Our Perspective.
Gold is beautiful. The high metallic luster – meaning it reflects light well – gives it that beautiful shiny appearance. Lesser-known qualities include exceptional malleability and ductility, it has a relatively high melting point, around 1064 degrees Celsius, and is an excellent conductor of electricity and heat. Additionally, gold stands out as one of the densest metals, contributing to its relatively heavy weight. Add to this its corrosion-resistance and scarcity, and you have a highly valuable, uniquely versatile, and rather rare element…one that has been a store of value for centuries.
But gold is expensive. Its value continues to rise whilst it doesn’t provide any yield or income. So, this month we ask ourselves…is it time to sell the shiny stuff?
As shown in Chart1 below, interest in gold from retail investors and ETF allocators in the west continues to decline, with a recent survey from Bank of America finding that 75% of advisors had less than 1% of their portfolios in gold, and less than 10% were considering increasing their exposures. This weakness in demand, however, has been more than offset by central governments and retail investors in Asian markets such as China. Despite interest rates at levels not seen in well over a decade, we believe there are several reasons why the price of gold is likely to continue to rise.
Government liabilities continue to rise as demographic tailwinds of the last four decades become headwinds. At the same time, fiscal spending and government deficits are increasingly likely to be funded by money that doesn’t exist. That is, governments will most likely fund their liabilities by printing money. This debt monetization devalues the value of fiat currencies, the direct consequence being asset price inflation. Chart 2 shows how the increase in the price of gold has not held up with the enormous amount of money printed by central banks. Considering more government debt is likely to end up on the balance sheets of central banks, the upper bound for gold is still a long way off!
Gold also offers protection against unpredictable and potentially significant events that can have a sudden and adverse impact on financial markets, economies, or geopolitical stability. These events may include political turmoil, wars, terrorist attacks, natural disasters, pandemics, economic crises, or unexpected shifts in monetary policy.
Finally, given the arbitrary nature of the fair value of gold, we believe a technical approach is the most practical and useful valuation methodology to price gold. Specifically, we employ a trend following strategy to determine exposure to the commodity based on the strength and significance of the underlying price signals. The trend remains very strong and would suggest investors increase exposure.
In conclusion, we believe the inevitability of financial repression is misunderstood, macroeconomic and geopolitical event risks are under-appreciated, gold is generally under-owned by institutional and retail investors in the west, whilst the underlying trend remains very strong and robust. All in all, the outlook for gold is as shiny as the metal itself, and we retain significant conviction and exposure.
“Gold is the money of kings, silver is the money of gentlemen, and barter is the money of peasants. But debt, is the money of slaves.” Franz Norm
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Shard Capital (Jersey) Limited is an associated company of Shard Capital Partners LLP, a limited liability partnership, registered in England with registration number OC360394. Shard Capital Partners LLP Registered office: 36-38 Cornhill, London, EC3V 3NG. Shard Capital Partners LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom, reference number 538762.
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