Global Investors Demand Gold As Protection Against Financial Repression

Global Investors Demand Gold As Protection Against Financial Repression

Daniel Lacalle 23/05/2020 10
Global Investors Demand Gold As Protection Against Financial Repression

There is a huge disconnect between markets and the economic reality, and it’s fundamentally based on the view that 2020 is a lost year and therefore what investors need to think about is 2021 is a recovery year.

It looks a very dangerous bet to me because if there’s anything that we have learned from this crisis is that estimates for 2021 remain excessively optimistic, and that the V-shaped recovery is more than elusive.

Reaction to Liquidity Injections

The reaction of markets has been very aggressive to the liquidity injections coming from the Federal Reserve and the European central banks. But I think that at the same time that level of risk-taking is too high considering the challenges both on the economic growth recovery, but more importantly, because it’s been driven by the most cyclical sectors, the recovery in earnings cash flow and balance sheets.

Gold Miners/ BANG Stocks

I personally always say that if you want to look at the world of metals or commodities, and you want to invest in the fundamentals of those metals or those commodities, the best way to play it is through the commodity itself, or the macro, not through equities, because cost of capital is also rising and there are challenges of financing.

Covid-19 Vaccine/Implications for Gold

There are two things that we know about Covid viruses. One is that there has never been a vaccine for a Covid virus. That’s something that we need to pay a lot of attention to when we get these levels of optimism in the market about the vaccine. When 18 previous types of viruses have never seen a vaccine, you cannot expect it to happen or at least happen as quickly as markets would want.

The second is there is likely to be a treatment, there is likely to be a way to live with Covid-19. What is the outlook for gold in that environment? Well if anything gold is proven in 2019 that in an environment in which markets remain positive and remain attracted to a certain level of expectation of economic growth, gold and the dollar do and can rise in tandem.

Gold is currently working as an alternative and as a de-correlated asset to a downturn. But we must remember as well that it is a pretty good inflation hedge. So, in general I think that the outlook for gold even in and in a recovery is actually pretty good.

Gold/Silver Ratio

I always tell my clients that if you like gold you certainly have to like silver.  I don’t understand why you would be long silver short gold or have it as a pair. I think that you need to have both. But I don’t believe in the debate about the ratio of gold to silver. Reminds me of the debate about the ratio of oil to natural gas. And I think that that was a mistake in the past.

Silver has its own fundamentals. They’re pretty good fundamentals in supply and demand. Silver is a precious metal that has numerous positive elements in order to be comfortably bullish. However, it is not money. This is the important thing in a monetary debasement craziness like the one that we’re living is that the only asset that has been proven for centuries to be money is gold. And I think that will maintain the ratio high.

Will Gold Continue to be Bullish?

I don’t think that gold is going to be as bullish relative to the dollar because of the high shortage of US dollars that exists in the economy right now, which is about between 13 to 20 trillion.

However, global investors are likely to look for opportunities to find a good investment relative to their currency now. So Brazilian investors, Turkish investors, Chinese investors, Japanese investors, European investors are likely to see a much better return of gold relative to their currencies than relative to the US.

The reaction of markets has been very aggressive to the liquidity injections coming from the Federal Reserve and the European central banks. But I think that at the same time that level of risk-taking is too high considering the challenges both on the economic growth recovery, but more importantly, because it’s been driven by the most cyclical sectors, the recovery in earnings cash flow and balance sheets.

Gold Miners/ BANG Stocks

I personally always say that if you want to look at the world of metals or commodities, and you want to invest in the fundamentals of those metals or those commodities, the best way to play it is through the commodity itself, or the macro, not through equities, because cost of capital is also rising and there are challenges of financing.

Covid-19 Vaccine/Implications for Gold

There are two things that we know about Covid viruses. One is that there has never been a vaccine for a Covid virus. That’s something that we need to pay a lot of attention to when we get these levels of optimism in the market about the vaccine. When 18 previous types of viruses have never seen a vaccine, you cannot expect it to happen or at least happen as quickly as markets would want.

The second is there is likely to be a treatment, there is likely to be a way to live with Covid-19. What is the outlook for gold in that environment? Well if anything gold is proven in 2019 that in an environment in which markets remain positive and remain attracted to a certain level of expectation of economic growth, gold and the dollar do and can rise in tandem.

Gold is currently working as an alternative and as a de-correlated asset to a downturn. But we must remember as well that it is a pretty good inflation hedge. So, in general I think that the outlook for gold even in and in a recovery is actually pretty good.

Gold/Silver Ratio

I always tell my clients that if you like gold you certainly have to like silver.  I don’t understand why you would be long silver short gold or have it as a pair. I think that you need to have both. But I don’t believe in the debate about the ratio of gold to silver. Reminds me of the debate about the ratio of oil to natural gas. And I think that that was a mistake in the past.

Silver has its own fundamentals. They’re pretty good fundamentals in supply and demand. Silver is a precious metal that has numerous positive elements in order to be comfortably bullish. However, it is not money. This is the important thing in a monetary debasement craziness like the one that we’re living is that the only asset that has been proven for centuries to be money is gold. And I think that will maintain the ratio high.

Will Gold Continue to be Bullish?

I don’t think that gold is going to be as bullish relative to the dollar because of the high shortage of US dollars that exists in the economy right now, which is about between 13 to 20 trillion.

However, global investors are likely to look for opportunities to find a good investment relative to their currency now. So Brazilian investors, Turkish investors, Chinese investors, Japanese investors, European investors are likely to see a much better return of gold relative to their currencies than relative to the US.

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  • James Campbell

    As you said forecasts are way too optimistic... They will be disappointed next year....

  • Scott Andrews

    This was the perfect timing for cryptocurrencies to gain more legitimacy but they have failed. Gold is a safe bet.

  • Phillip Nolen

    Wake me up from this nightmare

  • Jess Gillatt

    Investors are panicking while there are some billionaires making more money

  • Jess Gillatt

    Unprecedented times call for desperate measures

  • Vicky Dorman

    The global economy won't recover from this forced lockdown

  • Robert Armstrong

    Interesting analysis

  • Adam L. Craig

    Excellent

  • Harvie Singh

    That's an interesting point about the gold to silver ratio, most new sites state a 2:1 ratio but never actually give you a reason why.

    You state that global investors will turn gold over their relative currency, do you think they may also turn to the dollar?

  • Najeeb

    Agreed

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

   

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