Today’s world is reliant on easing policies and liquidity, which are now commonly supplied to the market in an unlimited fashion.
The financial assets, including loans, bonds, and other financial securities, now account for 5.4 times of GDP. Paper assets, such as securities, are now many times in excess of the value of the real assets and the real economy.
Figure 1: Global Financial Assets
In fact, two countries in the world, the United States and Australia, their central banks have openly said they would do unlimited quantitative easing (QE). The U.S. balance sheet is infinite because the world is hooked on the greenback. As long as they own a money printing machine, they can print any amount of U.S. dollars they want to buy anyone who wants to sell assets. This is the reality of unlimited QE.
But at the same time, we do not know when the bubble way of managing the world will end. Something terrible may happen besides COVID-19 – Nobody can be sure.
For that, you need to have some sort of buffer or defense when the system does collapse. At the moment, there are some defensive methods. One of them is holding gold – physical gold, not paper gold. Another is holding cash, even though the interest rates are meager.
The currency of the last resort – Gold as a defense strategy
A level of defense is much required when the system does collapse. Holding physical gold and cash is the way to lay a suitable buffer, despite the interest rates being meagre. There are several reasons to be bullish on gold.
- Worrying virus spread has propelled global central banks to trim rates and even to purchase assets in an unprecedented unlimited amount. Gold stands out with its ability to preserve value.
- While the major central banks, led by the Fed, rely on their printing machine to replenish money supply, gold carries precious scarcity. Unlike banknotes, gold cannot be printed endlessly. Moreover, it is believed that most of the gold on earth is mined out so it is unlikely to see new gold supply in large scale.
- Other than Japanese yen and U.S. debt, gold serves as a preferred hedging tool, lifting demand for gold-related investment instruments amid challenging times.
- Gold typically has an inverse relationship to the greenback. Softened U.S. dollar favorably supports bullion prices.
The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable as of the date of presentation, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited
