Gold has been the most effective financial instrument to hedge against the pressures of inflation and market fluctuations. Many investors consider gold to be an excellent asset for wealth and investment, as confirmed by the renewed interest in gold investment assets in 2016: rising price inflation and lowering interest rates have created loss of public confidence.
This article summarizes key ideas outlined in the amazing chartbook from Incrementum Liechtenstein by Ronald Stoeferle and Mark J. Valek: 50 Slides For Gold Bulls (pdf).
Judging the Current Economic Situation
Global market changes dynamically and hence, a traditional approach to financial markets and management of assets would not be rational. It is important to understand the current global economic situation to pick or hold investments The devaluation of currencies have also created new stories such as fall of Euro due to Greece crisis and Brexit. Hence, financial markets require effective implementation of monetary policies by the central banks. Prudent and rational investors should assess the repercussions of inflation and deflation. If we look at the gold prices, in 2008, the price of gold was USD 800, since it witnessed a great rise till September 2011, when it reached its all-time highs at USD 1,920.
Financial markets have become highly dependent on central bank policies. Grasping the consequences of the interplay between monetary inflation and deflation is crucial for prudent investors. Experiencing the downfall of markets and devaluation of currencies, it is expected that gold is still in a secular bull market.
Gold’s bull market started in the year 2001, and after four years of correction from 2011 to 2015, the secular bull market is still intact. It is said that when generally banks are in trouble, investors always go for the precious element gold. As the world is experiencing the burden of debt and sub mortgage crisis, which has the made the market illiquid and the bearish sentiment for gold is on extreme low. Gold on rise can be termed as the biggest surprise of 2016.
Can we Trust in the Gold Market?
Yes, we can say that gold is making a comeback; as we can attach several reasons to this assumption. Firstly, the financial system of the global economy is unsustainable debt. The debt levels have increased since the financial crisis by up to 40%. Secondly, the monetary authorities are taking many risky measures to deal with inflation and thirdly, persistent deflationary pressures constantly threaten the financial system of countries. The crux of the issue is the rising debt monetary system. The central banks figures and ratios are depressive, as the leverage ratios and size of balance sheets are on high in relation to the GDP of the country.
It is much feasible to invest in gold today as the interest rates are extremely low. Years of data has confirmed that the interest rates had never been so low as today. This makes gold a better counterpart for a balanced portfolio. If the bond market bubble bursts, then it would be surely evident how gold market effectively served as an insurance policy. Low interest rates have become the truth of slow recovering economy. Now, even the markets have been conditioned to the low interest rates, because if assets are withdrawn, the prices would fall instantly. The fall of asset prices has acted as a trigger for the global recession.
Can we trust the Central Banks to Heal the Economy?
Different economists have different views about what role can central bank play in healing the economy. The three popular views for the Post Lehman Economy are –
- Some believe in the Keynesian economic policy
- Sceptics have doubt on the sustainability of the economic measures taken
- The critics believe that the system is completely flawed and is neither sustainable nor self-supporting.
Economists who have faith in the Keynesian Economic Policy say that the economy is in the recovery mode and would become gradually sound for investment. The believers have given zero consideration to the holding of gold in the portfolios. The sceptics can be one of the drivers for the rising gold trend. After the financial crisis, the accumulation of gold has increased and sceptics could be the marginal buyers and responsible for the rising trend. Even the critics consider gold as a popular instrument to hedge against the risks.
There is a shift after 2011 where gold prices have been corrected. If the money supply would grow quicker than the stock bullion, there are chances that the gold prices would increase in the long run or vice versa. Other indicator for the price rise of gold is that there are no expectations for the recovery of balance sheet of central banks for certain years. If we look at the broader perspective, the average annual performance of gold has outperformed other asset classes between 2001 and 2016. Hence, after 2001, in 2016, it can be termed as a comeback for gold on 2016 after massive correction.