Government bonds are increasingly divided into 2 camps: bonds with zero or negative yields and bonds with too high yields. Developed economies, without exception, fall into the first group. This means that the investor is guaranteed to lose purchasing power when the bonds mature. Investors in Romanian government securities are also in such a situation, even though they have an interest rate of 5.2%.
In the second group are countries like Turkey, whose interest rates have fluctuated between 6 and 21% since 2010. However, its financial system is in a state of rampant inflation, which means that in this case , investors will be guaranteed a contraction in their purchasing power when the instruments mature.
In other words, government bonds do not necessarily perform well in times of crisis. Furthermore, because of the massive money printing by central banks around the world, it is very difficult for them to bring in profits that exceed the erosion of purchasing power by inflation.
Despite the crises – or rather because of them – the price of gold rose from $364.5 per troy ounce in May 1990 to $1,788 per troy ounce by mid-December 2021. This is a 5-fold increase, which precedes the rise of some top stocks and the collapse of the purchasing power of money. In the last 5 decades, its growth has been even more impressive – 30 times.
However, it is not enough to say that gold is getting more expensive to define it as a good guardian of value. The precious metal depreciated during the Western world crises of the second half of the 1980s and early 1990s, although it has risen in all other recessions since it was delinked from the dollar in 1971. This dynamic needs to be explained.
As with other assets, the price of gold is highly dependent on the actions of central banks. In the 1970s, the US was in a state of runaway inflation that drove the price of gold above all other types of assets. To stop this phenomenon, the chairman of the Federal Reserve, Paul Volcker, sharply increased the benchmark interest rate to more than 20%. This worked and the rate of loss of purchasing power decreased. But the rate hike leads to a collapse of the country’s deposit system and a crash in stock markets.
The last time US interest rates were relatively high was in 1990, when there was also a global recession. Since then, they have fallen steadily, chronically inflating bubbles in the economy, which have burst one by one: the tech bubble (2001 dotcom bubble), the real estate bubble (2008), the Treasury stock bubble, and the yo-yo bubble (2021).
With few exceptions, the country’s base interest rate has been 0.25% since 2009 and is 0% currently, a record low. At the same time, beginning in 1981, the Federal Reserve dramatically increased the amount of dollars it printed, which accelerated the rate of erosion of purchasing power.
The European Central Bank took the same measure after 2008, with the difference that it didn’t even try to stop euro inflation or raise the interest rate. It is a negative quantity. This was also the case in Japan, where the base rate has been 0% since 1999 (with very short breaks).
As can be seen, the actions of central banks around the world, which are almost identical, lead to the same effect – the devaluation of the currency relative to gold. In fact, all of the world’s major currencies, not just the US dollar, have an undervalued purchasing power relative to gold.
Typically in our lifetime we witness 2 or 3 major financial crises that bring with them huge transfers of wealth from one part of the population to another.
The truth is that financial markets are complex and unpredictable, even for professional investors. Each asset has its own risk profile and different performance in times of economic crisis and prosperity.
History eloquently shows that gold has unique characteristics that make it a suitable asset for long-term value preservation, especially in the context of the rampant central bank inflation we are currently witnessing.