short on memory – to repeat the same errors of the past accumulating huge levels of debt. This fed a bubble that Coronavirus burst. Central banks have in the meantime intervened in the market by solving the debt problem with more debt to a level that many think is unsustainable. The options on the table to deal with this enormous level of debt are few:

• Investors lose confidence in the United States and the dollar

• United States defaults

• Debt Forgiveness to start anew

All these scenarios favour gold. 

Gold is the anti-crisis asset

In past recessions, gold has always performed better than all other classes of assets. If an investor seeks an asset that will hold its value, he will not be disappointed in gold. Between 2007 and 2009, the S&P500 fell 50%, whereas gold rose 25%. This behaviour also reflects gold’s intrinsic characteristics: it is the only element that does not evaporate, does not liquefy, is not radioactive, is not inflammable and does not oxidize. It is malleable, lasting, uniform and a practical reserve of value. 

Gold does not behave like a raw material

The market for gold does not reflect the raw materials market. Take the Great Depression as an example, where between 1929 and 1933 the world economies experienced prolonged deflation. All raw materials collapsed except for one: gold. Simply because it is a means of payment. 

A proof of the instability of the monetary system

As James Rickards points out in his best seller “The new case for Gold”, the international monetary system has collapsed several times in the past: in 1914, in 1939 and in 1971.  It had a close shave both in 1998 and in 2008. This occurs roughly every thirty years and we are getting very close to the next possible collapse. In the meantime, both China and Russia have accumulated substantial stockpiles of gold: a strategy that could indicate the important role gold can play in the next possible collapse. Typically, countries print money, which eventually causes inflation or a speculative bubble that subsequently bursts when confidence evaporates and markets collapse, leaving gold as the ultimate safe haven. Already 2000 years ago China and India had understood this when they traded with the Romans selling spices and silk accepting only gold in exchange. In the past five years, apart from considerable acquisitions by central banks, 70% of global demand for gold was from China and India. 

From a financial perspective, we are living one of the most momentous periods of history. The present system is unsustainable even if the central banks have not understood this. Investors have to increase their returns and protect their capital. Millennials who entered the workforce in 2008, during one of the worst crisis in history, and are now in the prime of life, are experiencing another horrific crisis and gold  can help them survive.