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January 10, 2022

From Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Gold as more than just an investment, gold’s liquidity is coming to the forefront, and where investors will run if stagflation hits.

Treating gold as a savings tool instead of just an asset to invest in

The Daily Dive’s latest interview with Independent Speculator’s Lobo Tiggre delves deep into the environment investors now finds themselves in and how to best navigate it.

Tiggre is among the many analysts who never believed the “temporary inflation” narrative. While the most Consumer Price Index (CPI) report came in at a 39-year high of 6.8% year-over-year, we’re not out of the woods yet. The most recent Producer Price Index (PPI) report measured almost 10%. That’s bad news because the PPI measures price hikes on goods that haven’t even hit store shelves yet. Tiggre reminds us that the PPI is one of the best indicators of future inflation. Research shows that increases in PPI are usually reflected in CPI within three months.

One of the main issues Tiggre addressed is governmental helplessness in the face of the economic situation. Central banks and governments simply don’t have solutions for scenarios such as today’s, primarily because they view inflation as a hallmark of economic growth. Conversely, that means that any stagflationary period, especially with the kind of unprecedented shutdowns we have been seeing, presents uncharted waters with no real solution.

In other words, the Fed sees low economic growth and creates inflation. If that doesn’t solve the problem, their solution (to date) has been to cause more inflation. If that still doesn’t work…

Tiggre believes inflation will simply remain high as a best-case scenario. He doesn’t expect inflation to rocket far above current levels. Unfortunately, that’s not as comforting as it may sound. Economic collapse has the same result, whether the collapse is accompanied by a bang! or a whimper.

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Turning to gold investing, Tiggre offered an interesting perspective:

I don’t see gold itself as an investment at all. It’s savings. I save in bullion my stacks, not because I think gold prices are going up. My stacks are in case I actually need physical value, you know, a financial asset for which there is no short to my long.

He’s speaking to the many gold investors who seem disappointed that gold isn’t outperforming paper assets. Unlike inflation which is very much noticeable and observable, Tiggre says that gold is being pushed down by priced-in forecasts and expectations of hikes that are far from even being stated by the Federal Reserve. In other words, gold buyers are making long-term decisions based on short-term observations.

Tiggre thinks investors have once again jumped far ahead when it comes to both optimism and pessimism. Regardless of intraday price moves, if we adopt Tiggre’s perspective on gold and silver as savings rather than a speculation on price movements, we can set both optimism and pessimism aside. Then we can focus, as Tiggre does, on building our stacks rather than watching price tickers.

Investors need to hedge their bets more than they have in a long time

It seems that risk-on sentiment is once again popular, prompting the World Gold Council to remind investors that gold will remain a necessity in a portfolio to balance increasing risks.

With low or negative interest rates becoming the norm, investors are beginning to chase returns in a wide variety of assets, including high-risk, high-volatility alternative assets like cryptocurrencies and NFTs. Some alternative assets relied on in the past to juice return on investment simply aren’t very liquid, and can suffer badly should sentiment suddenly shift against them.

Ultimately, as individuals and institutions reach into increasingly obscure investment vehicles in an attempt to diversify, they may actually be taking on much more risk than they think. The combination of high volatility and reduced liquidity can be rather explosive.

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Why gold? Here’s the logic behind the WGC’s position:

The shift to risker and less liquid assets strengthens the case for an allocation to gold, given its unique combination as a highly liquid diversifier, that can reduce portfolio volatility.

Despite its label “alternative asset,” gold is just about the least volatile of the widely-traded alternative investments:

Gold volatility remins below nearly all alternative investments, and reduces portfolio volatility

Source: Bloomberg, World Gold Council

Less-liquid assets are not marked-to-market (MTM, essentially, having their prices updated) as frequently as assets listed on exchanges. Infrequent pricing may disguise price volatility, and may also disguise a suboptimal investment. When sentiment shifts against risk, owners of such assets might find themselves without a buyer at any price. Gold, on the other hand, offers ample liquidity (appx. $100 billion traded per day).

What’s at stake, exactly?

The WGC brings up the example of March 2020, when the broad market sell-off affected all assets and caused gold to slump by 12% within a week. Yet by the end of the month, gold was right back where it started. In contrast, the S&P 500 Index remained down by 13%, global hedge funds lost 6% and listed private equity lost 29%. Some assets finished the year higher, but so did gold, posting a 25% gain from the start of the year in its best performance over the past decade.

Risk-on investment is tied to market crashes, which are in turn tied to bids for liquidity. Being one of the most traded assets, gold provides liquidity during a scramble, capital when it is needed and overall safety in any scenario. Gold’s resistance to inflation will likely make it that much more of a necessity during a period when wealth erosion is being compared to the early 1970s.

If stagflation indeed becomes an issue, gold is ready to reap dividends

As stagflation starts to look like a more plausible scenario by the minute, investment firm Schroders examined how rising prices and low growth might affect the gold market. During periods of stagflation, gold is the top performer with an average growth of 22.1%, outpacing even commodities that everyone is in need of. Meanwhile, stocks tend to dip in the negative during these stretches.

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Sean Markowicz, CFA and one of the authors of the research, said:

This makes sense. Gold is often seen as a safe-haven asset and so tends to appreciate in times of economic uncertainty. Real interest rates also tend to decline in periods of stagflation as inflation expectations rise and growth expectations fall. Lower real rates reduce the opportunity cost of owning a zero-yielding asset such as gold, thereby boosting its appeal to investors.

The primary reason why stagflation is once again becoming the subject of debate is how and why economies have performed this year. Global equities, especially those in developed nations, saw fairly strong growth in the first half of 2021 before beginning to fade.

It might be more accurate to say that the monetary stimulus, which was issued in historic amounts as a response to the crisis, is beginning to fade. While many are quick to talk about economic growth these years, there has been no shortage of warnings that the actual economy isn’t progressing, but is rather simply being held up by freshly-printed money. As the stimulus dissipates, economies run the risk of showing their true weakness while inflation very much stays. Making matters worse, safe havens are few and far between.

“In theory, they should benefit from falling real rates, driven by declining growth. However, rising inflation eats into their income, putting upward pressure on yields and downward pressure on prices,” the Schroders report said of U.S. Treasuries, one of the only sovereign bonds giving a return these days. Gold should become all the more prominent if inflation outpaces nominal or “hiked” rates, as negative real rates are among the most bullish price drivers that the metal can hope for.

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