What lies ahead for gold in 2020 - Part II
A rude awakening
While most mainstream observers and speculators have been willfully blind to the deteriorating fundamentals, clinging to unrealistic hopes of an eternal expansion, to the discerning investor, most of the aforementioned risks have been apparent for quite some time now. Indeed, the past couple of years were particularly vexing for many responsible savers and conservative investors. They had to watch their savings and pensions wilt through negative interest rates and their rational, prudent investment choices get punished, while the reckless borrowing and spending of others was rewarded. It was easy to think that this complacency and mass denial could keep propping up markets for much longer. However, quite a few things have changed by now, making this scenario seem very unlikely.
As more and more central bank officials had to publicly recognize the toxic side effects of their loose money “cures” and to openly admit the risks they introduced into the financial system and the economy, this attitude of denial is becoming increasingly hard to maintain. It is true that the latest uptick in US equites has lulled a lot of investors and analysts into a false sense of security, while overall recession fears have been somewhat quieted. And yet, the release of official statements, central bank meeting minutes, and the latest Financial Stability Report, have attracted considerable attention.
The warnings are now getting louder from seasoned investors and economists that urge great caution going forward and highlight the need for risk management over greed and mindless profit chasing. Given the performance of gold over this period, it is clear that these words of caution certainly did not go unheeded. This growing risk-aversion and safe-haven demand is also vividly illustrated by the spike in gold-backed ETF inflows. With investor demand for gold surging, especially in the second half of 2019, the amount of gold held by gold-backed ETFs hit an all-time high and grew by 14% over the last year.
In addition to all the official warnings and raised concerns that have begun to refocus investors’ minds on the risks that lie ahead, we must also take note of the historic wave of central bank gold buying that truly spiked in 2019. It appears that central bankers have long been taking their own advice, in building up their gold reserves and preparing for adverse scenarios. While most reports on this topic have been focused on Russia and China, the top hoarders over the last years, other central banks have quietly been stocking up as well. Poland, Serbia, Hungary have also been adding large amounts by historic standards.
In fact, this points to a wider and much more important shift that investors should really pay attention to. As Jeff Currie, the head of global commodities research at Goldman, put it: “De-dollarization in central banks - demand from central banks for gold is biggest since the Nixon era, eating up 20% of global supply”.
Preparing for the next recession
The precise timing of the next downturn is, of course, impossible to predict. The same goes for the specific trigger that will set it in motion. It can be a swift chain reaction that begins in toxic corporate debt, or a severe downturn in the intensely vulnerable Eurozone economy, it might be a military escalation, or even a political shock in the US, emerging from the impeachment proceedings or during the 2020 election campaign. There are too many risk factors and weak spots in most major economies and any one of them can act as a catalyst for a wider meltdown. What we can tell for sure, however, is that we’re sitting on an economic and financial powder keg.
For the prudent investor looking to survive the next recession and to protect their wealth from the risks that await, there are very few options left and, in my view, only one of those is truly and demonstrably reliable. At the end of the day, only physical precious metals are money, everything else is just credit. For over 5000 years, fiat money used to be a mere property title on physical gold or silver, a fact that very few people realize today. We’ve only had unbacked paper money since 1971, with the end of the gold standard, which only kickstarted a long-term debt cycle. Thus, monetary history is clearly on the side of precious metals. Physical gold and silver are two time-tested stores of value and therefore offer a solid hedge in times of crisis.
While the price gains that can be expected for investors in the next years are indeed enticing, it is essential to remember that short term alone shouldn’t be the driving force behind bullion purchases. Physical precious metals should instead be primarily seen an insurance and a protection against economic turmoil and crises of all kinds, from stock market corrections to full-blown recessions and geopolitical shocks. As such, their storage must also be carefully considered. A stable, predictable and historically resilient jurisdiction, like Switzerland, with a strong track record of respect for private property, is therefore an ideal location.
Claudio Grass, Hünenberg See, Switzerland
www.claudiograss.ch
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