BFI Group Blog

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Daniel Zurbruegg
May 29, 2024

Gold Regaining its Role as an Anchor Within the Global Financial System

In our last update, we wrote about monetary policy and why 2024 might look very different from 2023. Until the 4th quarter of 2023, central banks maintained their hawkish tone and only in the final weeks of 2023 did the markets begin to consider the possibility of rate cuts in 2024. We are already in the middle of the second quarter of the year. While equities had a pretty positive start to the new year, the real action is currently in the precious metals market. In early March, gold was pushing through the critical resistance level of USD 2’080 and has since then moved to a new trading range, between USD 2’300 and USD 2’400.

Our regular readers will remember that we have maintained a very bullish outlook for precious metals for a while now. What is interesting is that while gold’s spot price is moving higher, most precious metals mining stocks are lagging behind. It is not entirely clear why this is the case, but the most logical explanation is that there are mostly long-term institutional and state buyers chasing the physical metal and building up their reserves.

This in our view makes perfect sense. The world is more divided and a multi-polar order has emerged. This creates more and more tensions between the different blocks as different geopolitical and economical interests collide. Russia’s war against Ukraine and the sanctions that have been imposed against it are a prime example. Russia has seen most of the assets and currency reserves it held within the western system frozen.

This weaponization of the global financial system triggered a considerable strategy readjustment by countries that are also holding substantial currency reserves. China in particular is making changes to decrease dependence from the largely western dominated financial system. Investors should pay attention to this shift, as it has far reaching consequences for the future in general and global investments in particular.

The western world is increasingly competing against countries like China, India, Russia and other nations that have very different political agendas and systems. The western ideals of freedom and democracy are increasingly under threat, because in this multi-polar world there are growing alliances among countries that don’t necessarily value these ideals in the same way. There is increasing evidence that countries like China, Russia, Iran and even North Korea, are building friendly ties and what brings them together is a political inclination towards collectivism, utilitarianism and even pure authoritarianism.

This comes at a time when the western world itself is in crisis, not so much an economic one, but a crisis of identity. Many western countries have become complacent, ill governed and mismanaged. Debt levels are rising quickly and while some say this is simply the fault of the political leadership, this would be too easy of an explanation. People freely vote for the leaders they want and choose their own government. Many (or even most) of these people simply vote for representatives that promise them “something for nothing”, i.e. free services, subsidies, welfare and other kinds of governmental support. Of course, there is no such thing as a free lunch, and the government can only hand out what it has taken from others through taxation, or more conveniently, what it has borrowed.

The next candidates offer even more “free lunches” than their predecessors and their competitors in order to win elections, and the ones that follow will do the same, until there are no alternatives left and no-one advocating for fiscal responsibility and restraint. This inevitably leads to overspending and rapidly growing levels of debt that the next generations will have to deal with. In most countries, there are no or very few ways to counter this self-destructive behavior and to stop this vicious circle. The ideal solution would be automatic and firm spending/debt ceilings or a direct democracy. Especially the latter allows the citizenry to intervene through a popular vote whenever it deems it necessary, not just every four years in a general election that is largely partisan, but at any point that enough people with common sense gather critical mass, no matter their party affiliation. Switzerland is a prime example of such an ideal case: a direct democracy with automatic spending ceilings, combined with lean government and a decentralized distribution of power. But how does this all link back to our original topic and why is it important for gold and for all real assets in general?

In the global financial system, there are many different markets, asset classes and investments competing against each other. Global bond and stock markets, currencies, precious metals, cryptocurrencies, etc. and the what connects them all is the global monetary system. Currencies are competing against each other; it is almost like each nation’s currency is like that country’s share price.

It all comes down to the basic equation of supply and demand; that’s what determines the value of a currency, as it does for any other product. The worse the finances of a country, the more pressure builds on its currency - even though it can sometimes take a long time for this causal relationship to become apparent.

A good example is the US Dollar. It might have taken a bit longer, but given its crucial role in the global financial system, there is growing evidence that there could be significant pressure building on the greenback in the coming months and years. While higher interest rate levels have been supporting the USD over the last three years, this might all be changing now that the first rate cuts appear to be on the way.

That doesn’t only apply to the US, of course, as economic activity in general is slowing down again and we therefore expect dovish policy changes from other central banks too in order to stabilize and support their respective economies. This, coupled with the inability of many countries to get their finances in order, will result in the devaluation of most currencies. Clearly, in our global financial system, all fiat currencies are valued in relation to each other, but that relative value between them can fluctuate very significantly over time.

For example, just in the last 50 years, the US Dollar has lost more than 80% of its purchasing power relative to the Swiss Franc and economic fundamentals today indicate that this will continue for years and maybe decades to come. In view of that, investments in precious metals, and gold in particular, are becoming much more interesting for individual investors, not only large institutions and governments as mentioned earlier. The unique role of gold as a reliable store of value and its safe haven status is once more in high demand. Its recent price spike, from around USD 2’000 to almost USD 2’400, is therefore perfectly logical and it looks like this might only be the start of a longer bull market.

There is more to this story, as what goes for gold and precious metals in general is usually true for the whole commodity sector. Historically speaking, real assets have never been so cheap compared to financial assets. While we understand why financial assets have gone up in nominal value, i.e. due to the destruction of purchasing power of fiat currencies, there are also additional factors that now clearly support the case for a long-term bull cycle in commodity markets.

In the past, most commodities have been trading globally and in a largely bi-polar world that functioned pretty smoothly and predictably. Now, in a multi-polar world with increasing tensions, it is not simply all about supply and demand anymore. It is all about supply and demand and the question of where said supply and demand are coming from. These growing economic and geopolitical tensions are also increasing the risk of trade wars. All of these risks and uncertainties point to significant upside for years to come.

At BFI Infinity, we build global investment portfolios, and we identify specific themes and trends in order to select our investments. We don’t simply benchmark our portfolios, because we are convinced that the optimal strategy for the future needs to include al-locations to precious metals, commodities and to focus on clear trends and themes that promise to be value enhancing in the years and maybe decades to come. Of course, we diversify, but never at the expense of conviction. We would like to encourage our readers to review our Special Report, outlining how investors should be positioned for the New Era. Many of the warnings and shifts described therein are now unfolding as expected and the consequences are set to be felt for years to come.

Generally speaking, we remain optimistic for our investments given the monetary policy outlook, as well as the themes and trends that we are following. Don’t hesitate to reach out to us to discuss any questions that you might have.

To access the exclusive full report and delve deeper into the second article, which provides an insightful discussion on the importance of portfolio risk management at a time of increasing systemic risks, click here.

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