The asset outperforming almost every other in the first half of 2022
The mid-year reporting season resulted in many investors closely examining both sides of the typical 60/40 stock and bond portfolio weighting, especially considering the substantial investment declines in the past few months, the ongoing inflation hikes and the potential for stagflation.
In this environment, Rush Gold Director Mark Pey notes how gold has held its value as all other asset classes have declined, and how it can be a safe haven for those seeking an alternative investment strategy.
- As investors flee bonds as prices decline and interest rates rise, investors will need to rotate into another capital preservation asset. The bond market declines in H1 2022 were a clear rejection of bonds as the long-time traditional safe haven that has been enjoyed since the last decline of this magnitude in 1865.
- Given the size of the bond market globally (+/- $140T), key characteristics investors will seek are daily liquidity and an asset that is similarly traded globally. The gold market is currently sitting at $12T and could see a significant price increase as investors rotate out of bonds and into gold.
- Gold is widely quoted and traded in USD, and with the dollar rallying as investors sell assets to pay down debt in anticipation of an upcoming recession, gold’s ability to stand strong against this price is impressive. Pey adds that many analysts are comparing the current inflationary environment to that experienced in the 1970’s but believes the available fixes are largely different.
- The 1970s saw Federal Reserve Chairman Paul Volcker raise interest rates to 20% to slow wages and spiralling inflation. A hike of this magnitude would not be possible today as total government, corporate and personal debt burdens are simply too large. As a result, central banks have a reduced ability to fight inflation with higher rates.
- In contrast to Australia, Europe has been especially vulnerable given its economic weakness and now some countries are seeing inflation rates touch that 20% seen back in the 1970s. In particular, Estonia and Lithuania with Turkey way ahead with an exceptionally high inflation rate of 78.62%.
- Australia still adding fuel to fire with the printing of money; this is evident in the NSW Government’s latest announcement of a 26% increase in spending in 2022 alone.
Pey concludes that if investors take into consideration the historical parallels both locally and globally, the current gold price weakness could provide a solid entry point into a strategy looking for diversification.