Investing in a global economy where growth remains fragile
It is easy to succumb to .glum views, but good firms will get through the turbulence, as they always do
Yes, central banks could, conceivably, navigate economies safely back to trend growth and manage to take away all the excess liquidity from the banking system in time, But a serious ramp up in inflation has to be a realistic outcome down the line.
Gold, as the only currency that cannot be printed, remains a source of protection against this eventuality. We are in uncharted territory and gold offers protection against the continuous printing of money to pay off previous debts.
Gold bull market
In my view, it is highly unlikely that this gold bull market is over. It is resting, as I see it. Recent calls from the likes of Goldman Sachs and Morgan Stanley that the gold price is going lower are nothing more than random speculative calls designed to encourage trading. They, like everyone else, simply do not know.
It is a strange world central banks are creating, although I acknowledge that they may have had no choice, post-2008 anyhow. Those with assets are benefiting from the uplift in asset values fuelled by an abundance of cheap money issued by central banks out of thin air.
Central banks are silently shipping free profits to the banks. In the US, for example, banks can borrow from the Federal Reserve at the overnight rate of 0.25 per cent and then buy longer-dated bonds with higher yields and pocket the difference.
In Europe, banks are borrowing from the European Central Bank (ECB) at 0.5 per cent and buying their own governments’ longer-dated bonds, and the ECB has guaranteed that long-dated bond yields will not be allowed to rise (ie the ECB is underpinning long-dated bond prices). This is assisting the euro zone banking system to recapitalise (a silent tax, if you like).
The corollary, of course, is that the ordinary saver in society pays for it via lost income on his/her bank deposits. It represents a significant and ongoing transfer from risk-averse savers to the banks. In addition to this lost income, the downturn has depressed incomes for those out of work as well as for those in work.
With and without assets
The net result is that the divide between those with assets and those without assets in society is growing, not narrowing. That is not a healthy trend in democracy and who knows where it leads!
At the recent Coca Cola agm, the iconic chairman of Berkshire Hathaway, Warren Buffett, said the world “does not belong to the pessimists”. His point was that we have been here before and have overcome even more difficult times and that the US entrepreneurial spirit is alive and well. Standards of living in the US, Buffett points out, are six times what they were in 1930 when he was born.