There is certainly no shortage of trouble spots. The US trade dispute, the new anti-European government in Italy, Brexit, the smouldering conflict between Russia and “the West” or the powder keg in the Middle East. All in all, a very good environment for the gold price, one might think. But the reality is different. The price in US dollars has fallen by more than seven percent since the beginning of the year. “Crisis metal in crisis” was the title of an online medium.
Gold is currency and insurance
A mistake in thinking. Gold is not a crisis metal, as is often claimed, but a currency – the currency of last resort. An insurance against the known and unknown risks of the financial system, in particular the possible consequences of the ultralax monetary policy of the central banks.
What if confidence in paper money dwindles?
Its value depends on people’s trust in the monetary order, in the paper money system. Those who expect inflation to gnaw away at the purchasing power of their savings and – in extreme cases – whole currencies to go under, lose confidence and reach for gold. This was the case between 2007 and 2011, when the global financial system threatened to collapse and the euro zone had to endure its first major test. At that time, the price of gold climbed to more than USD 1,900 per troy ounce. Since then it has fallen sharply – what has happened?
Has the financial system really become safer?
The concerns of many investors about the state of the global financial system have given way to the conviction that politicians and central banks have put the global banking system on a more stable footing. Bond yields have fallen dramatically and the stock market has risen sharply. Good stocks are gold’s biggest competitor. Similar to precious metals, they are tangible assets. Unlike gold, however, they also yield attractive returns in the form of dividends. Without a doubt, first-class equities are indispensable for asset accumulation in the low-interest environment. In our opinion, the assessment that the financial system has become safer is naive.
What if the central banks’ experiment fails?
Worldwide, central banks are outbidding each other in expanding their money supply in order to protect many industrial nations from financial collapse and stimulate the economy. A huge experiment with an uncertain outcome. If it fails, people’s confidence in the paper money system will dwindle. We therefore believe that gold should be part of a broad portfolio.
Turkey is a good example: weak currency, strong gold
The value of the precious metal as insurance can currently be seen very clearly in Turkey, where inflation is eating up the purchasing power of the lira. Calculated in lira, the gold price has more than doubled since the beginning of 2017. From the point of view of Turkish gold investors, the insurance has long since paid for itself.
Put simply: if currencies are weak, then gold is strong. And in our opinion there should be no shortage of weak currencies in the coming years.