The US election season alongside a pandemic has created uncertainty for business globally. Putting the election results aside, all the fundamentals are saying buy gold now. This is why we are seeing investors who have not previously bought gold, now investing in the yellow metal.
Cash has become unattractive. Central banks around the world are printing money. Many countries have negative real interest rates. The global pandemic has accelerated the trends that were already well established at the beginning of 2020. The following graph illustrates this very well. The Federal Reserve has increased its balance sheet significantly since 2008. From March this year the Fed’s money printing and purchasing of treasuries has been on steroids. The funds rate has declined sharply to 0.25% to 0% range. There is ‘A symmetrical’ risk in holding bonds in this environment, with little upside and significant downside risks. The bond market is massive, and over the coming year, investors are likely to increasingly redirect a proportion of their bonds into other asset classes to provide balance in their portfolios. Gold is one of the asset classes that can provide that balance in a portfolio.
In response to the massive increase in government debt, countries around the world are actively trying to debase their currency through money printing and artificially low interest rates. Holding gold is one of the most effective assets in this environment to protect your wealth. Central banks around the world who hold US dollar reserves have been actively buying gold to hedge their positions. If you are heavily invested in US domiciled assets, you should consider doing the same. Gold is in the early stages of a bull market that could last for a number of years.
The following table shows how gold has performed against leading currencies for the first 21 years of this century. On average gold has appreciated by 10% per annum relative to 9 leading currencies. Given that conditions for gold have never been more favourable, it is reasonable to assume this will continue for the foreseeable future. As Ray Dalio, founder of Bridgewater Associates famously said in Davos earlier this year, 'cash is trash'. He said that gold is a logical asset to own in this environment.