Why the Largest Offshore Capital Pools are Buying Gold
Gold has always been valued throughout history as a commodity which is precious and a good store of value. As the world transitioned from using the commodity in the form of gold coins or the basis on which currency was tied to, investors have predominantly used the asset as a safe-haven guard against certain economic factors.
There are a variety of reasons why investors flock to gold in order to maintain their purchasing power and protect their hard-earned capital.
In times of economic uncertainty and market volatility, gold has historically risen in value as other forms of investments (i.e stocks and bonds) decline . During these times of economic hardships, the federal governments and central banks step in to provide support for the economy. Governments have a couple of economic routes they can take in order for individuals and corporations to feel confident enough to keep spending money:
1.Reduce the federal nominal rates in which banks charge each other to borrow capital reserves. Reducing interest rates makes money theoretically cheaper to borrow, which influences the economy.
2.The introduction of new money into the supply chain by central banks. A direct stimulus into the economy which again boosts economic activity in the short-term.
Every action also has a reaction or consequence, thanks Mr. Isaac Newton. But unfortunately, economic policies don’t escape the fundamental rules of our universe. As central banks introduce economic stimulus, the existing money decreases in value since capital becomes more readily available. Decreasing or low interest rates indicate a weakening in economy which in turn makes investors nervous when spending in the stock market.
As COVID-19 still plagues the health of nations worldwide, the economic uncertainty is at an extreme high. Corporations are digesting and implementing new policies as they adjust to these unprecedented times. . Even as governments talk about re-opeing economies and re-intergrating workers back into their old lives, the consequences of such a thing is yet to be realized. The virus is still prevalent and more people will unfortunately succumb to this illness. Experts are predicting that the world’s economy will still be tested in the coming months.
Where does gold fit into this narrative? The commodity can be used to hedge against the themes of economic weakness. Gold as a commodity is utilized by investors to hedge against inflation and currency debasement. The commodity trends higher as federal governments and central banks provide stimulus, devaluing currency. As a notoriously good store-of-value, gold can provide financial relief during macroeconomic uncertainty.
All these bullish-gold catalysts don’t even mention the bottom line driver of gold price. The ongoing and real pandemic: the sovereign debt crisis. As of March 31, 2020, the US national debt reached $23.31 trillion – which is more than the country’s nominal GDP.
The value of gold has increased roughly 11% year-to-date as the rest of the economy has been slashed in valuation due to COVID-19. As investors hesitate to invest into their usual equity stocks of choice, capital has flown into gold heavily over the last month. Gold equity and bullion ETF’s have seen their largest monthly inflows in about 4 years. Gold ETF’s have received inflows of near $400 million.
ISHARES S&P TSX GLOBAL GLD INDEX ETF (TSE:XGD) have profited approximately 40% since the market bottom late March – seriously outperforming large equity market indices such as the S&P 500 Index (INDEXSP:.INX), which is up around 25% since the same low.
Regardless of the economy’s performance, Gold should be used in a diversified investment portfolio. The price of gold can be volatile but historically it has always maintained its value. It can hedge against inflation and market uncertainty and so should be an investment well worth considering.
- We are quickly approaching a time of “hyperinflation” – where money is being printed so fast, purchasing power is evaporating.
- The Coronavirus is causing unprecedented volatility and uncertainty in markets.
- Interest rates have been cut.
- And maybe worst-of-all: the ongoing sovereign debt crisis.
For all these reasons and catalysts, guess what the largest offshore capital pools are buying?
That’s right. Gold.
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
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