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When inflation rises, you want to have gold in your portfolio. That's what billionaire John Paulson said in an interview with Bloomberg. He expects more inflation in the coming years, which will cause people to move their wealth from bonds and other fixed-income securities to gold. Because the gold market is relatively small, this can result in an explosive increase in the price of the precious metal. A repeat of the price increase in the late 1970s is even possible, according to Paulson.
"The reason why gold can rise so quickly is that there is only a very limited amount of gold. It is on the order of several trillion dollars, while the total amount of financial assets is closer to $200 trillion. So, when inflation increases, people try to get out of bonds and other fixed-income securities. And the logical place to go is gold. Because the amount of wealth in bonds and cash is many times greater than the amount of wealth in gold, the Gold price rise very quickly."
Paulson notes that savings are also rapidly losing value under current market conditions. The interest rate is 0%, while the inflation rate is around 4%. As a result, more savers will look for alternatives to protect their assets. Gold can benefit from this, because the precious metal has historically achieved a good return when real interest rates are negative.
As enthusiastic as the billionaire is about gold, he is critical of virtual currencies such as Bitcoin. He doesn't believe in the scarcity of cryptocurrencies and doesn't see any intrinsic value in them. About this he says:
"It's a scarce supply of nothing. As long as there is more demand than supply, the price rises. But if the demand drops, then the price goes down. There is no intrinsic value whatsoever in cryptocurrencies, other than the scarcity of supply. Virtual coins will eventually prove to be worthless. When the exuberant sentiment subsides, liquidity decreases and the price drops to zero. I wouldn't advise anyone to invest in cryptocurrencies."
Despite his skeptical attitude towards Bitcoin, Paulson does not dare to speculate against it, as he did with the US housing market more than twelve years ago.
"The reason we shorted sub-prime mortgages was because of the asymmetry. You could make a lot of money, but lose at most 1% against U.S. Treasuries. During the term, you could not lose more than the interest rate difference. When shorting cryptocurrencies, the downside risk is infinitely large. So even if you're right in the long run, you could be pushed out of your position in the short term. Thus, Bitcoin went from $5,000 to $45,000. It's just too volatile to go short."
According to Paulson, virtual currencies have no intrinsic value, but it is also very limited for gold. The precious metal is a good conductor and a metal that does not corrode, but that does not explain why a kilo of gold is worth almost €49,000 today. Industrial demand is only ten percent of the total demand for gold. The value of the precious metal is determined to a much greater extent by the demand for jewellery and investment gold. These forms of gold are mainly bought by people who are looking for an instrument to store wealth. In that respect, gold and Bitcoin are similar.
The advantage of gold is that it has proven itself as a safe haven over the centuries and that central banks are still sitting on large gold reserves. They can use it in a 'monetary reset'. Virtual currencies such as Bitcoin have the advantage that they can be traded digitally. This makes cryptocurrencies easier to use as an alternative means of payment than precious metals such as gold and silver.
This contribution was made from Geotrendlines
