Gold: The Best Diversification Against The Worlds Flawed Currency Systems And Bad Decisions Wednesday, Mar 27, 2019
At Quantum, we are often asked what our outlook on gold is and whether it’s a good time to invest in the metal.
Well, you know when is a good time to invest in gold? Always. The strategic presence of this timeless asset to the tune of 5 to 10% in a portfolio can’t be asserted enough. Let’s see why.
Many of us understand saving for a rainy day. We do so diligently through stocks, bonds or bank deposits, and that’s great! But all these investment avenues have an underlying currency risk. Currency risk is the possibility that a currency will devalue to the exchanger's detriment, either relative to another currency or in terms of purchasing power, hence eroding the value of his savings or investments. We’re simply suggesting you to counterbalance this currency risk with some gold holdings, and we have good reason why.
If you haven’t noticed yet, extreme economic conditions are the new normal. World economies have been oscillating between high inflation-led growth and painful slowdowns! This is thanks to constant central bank manipulation of currencies and unregulated use of leverage. With no gold required to back the currency since 1971, there is no longer any restriction on the creation of new money and debt. Central banks worldwide, led by the U.S. Federal Reserve, mint new money to artificially prop up slowing economies and endlessly bail out insolvent governments, banks and corporations.
The economy of the United States, for example, has been continuously supported by money printing or Quantitative Easing and near zero interest rates ever since the financial crisis of 2008-09. The first round of easing from 2008-2010 had to be followed by another round in 2010-2011 to stimulate the economy. The program was then halted when according to the Federal Reserve the economic conditions were improving. However, when the economy showed signs of weakness again, another round of stimulus was announced in late 2012. Three rounds of pumping new money worth approximately 4 trillion dollars were needed to save the economy from past bad decisions.
Finally in the second half of 2017, with an optimistic take on the current economic picture, the American central bank decided to taper its multi-billion dollar balance sheet and bring it back to normal. And thus began the massive process of Quantitative Tightening and increasing interest rates. This attempt to normalize, however, didn’t last long. The world had witnessed barely a year of unwinding the excesses of last ten years by the Federal Reserve, before it decided to take a U-turn in January this year to “brace the slowing U.S economy”! This proves that our financial systems are walking on fiscal crutches, and central banks may be trapped in a state of perpetual policy manipulation.
Historic debt levels, asset bubbles, currencies losing their worth and unprecedented market volatility are the new reality! Excessive sovereign debt has in the recent past led to bail out measures for entire countries including Euro zone economies of Greece, Ireland and Portugal. And the sustained low interest rates have been the major cause of asset bubbles in real estate in 2005, oil in 2008, stock markets in 2013, US dollar in 2014-15 and bitcoins in 2017.
We are of the view that the world economy is slowly inching towards a systemic breakdown.
All of this makes it impossible for unsuspecting currency savers like us to sustainably preserve purchasing power. We don’t know what our savings in currency will be worth in a few years’ time or whether our savings will even exist! Take the case of an average Venezuelan, whose Bolivar savings at the start of 2014 are now worthless, thanks to the mindboggling hyperinflation in the country since. Or the doubling of prices every day in Zimbabwe in 2008. With daily inflation of 98%, having an income or savings worth even one billion Zimbabwean dollars wasn’t enough because a loaf of bread cost two! These are both recent cases of central bank manipulation of currencies gone terribly wrong.
Yes, these are rare and extreme. But you never think it will happen to you, until it does. Thus, it is prudent to reduce dependence on these fiat currencies that are subject to the whims and bad decisions of the ones in charge. And how do you do that? We recommend investing a part of your money in a global currency that can’t be printed, or meddled with - gold. Gold is mostly immune to financial & political mistakes. It is your hedge against the mismanagement of economies and currencies. It is timeless and universally accepted. Unlike currencies, gold retains its value in the long term, mostly because it is rare, tangible and coveted. But also because it doesn’t generally co-relate with most asset classes. Gold has both positive and negative correlation with the overall state of economy. Purchases for investment increase during times of contraction, and purchases for consumption increase during times of expansion.
All in all gold is likely to provide your savings the much needed value preservation in these unpredictable times by reducing the impact of global economic and currency shocks.
As Richard Russell, author and publisher of Dow Theory Letters famously said, “Gold will be around, gold will be money when the dollar and the euro and the yuan and the ringgit are mere memories.”
Lastly, don’t make the mistake of seeing gold returns in isolation. Owning gold is not about the upside potential, it is about minimizing risk to the downside. Use it for long-term strategic reasons, not for short-term, tactical investment considerations.
Remember, gold is universally accepted, gold is timeless, and gold is the best diversification against the world’s flawed currency systems and bad decisions.
|Name of the Scheme||This product is suitable for investors who are seeking*||Riskometer|
|Quantum Gold Fund ETF|
(An Open Ended Scheme Replicating / Tracking Gold)
|• Long term returns|
• Investments in physical gold
Investors understand that their principal will be at Moderately High Risk
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