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Seductive Group Think—Chasing Central Bank “Stimulus” - Today, just 0.5% of global assets are invested in gold, the only asset that has held its purchasing power throughout history. The majority of investors continue to think in consensus-driven packs, continually over-weighting their portfolios with allocations to risk assets like stocks, bonds and property.
Such group-think has been well rewarded in the post-08 tailwinds provided by global central bank stimulus.
Thus, the vast majority of even UHNW investors continue to chase returns and market tops. They operate with an almost blind faith in policy and equally blind disregard for pending market risks and real-time currency risks.
Such artificial policy support for stocks and bonds creates a dangerously false sense of complacency, akin to that of the pre-89 Nikkei disaster.
Gold is thus often sought in haste, and frankly, when it’s too late—i.e. after a crash in risk assets.
INTELLIGENT CONTRARIANISM - MANAGING RISK
Sophisticated investors, however, play the long-game and consider risk even in the midst of extreme bull markets, such as the post-2008 era. They grasp the complex relationship between global debt levels, productivity measures, artificial liquidity, currency risks, and yes, precious metals as a critical hedge against repressed yet inevitable dangers.
DEBT: THE ULTIMATE MARKET SIGNAL
Extreme debt explains the unprecedented post-2008 “recovery” in U.S. and global security markets. Global debt is now at a staggering $260 trillion:
Such debt levels end badly, but the ride up can be deceptively seductive.
The unprecedented rise in post-08 risk assets does not evidence a natural economic and market recovery, but something more akin to a ticking time bomb.
Healthy economies and markets are characterised by productivity growth, rather than debt growth. Global GDP growth rates are at embarrassing and historical lows, hovering at the $88 trillion level. This means global debt exceeds income by a ratio of 3 to 1.
MARKET STIMULUS MASQUERADING AS ECONOMIC SUPPORT
Monetary policies geared toward instant liquidity and artificial rate suppression go directly toward inflating risk assets, not stimulating economic growth.
Given such unprecedented debt ratios, governments and markets now have no choice but to continue borrowing—i.e. issue more “IOU’s” to keep credit markets afloat. This, of course, makes governments and CEO’s desperate, which leads to policy and investment behaviour that is equally so.
Artificial Support vs. Natural Market Forces: Ignoring the Warnings of Genuine Capitalism.
Today, not enough natural buyers can absorb such record amounts of debt. That’s a problem central banks “solve” by creating fiat money to monetise their own debt.
Even the IMF is discussing plans for a “New Bretton Woods” and global crypto currency to help “pay for” these ever-increasing yet otherwise unwanted bonds.
In healthy, free-market economies driven by natural supply and demand, any gross over-supply of bonds would go un-bought, forcing natural recessions and market corrections.
Such declines in securities markets would serve as necessary reminders to focus on sound productivity, balance sheets and growth initiatives.
Modern stock markets, economies and policy makers, however, have arrogantly attempted to control natural forces by creating more debt and artificial liquidity to otherwise delay or even “outlaw” natural market forces, a policy which smacks of “Wall Street socialism.”
In the last decade, policy makers have whistled past the debt graveyard while stimulating further risk-asset inflation, which can be temporarily achieved via central bank “accommodation.”
Central banks have created trillions out of thin air to purchase otherwise un-wanted debt instruments—effectively borrowing from themselves with engineered money. As of 2020, there’s over $30 trillion of fiat currencies on the balance sheets of the major central banks.
HOW ASSET BUBBLES ARE MADE
Engineered bond demand paid for by printed dollars pushes bond prices higher, thereby creating over-valuation risk. As bond prices rise, bond yields fall (price moves inversely to yield).
The staggering level of artificial bond price support has grown so unnaturally high, that nominal as well as real bond yields are now at lows never seen in the history of capital markets. Today’s global sovereign yields are negative, which is effectively a defaulting bond.
Bond yields are correlated to interest rates. If yields are low, rates are low, which adds more debt air to risk asset bubbles. Interest rates, after all, represent the cost of debt.
Companies are now addicted to cheap debt ($11 trillion of corporate debt in the US) to mask otherwise poor profit and earnings profiles. There is an undeniable correlation between extreme rate-repression and the simultaneous inflation in equity prices by executives who employ cheap debt to rollover old debt, or engage in record-breaking (and debt-supported) stock buy-back initiatives.
FROM EUPHORIC ASSET INFLATION TO FATAL REAL INFLATION
Low interest rates grossly inflate all manner of risk assets, most notably bonds, stocks and real estate. Policy over-reach by market-focused central banks explains the embarrassing disconnect between the real economy (tanking) and risk asset markets (rising).
Such disconnects and policies are not a sustainable. Risk assets will and can continue to melt-up on artificial tailwinds of rate suppression and infinite liquidity, but the law of diminishing returns indicates that such artificial support is slowly losing impact.
Interest rates, now stapled to the floor by man-made monetary policies, gradually rise as natural inflation returns. Markets are thus poised for an inevitable day of reckoning when yields and rates rise. This is fatal to traditional, risk-parity portfolios of bonds, property and stocks which are dangerously correlated—i.e. poised to fall simultaneously in the next inflationary and rising-rate market correction.
GLOBAL CURRENCIES- ALREADY ON THEIR KNEES AS GOLD RISES TO ITS FEET
In the interim, global currencies are already suffering the effects of extreme money creation and central bank support.
Pundits and financial advisory firms traditionally focus on the rising dollar, but a critical and deliberately overlooked point is that the relative strength of one currency vis-à-vis another currency is largely irrelevant.
Instead, the far greater issue lies within the declining purchasing power of one’s currency, be it the dollar, yen, euro etc. Fiat money is not backed by any real collateral (i.e. gold) and is effectively nothing more than, well…a “barbarous relic” (sorry Mr. Keynes).
Gold, unlike paper money, holds its value. Speculators typically focus on the price of gold or the strength of gold. But the ironic truth is not that gold is getting stronger, but rather, that every major currency in the world is getting weaker. This is made clear by the chart included, which tracks the obvious (and lengthy) decline in currency purchasing power when measured against gold:
Such graphs may even explain why the central banks have been quietly increasing their gold purchases, with countries like China and Russia, all-too-familiar with the “long game,” patiently leading the pack in gold acquisition.
Informed investors see these trends, and are strong buyers of gold. They are driven by price appreciation, but see gold as an historically-confirmed hedge against blatant currency devaluations in play today, and the inevitable collapse in store for risk assets tomorrow.
As investors slowly realise the lack of return/yield for their bond risk, they begin to sell yield-less bonds en mass, thus creating a chain reaction of falling bond prices and hence spiking yields and interest rates. Such forces, accompanied by rising inflation, are fatal to risk assets.
Contrarian investors recognise that from the Fed to the IMF, the only strategy at play is replacing old debt with new debt, and old currencies with new currencies. Such a global strategy is akin to an otherwise broke consumer replacing one maxed-out credit card with a new credit card. Again, this is not a policy plan, but a desperate act of can-kicking.
Such can-kicking as a policy ends when inflation and yields rise, which also occurs as central banks become spenders rather than lenders and slowly (as well as desperately) begin making direct purchases into the private exchanges, which is now in play. Five years out, inflation will get the last dark laugh over these hubris and debt driven market highs.
Those who hold physical gold outside of a fractured banking system teetering above a derivatives pile measured at over a quadrillion-dollars, are best prepared for such risks. Although outright gold confiscation as seen under the U.S. in the 1930’s is unlikely, the liquidity risk of bank hypothecation of gold assets or custodial failures by third-parties who “store” gold for the banks which hold gold for clients in unsegregated accounts, is extremely high, as is the potential for extreme tax measures by local jurisdictions against owners of paper gold.
This is why sophisticated investors vault their physical gold privately and directly in their own name in safe jurisdictions with the highest privacy rights, namely Switzerland.
ALL SIGNALS POINT TO GOLD
The above charts empirically indicate open risks that are grossly asymmetric to reward.
Informed investors give precedence to managing rather than ignoring risk. Toward this end gold emerges as an obvious and quantifiable hedge against such risks rather than as the fodder of silly debates between gold bugs and market bulls.
For more on the clear role of precious metal ownership for sophisticated investors, the authors invite you to visit us at goldswitzerland.com. EG
