Why Are Large and Small Investors Increasing Their Physical Gold Holdings?

Gold is indeed not a new investment class, being used to store wealth since 4000 years. However, holding physical gold substantially increased its importance during the last decades. Our “modern” economies lost all and any inhibition to accumulate debts, finding the solution in transferring the liability of re-payment to generations to follow.

When excessive indebting started about two decades ago, especially in the world’s largest economy, the United States of America, financial experts and analysts warned of the consequences. But nobody wanted to hear that. Creating new debts is so easy and looks so sweet in the eyes of politicians when it comes to realise their vote-catching ambitions that nobody found the idea to limit spending, instead of mounting up new debts, really charming.

Expectations of large investors are focused on quick returns. Shareholder expectations have to be satisfied. The more you squeeze the lemon the more juice you get out. At the end, you through it away.

That is not an approach that focuses on sustainability and on resilience. Many investors, both individual and institutional, eye the profit that they can realise now and do not much car about for how long they will be able to cash in their profit. When the lemon has been squeezed out, they move to the next one.

While banknote presses were turned in the past, banks and other financial institutions now create new checkbook money based on new debts that are based on already existing debts – derivates. The risk is that of the smallest irregularity comes up, the entire house of carts crashes. Just remember how the Lehman Brothers crises jumped from one country to the other, within days only, encompassing the entire world.

As per March 2020, the total global public and private indebtedness mounted up to 245% of the global GDP; meanwhile, it even grew further. Private indebtedness does also include the debt of companies. Again, as per March this year, almost 50% of all US companies were one single step away from junk, as a result of their over-proportional debts. The number of zombie companies, companies whose profits are not enough to honour re-payment and interest payments of the loans in their books, is reaching 20% in the US.

On the other hand, central banks are busy with keeping economies running. Are they successful with their stimulus programmes? Definitely, no!

The European Central Bank, EBC, introduced negative interest rates more than your years ago. The idea was to float cheap money on the markets in order to increase spending for consumption and thus boost the economies of the EU member states. What happened after almost five years? Did the GDP of any EU country flourish during the last years because of cheap money, actually free money? No.

Instead, negative interest rates do destroy the markets because there is no motivation left anymore to accumulate savings. However, savings are the basis to overcome difficult times, and savings are the basis for industrial investments.

Negative interests are also destroying the welfare systems of nations. Pensions are generally secured by pension funds, be them national funds or privately owned. The foremost liability of pension funds is to secure the pension payments to current pensioners and pensioners to come. Therefore, pension funds are strictly regulated to invest in low-risk products only. In most countries, pension funds have to invest the majority of their assets into governmental bonds. But these governmental bonds are now bearing negative interest rates. How will the pension funds secure the pension payments?

To get this into the right light: there is no disaster to be expected soon. The disaster has started already. Several national pension funds are in desperate talks with their countries’ lawmakers to ease the investment restrictions for pension funds.

While in the (not so) old times central banks started their money printers to produce and to float new banknotes, whenever they need money, central banks today us QE, Quantitative Easing. QE is nothing else than as described above, creating new checkbook money based on new debts that are based on already existing debts.

And Now We Have COVID-19

The panic created by the spread of the coronavirus is unprecedented and thus is the economic damage, which reached catastrophic dimensions. Since weeks, governments are (perhaps purposefully) underestimating their economic damage forecasts. But those underestimated forecasts do not last long. A week later or two, reality has already “out-performed” the forecasts.

There is without any doubt the immediate need to support businesses and people. Whether that has been done in the right way, focusing on “sustainable heeling”, is another question worth a separate article.

As we all know, the Fed and the ECB decided on inconceivable amounts of support to be released to the economies. As many businesses, people and governments were (and are) suffering, everybody welcomed those billions over billions. Nobody thought about how to repay that new debt.

But those billions are of course not solving the problems of damage but only postpone the damage to later dates.

Between 2008 and 2015 the Federal Reserve’s balance sheet total increased from USD 0.9 trillion to 4.5 trillion. Only a fraction of this increase was repaid in the course of the economic cycle. After the first round of Federal Reserve measures to combat the economic effects of COVID-19, the balance sheet total currently stands at a breath-taking USD 7 trillion.

Physical Gold for Hedging Risks and Preserving Wealth

Physical Gold is an essential part of every portfolio to balance portfolio risks and to preserve wealth in general.

Many people who are having a look at gold as possible investment often lose sight of the continuous value gain of gold. Despite temporary volatility, the annual average value gain of gold during the last 15 years is 10.0% based on USD, 11.4% based on EUR, and 13.4% based on GBP.

This average annual gain is paired with many advantages that no other investment class can offer in a combined form as physical gold does it.

Gold bears no counter liability. When you buy gold, your gold bars are the value itself, you are not depending on anybody’s liability. This is not the case with any shares or bonds or derivates that others invest in; you would be exposed at least to the liability of fulfilment by the issuers. That is also the reason why long-term gold investors who aim to preserve their wealth do not invest in so-called gold-backed ETFs. ETF units are representing at least two but often four layers of third-party liability. Instead of holding inherent value, you would hold a piece of a chain of counter liabilities.

Holding physical gold, you are the legal owner of your wealth, and not the legal owner of counter liabilities of third parties towards you.

Physical gold protects its owners from inflation and deflation. The US Dollar lost 95% value since the Congress has passed the Federal Reserve Act in 1913, based on gold. The gold price in Euros has increased by 555% since the Euro’s inception in 1999, or, in other words, the Euro lost 85% of its value against gold.

Physical gold is scarce and cannot manifolded like fiat money gets manifolded with Quantitative “Easing”.

Physical gold cannot default and is not exposed to bank risks and risks of banking systems.

Physical gold is a liquid asset, unlike rea estate property. The global gold market is one of the most liquid markets existing.

Consequently, it comes as no surprise that the demand of both private and institutional investors in physical gold increased substantially since the last years.

Liemeta ME provides gold sale services and sophisticated custody storage solutions in its state-of-art storage facilities in Liechtenstein, which is one of the safest in all Europe. We only sell 999,9 fine gold produced by LBMA-registered refineries, mainly from Switzerland. Liemeta ME is privately owned and it is not a financial institution or bank or affiliated with any bank.