Gold is playing its traditional role in the flight to safety and rose above 2000 dollars per troy ounce this week. There was disappointment last year when the gold price reacted poorly to sharply rising inflation, but Ukraine has pushed up the price. Gold thrives best at times of chaos, but it is not a good hedge against inflation.
Jan Longeval, independent author, lecturer and consultant to wealthy and institutional clients, said history has shown that gold does not offer any good protection against inflation in the short or medium term. “Gold thrives best in an environment of chaos, as it is now. It is a classic safe haven outside the financial system.”
Longeval is considering a the possibility of a 1970s-style stagflation scenario. With energy prices soaring, consumers’ purchasing power is under pressure. A sharp economic slowdown is imminent in Europe. The United States is doing relatively well.
All roads still lead to the US as far as equity investments are concerned. It is and remains the most dynamic economy with the most shareholder-friendly companies. The battlefield, as in WWI and WWII, is again in Europe, America remains out of range. The dollar also remains a refugee currency, to the regret of those who envy it’, says Longeval.
Disappointment
For many years now, European equities have been touted as promising by countless European asset allocators at the start of each new year. Longeval has been sceptical for just as long. Investors suffer too much from a “home bias”, a sentimental and irrational preference for the home market. Look at what is happening to Russian investors.
Data from Charles Schwab and the IMF show that 95 percent of them are in Russian stocks. In Belgium it is almost 50 per cent.
Much depends on the situation in Ukraine and the chaos that brings. Gold is a hedge against calamities. Silver plays that role much less and is therefore stuck. It is not a real monetary metal, but rather an industrial one, and therefore has no real escape function.
Longeval considers gold mines to be poor long-term investments, but the right ones can tactically provide leverage on the gold price, as in the current circumstances.
“We are probably in a longer bull market for commodities. Even arms producers are now becoming investable again, because while investing in arms used to be a curse in the ESG church, some sustainable managers are now starting to see conventional weapons as sustainable again. So you see how quickly everything changes on the financial markets when a black swan passes by.”
Fundamental
Bernard Busschaert of consultancy Busschaert & Co in Knokke has been studying the gold markets for decades. He does not like the argument that war is positive for gold.
“That is an emotional argument. Fundamental reasons are much more important, and that is that our money markets are not doing well. Purchasing power is decreasing and money is depreciating, instead of gold increasing. Gold retains its purchasing power in the very long term, but in the short term it is difficult to study it because it is subject to economic factors.”
Big buyers benefit from keeping the gold price low, especially from Asian countries, which are starting to unload the dollar. There are also huge short positions on the Chicago stock exchange, which causes manipulation. “By the way, have you noticed that the gold price is always knocked down when a critical level is reached?”
Basel III
Busschaert advises investors to study Basel III, which came into force last year. Gold is equal to money. “Banks are no longer allowed to speculate with gold and have to hedge their short positions, except on the Chicago stock exchange.”
He also disagrees with the oft-repeated argument that you cannot determine the value of gold. ”’Based on the creation of money, I arrive at at least $3,000. A severe stock market downturn will cause gold to rise further.”
Finally, make a distinction between paper gold and physical gold, he said. “The former are traders, the latter long-term investors who want a real asset in their hands. There was a whole generation of investors during the Corona crisis, around one billion people, who mainly invested in ICT. If you point them towards physical gold as an investment, they won’t believe their ears,” Busschaert said.
Allocation
Most asset allocators that Investment Officer surveyed invest only 0 to 5 percent in gold, and mostly tactically. Due to the price sharp increase, it is not excluded that the importance of gold and commodities in general will increase in strategic and tactical asset allocation.
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