Since the beginning of the year, the price of gold has risen by around 16 percent in US dollars and a good 22 percent in euros. Almost the entire increase is attributable to the summer months. This development was probably also driven by inflows into investment products. In June, for example, gold holdings held by ETFs increased by around 100 tonnes. The chronological connection to the statements of the heads of the major central banks at that time, Jerome Powell of the US Federal Reserve (Fed) and Mario Draghi, President of the European Central Bank (ECB), suggests that these were understood as signals from the central banks for a long-term zero and low interest rate policy.
No one knows how the experiment will turn out
One thing is particularly important to us as investors. Gold should not be a substitute for profitable investments in productive capital, i.e. stocks. Gold is a currency – the currency of last resort. An insurance against a lasting dwindling confidence in our monetary system.
The insurance character of gold, which is also documented by the recent rise in prices, is once again coming into the focus of investors. Nobody knows how the enormous experiment of the central banks will turn out. It cannot be ruled out that the ultra-loose monetary policy will at some point lead to a loss of confidence in our monetary and financial system.
Those who expect inflation to gnaw away at the purchasing power of their savings, that – in extreme cases – entire currencies will go under, lose confidence and reach for gold. This was the case between 2007 and 2011, when the global financial system threatened to collapse and the euro zone had to endure its first major test. At that time, the price of gold climbed to more than USD 1,900 per troy ounce. In the following years it fell back significantly – but what had happened?
Has the financial system become safer?
The concerns of many investors about the state of the global financial system had given way to the conviction that politicians and central banks had put the global banking system on a more stable footing. Bond yields had fallen drastically, and the stock market had risen sharply. Good stocks are usually gold’s biggest competitor. Similar to precious metals, they are tangible assets but, unlike gold, generate additional income in the form of dividends. There is no doubt that first-class equities are indispensable for wealth accumulation in the low-interest environment. But the assessment that the financial system has become safer has, in our opinion, been naïve.
In recent months, concerns about the state of our monetary system have once again come to the fore: central banks around the world are outbidding each other in expanding their money supply in order to protect many industrial nations from financial collapse and stimulate the economy, especially in the euro zone. We assume that the measures recently announced by the ECB and the Fed have not been the last of their kind. On the contrary. We believe that monetary policy will remain loose, even looser in case of doubt. Christine Lagarde, Mario Draghi’s successor at the top of the ECB, has already indicated that the instrument box has not yet been exhausted.
The centrifugal forces are enormous
Homemade problems are also occurring in the currency community. The individual euro members, their economies, are far too heterogeneous for one currency to fit all permanently. The euro is too strong for the economically weak states and too weak for the strong ones. This means that the euro is a weak currency rather than a strong currency. More Lira than D-Mark. It is fitting that the price of gold has recently reached a new all-time high, at least temporarily – in euros.
The centrifugal forces to which the currency community is exposed are enormous due to the construction errors of the currency association. The euro crisis has become a permanent condition – and is recalled from time to time. Be it through a new, euro-critical government in one Member State or increasing budget problems in another.
We believe that gold should be an integral part of a broadly diversified portfolio, especially from the point of view of a euro investor. Gold is like a fire insurance policy that one is glad to have taken out – and happy not to have to take up.