Amidst a global pandemic that has choked the world economy with lockdowns, hospitalizations, and deaths, Gold is again being recognized widely as a must-have strategic investment.
The current high-risk and low interest rate environment is spurring alternative investment demand at all levels. From small investors to institutional investors, Gold is the perfect alternative to Stocks and Bonds for true diversification.
A decade or so ago, institutional investors in the private and public sector were not permitted to invest in physical Gold. But that’s all changed. The increased quantity, size and location of Gold ETFs have provided easier and more efficient access for large investors allowing them to take advantage of the Gold market.
The more worldwide Gold locked away in ETFs, the better for all Gold investors.
Through September 2020, holdings in the 83 active gold ETFs we track totalled 3,880t, with total assets under management (AUM) of US$235.4 billion (bn)3 – record highs in both tonnage and value terms. China now has seven Gold ETFs and that means Gold is now available to 1.4 Billion Asians who were locked out before. In 2020, investors everywhere have embraced Gold as a key portfolio hedging strategy.
COVID-19 Upending Traditional Asset Allocation
The COVID-19 pandemic is having a devastating effect on the global economy. The IMF is currently projecting a 4.9% contraction in global growth in 2020, with high levels of unemployment and wealth destruction.
In response to the pandemic, central banks aggressively cut interest rates and/or expanded asset purchasing programs to stabilize and stimulate their economies. At times this year, the U.S. Stock and Bond Markets were hanging by a thread until the Federal Reserve stepped in to halt the crash. Those risks are systemic and not going away soon.
The combination of these actions (or over-reactions) have unintended consequences on both Stock and Bond performance:
- Soaring equity market valuations are not always backed by fundamentals, increasing the chance of pullbacks during the current recession.
- Corporate bond prices are also increasing, pushing investors further down the credit-quality curve— ever smaller rewards with rising risks.
- Short-term and high-quality bonds have limited returns, many less than the anticipated 2% inflation the Fed forecasts.
- Near zero interest rates reduce the effectiveness of Bonds as hedges against Stock volatility and sharp, unexpected corrections.
- Once deflation is in check, we fear central bankers may have created a hard to stop, runaway train of inflation.
Paper Money Floods the World
We feel the Covid 19 Pandemic is far from over. The economic impact and worldwide recession won’t go away for years. The announced bankruptcies, so far, are frightening reminders of once great American companies that are gone forever leaving millions unemployed. Sadly an estimated 100,000 small businesses are also forecast to go out of business.
Many sectors of the U.S. economy are limping into 2021 with loads of debt, millions of layoffs still ahead. Industries like energy, airlines, travel, entertainment, advertising, education, transportation, and manufacturing are still suffering unsustainable long-term losses.
It’s not over yet as the latest record high cases of Covid 19 continue to overload emergency rooms and hospitals. Demand destruction continues in Holiday lockdowns and stay-at-home orders expanding.
It will takes years, in some cases more than 5 years, to recover to Pre-Pandemic levels. At the moment, vaccine madness has infected Wall Street and major Stock indexes are trading at fearfully high levels. At some point, reality sets in and valuations will decline for equities.
Newly Created Money Experiment
To offset the waves of economic damage caused by the Covid 19 Pandemic, governments worldwide have gone to the printing presses to inject at least $10 Trillion Dollars of new fiat, paper money into their economies.
The massive money creation for fiscal stimuli also results in ballooning government debt levels that raise concerns about a long-term run up of inflation. At the very least, we expect significant erosion of the value of fiat currencies while this risky experiment in massive money creation knows no end. Every fiat currency is at risk and the U.S. Dollar has the most to lose.
Gold is traded globally in U.S. Dollars. Any losses in the Dollar create an almost immediate increase in the price of Gold.
The Advantages of Owning Gold
As a result, Gold has become increasingly relevant in investor portfolios. Anyone seeking diversification, safety, inflation insurance, and better returns than available today in Bonds are looking at Gold. Negative interest rates in Europe and Asia are also driving investors back to Gold as a storehouse of wealth.
Not everyone needs the unique protection Gold offers, but you may. If any one these issues are important to your family’s future, we highly recommend exposure to Gold. We prefer the private ownership of physical Gold Coins stored away quietly in a secure, safety deposit box inside a bank.
It won’t hurt to put away a roll or two of new Silver Dollars as “emergency money” just to have at hand.
Both precious metals have performed well both before and during the Covid 19 Pandemic. For all these reasons, we expect the bull market will continue for years to come.