Gold, The Ultimate Safe Haven Asset. A Looming Nobel Prize?
2019 Nobel in Economics and Gold
Yesterday was a big day! At least for all those boring economists and similar bean-counters. The Nobel Prize in economics was awarded. Abhijit Banerjee, Esther Duflo, and Michael Kremer became 2019 laureates for their experimental approach to alleviating global poverty.
Nice! But, dear Nobel Committee, we also have great ideas how to reduce poverty in the world. Just give everyone some gold! We know, that’s not the quick road to wealth, but whatever the current outlook, gold portfolios should appreciate substantially in the long run.
Jokes aside, and let’s get serious. How about central banks stop printing money? You see, inflation is a silent wealth killer. Even a small rate of inflation, like the popular 2-percent target, means that prices double each generation (around 35 years). But in many developing countries, inflation rates are much higher, closer to 5 percent, which means that prices double each 14-15 years. Inflation is a great hit to real wealth. So, even if gold does not generate any yield, it can provide people a hedge against inflation (under the condition that inflation is not small or diminishing).
Or how about central banks stop keeping interest rates at ultralow levels? Yes, zero or even subzero interest rates are great for borrowers, but we doubt whether anyone attained wealth through indebtedness. If you are a company, you can leverage to finance your investments. But if one is a consumer and takes a loan to buy another luxury car, he is moving away from making a fortune. You cannot reach wealth except through hard work, savings and investments. Due to diminished compound interest, the ultralow interest rates reward saving much less, putting all savers in troubles.
For example, if a person saves $100 each month at 4 percent, then she will have $120,000 in forty years, but only $59,000 at 1 percent. Our saver would be about half poorer in forty years. Say goodbye to your happy retirement under the palm trees! Gold will not substitute your pension fund, but when added to portfolio, it can make it more resilient and profitable. The fact that gold usually shines during very low real interest rates, is a nice bonus!
Last but not least, how about stopping maintaining the flawed monetary system which generates business cycle and economic crises with all their disastrous consequences (think about high unemployment)? Luckily, the yellow metal can help in this regard as well. Even central banks begin to notice the exceptional features of gold… or, goud!
Dutch Central Bank Acknowledges the Unique Role of Gold
The De Nederlandsche Bank (DNB), which is the central bank of the Netherlands, has published a rather unusual note. The DNB pointed out that gold is the ultimate safe-haven asset, which always retains its value, crisis or no crisis:
Shares, bonds and other securities are not without risk, and prices can go down. But a bar of gold retains its value, even in times of crisis. That is why central banks, including DNB, have traditionally held considerable amounts of gold. Gold is the perfect piggy bank – it’s the anchor of trust for the financial system. If the system collapses, the gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security.
Isn’t it a shocking note? The respected central bank of a developed economy has finally acknowledged the possibility of the monetary system collapse. We hope that the timing of the publication does not reflect any insider knowledge about the state of the global monetary system… Or, gold bulls could actually keep their fingers crossed for it. And what is more: the DNB admitted that gold would be superior than financial assets during the hard reset! Finally, we can praise the central banks!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.