Gold.
It conjures all manner of emotions in men – especially these days.
The heavy yellow metal is in high demand right now. And it’s hard to imagine a world where that’s going to change with the spread of coronavirus and its economic consequences.
Why? Because gold protects wealth. It has retained its purchasing power throughout history.
And coronavirus poured accelerant on to a situation that was already making people question the value of their money.
When paper currencies lose their value, gold absorbs the fall in the form of a higher price. The backdrop to higher gold prices in recent years has been central banks lowering interest rates to drive down the value of paper money and stimulate spending. We are seeing this in spades right now. But, crucially, we are also seeing governments maxing out their credit cards and then some. This combination is behind the increased demand for gold and the surging gold price.
Since March 2020, governments around the world have delved into this currency debasing realm.
Now let’s take a look at the government spending programmes. Data from Bloomberg shows how much cash governments around the world are injecting into their economies to deal with the crisis.
The German government, legendarily reluctant to spend cash due to memories of the Weimar hyperinflation, finally broke its habit and pledged over $1 trillion in spending. This is a huge departure from the norm for one of the most fiscally tight economies in the world, and is indicative of a future which involves a lot more government. Importantly for gold, it is also indicative of a future with much more inflation. Which the gold price absorbs.
This binary combination of low interest rates and high government spending is quite the cocktail. However, those uber-low interest rates are also debilitating for banks (who require positive interest rates to earn money in the traditional manner). And trouble in the banking system is yet another reason why folks own gold…
But do they truly understand it? We believe you should, before you decide whether gold is for you. So, let’s dig in.
