In Gold we Trust

Investing for Inflation

Currency Climate Change and Gold as a future international reserve asset

May 2024. by PM

Bullion, for the reasons set out below, is due to shine once more.

Gold is scarce. It’s independent. It’s not anybody’s obligation. It’s not anybody’s liability. It’s not drawn on anybody. It doesn’t require anybody’s imprimatur to say whether it’s good, bad, or indifferent, or to refuse to pay. It is what it is, and it’s in your hand. Simon Mikhailovich

Fiat Money Hedge and Crisis Alpha to boot:

During the great pandemic, bullion once more demonstrated its anti-fragile properties. Having performed as an inflation hedge, it provided much needed diversification benefits in portfolios, before providing a forewarning of imminent inflationary burst.

However, having reached new highs in August 2020, preceded by two incredibly strong years of returns registering 18.9% and 24.6% in USD terms, it has required the pause that refreshes. Many investors sought to allocate monies to Bitcoin, which dramatically outperformed gold, which struggled in the face of rising yields and a stronger US Dollar.

However, that would be to overlook nearly two decades of attractive returns – in the 22 years from 2000, gold returned 9.3% on average per annum. Such a performance leaves most asset classes and currencies in its wake. Moreover, during this period it has provided a trusty capital protection policy given a negative correlation with many stock markets that have faltered ruing the period. Gold’s long term upwards trend remains firmly in tact, with many reasons to expect continued asset price appreciation

The merging of fiscal and monetary policy, the much mooted central bank digital currencies, the new East West Cold War and the seizure of Russian central bank reserves are to underline just some of the dynamics that should support rising gold prices in the years to come


In an attempt to stave off a deflationary turn, and resuscitate global economies have being switched off, governments and central banks globally joined forces to unleash and historic torrent of liquidity. In doing so, any chances of a depression quickly receded and risk assets such as stock markets rallied hard, with the S&P 500 notching up new all time highs within 5 months of the lows of March 2020. It took until mid 2021 for the inflationary consequences of the fiscal and monetary might unleashed to register as the level of prices touched and rose beyond the 2% target of the US Federal Reserve.

Transitory by name, but not by nature

Since that milestone, inflationary forces have continued to gain ground and the majority of investors have been caught flat footed, still positioned in assets such as long term government bonds and technology stocks, which had been the beneficiaries of an extended period of disinflationary macro backdrop.

Investors had bought into the central bank’s confidence of short lived inflationary pressures. The European Central Bank has not been alone is dramatically understating the spike in prices – in September 2021 its very own forecasts had inflation projected at 1.7% in 2022. By the end of the year, they have notified investors that their expectations has risen to 3.2%. Realised inflation was 5.1% by March this year. All of this occurred before Russia crossed Ukrainian borders.

Gold has offered a premonition of things to come is rallying impressively almost 80% from it’s August 2018 low until it’s August 2020 high. Gold’s performance since then has been muted – crypto assets created a significant distraction and rising stock markets globally dimmed its lustre. Perhaps no little of its consolidation was due to investors accepting the ‘transitory’ narrative at face value.

However, this is to consider Gold’s performance only in US Dollars. If Gold is seen as a hedge against declining purchasing power, as central banks persistently debase their respective currencies through money printing, then Gold’s performance should be considered against a basket of different currencies.

The below table shows Gold’s performance against different currencies. 2021 is illustrative, in that there was significant performance dispersion when considered through the lens of different currencies. In Japanese Yen terms it appreciated 7.5%, it gained 3.6% against the Euro, but lost value when priced in US Dollars.

The below chart shows the performance of Gold in USD versus the an equally weighted average of the above currencies, and then against a basket of the 5 weakness currencies when measured by the year on year 2% government bond. What’s clear is by taking adding a relatively simply currency overlay, we can ‘distill’ Gold’s price to one that surgically targets its relative outperformance of the weakest currencies. In this sense, we have an approach that truly captures falling purchasing power of currencies or a fiat hedge.

Portfolio Protection Characteristics:

As alluded too above, Gold did perform during periods of stock market distress. A historical review of performance: The chart below shows Gold’s returns during the every 20% correction in US stocks over the last 50/100 years.

The table below shows golds countercyclical performance – its ability to make both absolute and relative positive returns during significant equity market corrections. As a portfolio stabiliser it is compared to fixed income.

Source: Cornerstone Macro, Bloomberg, Reuters Eikon (’Lowest closing price since 01/03/2022), Incrementum AG

Since 1930, there have only been 4 occurrences when both US equities and bonds fell in a given year. 2022 is on course to record the fifth such event.

During the teenies, (2012 to 2020), Gold saw a pronounced period of underperformance. Relative to the S&P 500, it had seen a pronounced downtrend, whereby except for a brief burst during the pandemic, (again a bridge across troubled waters), it had largely been outgunned by US equities – until that is from 2018. As we stand, the ratio has bettered is 90 day and 1 year moving averages as investors seem to be rotating capital from equities to bullion once more.

Gold/S&P 500 Ratio, 01/2008-05/2022

Source: Reuters Eikon, Incrementum AG

A similar picture is painted if we take a longer term perspective. A simple retracement of gold to its median price against US equities would see a tripling of its price performance compared to the S&P 500. There is compelling evidence to suggest that the turn in the tide in 2018 will endure.

Gold/S&P 500 Ratio, 01/1900-05/2022

Source: Reuters Eikon, Incrementum AG

The biggest bubble of all: Faith in Central Bank’s

Investors have been served well by buying the dip in risk assets over the last 30 years. Confident in the central’s banks implicit support for stock markets when a correction becomes pronounced, it has been correct to presume that the Federal Reserve would pivot and ease monetary conditions when the going got tough. However, throughout such a period central banks, at least in the West, were not hamstrung by inflation – they could use monetary policy to stimulate, comforted by broadly disinflationary pressures. But that is not to describe the current hand they hold.

We believe that investors have recognised that one of the fiscal responses to address price pressures is inherently inflationary in its own regard. Italy, France, Spain and California even are notable for posing fuel subsidies or tax cuts, which would be financed by one off taxes upon energy producer’s windfall profits. The increasing hand of state in economic policy is beyond the remit of this discussion, but the proposed responses would serve to do little other than further discourage investment into energy sector – capital expenditure which is desperately needed to remedy energy shortages.

Conversely, investors’ faith in Gold may be growing. Trust grows when expectations are repeatedly met. Year to date, Gold is one of the few assets which has made a positive return – all this having done so during the worst of the pandemic, and more recently during the invasion of Ukraine. As bonds have faltered in providing a ballast for falling equities, investors are increasingly looking for reliable portfolio stabilisers – those that play defense just when needed. If ultimately Central Banks wither in their determination to address inflation, deterred by unprecedented debt burdens that would crush government finances with higher interest rates, then Gold may yet displace fixed income as the hedge of choice for equity markets. With limited growth in supply, even a small change at the margin in institutional investors would propel Gold’s price to all time highs.

Perhaps it is instructive to look beyond what Central banks are saying, but what they are doing. In 2021, Central banks net inflows of Gold struck 463 tonnes, an 82% increase of 2020. Total global central bank gold reserve now register a nearly 30 year high.

Geopolitics: The changing global monetary order and Gold as a ‘Sanction Hedge’

Beyond portfolio diversification, scarcity value, an inflationary or even stagflationary hedge, there are newer exigencies to hold gold. Post the invasion of Ukraine, the seizure of Russian’s central bank assets is a momentous event. Such monetary sanctions have been imposed upon Venezuela, Iran and Taliban assets, but it would have been unthinkable for a former G8 member, with UN veto voting power, a nuclear state responsible for providing nearly 40% of Europe’s gas supplies to have been stripped of nearly 60% of its currency reserves. When nearly 12 trillion of FX reserves can be politically confiscated, we have undoubtedly set sail for a new global monetary order. China, amongst other nations will now carefully consider how else to store their liquid reserves, when EUR’s and USD Dollars can summarily be confiscated.

All roads lead to Gold" - Kiril Solokoff

Some commentators are now pointing to a multipolar monetary order, backed by commodities, and a continued de-dollarisation of the global economy – which seems very logical when many state actors, perhaps not militarily aligned with the US, are uncomfortable with the fact that 87% of all global trade is still conducted in US Dollars.

It seems highly plausible that gold would anchor any new monetary order. Given it remains the obligation of no-one, it is a politically neutral monetary intermediary, central bank’s appetite seems destined to grow apace. Provided it can be stored within a nation state’s security apparatus, many countries will see the logic in holding liquid currency reserves in bullion, with no risk from appropriation from a third party whilst addressing the falling purchasing power of currencies in the face of higher inflation rates.

Is Gold at Risk from Higher Interest Rates?

Recent times have shown that rapidly rising interest rates to provide a headwind for gold’s price. Financial conditions have tightened dramatically in recent months as central banks have sought to slow consumer demand. However, we suspect central bankers interest in tightening policy is transitory. The sheer size of the global debt burden would seem to preclude tighter interest rate policy beyond the short term. Optically at least, total global debt receded in 2021. As pent up global demand exploded, fuelled by fiscal stimulus cheques, nominal economic growth saw a huge rebound. However, the world remains mired in debt – a number that is xx times of that during the 2008 global financial crisis. We have now crossed over 300 trillion in debt globally, and governments sports significant deficits.

Therefore, an increase in interest rates from xx to xx would lead to a Uncle Sam’s debt servicing repayments rise from xx to xx per year. In that light, we expect that if it seems that central banks were losing control of interest rates, they would intervene with ‘yield curve control’, in effect following Japanese example of ‘pinning’ the interest rates to a certain range. Without doing so, we would see a global debt crisis that would dwarf the trials and tribulations that Greece endured during the Eurozone crisis. Substantial interest rate hikes then to control inflation that is a political strategy in its own right, (as it reduces the value of the debt outstanding), does not serve any governmental interest.

Why Invest?

It is tempting to think of gold as a silver bullet for all our ills. It offers some unique advantages of an asset, and improves the risk reward profile of portfolios. It is at once a portfolio diversifier, an effective tail hedge against black swan events, high liquity, and a portfolio hedge against rising inflation. Moreover, it clearly provides a currency hedge too as evidenced above correlating negatively with fiat currencies over time.

The major threat to Gold’s continued outperformance is rapidly tightening monetary policy. But as considered above, there are limits we believe as to how high interest rates go before the weight of the global debt burden makes repayments unaffordable for governments to world over. IN light of the rising risks of a stagflationary environment, history would suggest that the positive relationship between equities and bonds as witnessed in 2022, could well continue. That would require institutional investors to seek out new means to diversify portfolios which would inevitably describe ‘hard assets’ – and within them gold shines as bright as any in that firmament.

How to Invest?

ARIA’s Navigator portfolios are cornerstoned in precious metals as an asset class, including gold and silver, which have demonstrably performed during periods of increasing central bank balance sheets. The portfolios rotate their exposures between the metal and miners, depending on liquidity conditions. Moreover, it also targets gold’s performance of weaking currencies globally meaning a broad means of protecting against currency debasement rather than one just framed in US Dollar terms.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.


For more information and answers to any questions you may have, please contact us.

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