With central banks around the world providing records amount of liquidity, investors are getting increasingly worried about “fiat” currency, e.g. paper money, some investors are even calling for a new gold standard to stop the money printing and save the world from upcoming hyperinflation. We believe it’s unrealistic to have a new gold standard as we outlined in previous publications. The system of global currencies is one of relative strength and weakness, where ALL valuation factors of an economy get measured (including political stability, competitiveness, etc.). When a country decides to monetize its debt or “print” money, it is a question of how all the other countries/currencies behave but it is clear that such a move would normally result in a devaluation of a currency, all other factors being constant. We actually believe that there is no need for a new gold standard, but that the market is already creating such a proxy standard with investors bidding up the prices of hard assets.
The Bretton Woods system, which was implemented after World War II, introduced a system where most currencies were fixed to the U.S. Dollar, with U.S. Dollars being exchangeable for gold, fixed at USD 35 per ounce of gold. This monetary system introduced the U.S. Dollar as the only major reserve currency and made it the world’s leading currency, a status that the U.S. Dollar kept until 1971, when the system finally collapsed. Since then the importance of the U.S. Dollar has been diminishing slowly and the value of the U.S. Dollar continues trending downwards, a trend that, in view of the current policy developments and economic problems, might continue for much longer.
However, the fact is that all currencies today are “fiat” currencies or paper money, therefore, the value of each currency is determined by a larger number of factors, which makes the valuation of currencies a rather complex exercise. No matter how much the global money flow expands and how much money is printed globally, the value of hard assets such as gold, silver and most commodities tends to appreciate and make up for the destructive effect of money printing. In light of this, investors need to be careful to call the current price increases in gold, oil and other commodities as a sign of a bubble building and waiting to burst.
We think that what we are seeing is only to some extent speculation, we believe that we have entered a long-term trend of structural adjustment of hard asset prices. We also remain concerned that long-term excessive expansion of the money flow will lead to inflation, this is another reason to hold a significant exposure in hard assets such as gold, commodities and energy.