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In a recent analysis, the U.S. Crescat Capital a new 'Big ShortOpportunity: The continued devaluation of fiat money against scarce hard assets that are essential to society such as commodities and hard money. The well-known businessman Frank Giustra and investor Ray Dalio come up with a similar analysis. Why are they so positive about it? Buying gold and raw materials?
Confidence in fiat money such as the dollar and euro is under pressure due to high debt levels and persistent inflation. Global debt is at an all-time high of $313 trillion 330% of the global economy. Many large countries such as the United States and France are facing increasing fiscal deficits and interest payments.
European sovereign debt (source: x.com/MichaelAArouet)
Debt and money become unattractive to investors if there are high risks that debts will not be repaid, or will be repaid with money that has depreciated in value. A central bank is likely to print money and thus devalue its own money when a government has too much debt to repay.
Frank Giustra is of the opinion that that this will happen due to the high debt burden in the US and that this will even create hyperinflation in the long run. He thinks that the US central bank (Fed) will have to intervene more and more. This will deter the remaining buyers of U.S. debt, requiring even more money creation from the Fed to keep interest rates low. This creates a vicious cycle of inflation that will eventually become unmanageable. He expects U.S. policymakers to protect the system at the expense of individual citizens. Possibly by introducing capital controls and 'bank bail-ins', which means that banks can confiscate assets if they get into financial trouble.
Crescat Capital expect a prolonged period of high inflation. They see the growing money supply and government spending as the main cause. As a result, there is much more money in circulation without a corresponding increase in goods and services. That inflation will not just disappear but tends to develop in waves that can last for decades. Previous periods of high inflation, such as in the 1940s and 1970s, show that inflation can be structural and difficult to control once it is firmly entrenched in the economy.
The three waves of inflation of the 1970s (source: Crescat Capital)
The structural aspect of inflation has several causes. Psychology is an important one: as soon as consumers and businesses expect prices to continue to rise, they start behaving in such a way that they make that expectation a reality. Companies are raising prices to cover future costs, and workers are demanding higher wages, leading to a wage-price spiral that further fuels inflation. In addition, there are currently other key drivers of inflation that are likely to continue.
Deglobalization, in which countries are increasingly trying to build their own production capacities and be less dependent on international trade, will lead to higher production costs. Protectionist measures such as a import tariff on electric cars from China will have a price-pushing effect. Also, Shortages of critical raw materials persist.
In times of increasing geopolitical tensions, distrust in the monetary system and persistent inflation, the Preference for gold as scarce money with no counterparty risk. Unlike debt-backed currencies, which are threatened by the risks of default and inflation, gold can maintain and strengthen its value.
Giustra advises rethinking the traditional 60/40 stock/bond portfolio. He thinks that bonds will be a guaranteed loss in the near future. He recommends investing in assets that have historically performed well in times of inflation. He mentions energy, food, gold, and other metals. Crescat Capital believes that stocks and bonds, given their current high prices, are unlikely to collectively deliver significant returns over the next decade. The asset manager therefore also expects a significant capital shift from the 60/40 portfolio to hard assets such as gold and commodities. They advise geographical diversification and investment in sectors that are currently undervalued but remain essential to the economy, such as the mining sector.
The earnings yield cycle of 60/40 portfolios (source: Crescat Capital)
Several times in history, the precious metals industry was considered the largest market among global assets. The potential for capital to flow back into this sector is significant, and we are only at the beginning of a new gold cycle, according to Crescat. A number of central banks have started to accumulation of gold instead of filling their balance sheets with debt securities from other debt-laden economies. It is expected that other large institutions will follow suit. Currently, less than 20% of central bank balance sheets are made up of gold, compared to 75% in the early 1980s.
Gold and gold mining companies as % of total global assets (source: Crescat Capital)
Investors normally include bonds in their portfolios as a safe haven with minimal downside volatility. However, there is a turnaround. For the first time in 45 years, gold has become less volatile than government bonds. In other words, government bonds are no longer the safest alternative. The asset manager expects capital to flow back into inflation-hedging instruments such as gold and commodities, ushering in a prolonged bull market for these assets. This shift has barely begun. According to Bank of America, 71% of wealth advisors currently allocate only 0-1% of their portfolios to gold.
Gold Investment Advisors Allocation (source: Crescat Capital)
According to Crescat, the supply of gold will not be able to grow quickly. The marginal gold supply available from new mine production is currently very limited due to the lack of new reserves and the declining quality of existing reserves. Mining companies have shifted their investments to battery metals and other Critical Minerals necessary for the Green Agenda.
The analyses of Crescat Capital and Frank Giustra make the business case for investing in hard assets such as gold and commodities very clear. These assets not only offer protection against the depreciation of fiat money, but also have the potential to benefit from the structural shifts we are currently seeing. The historical undervaluation of gold and the recent interest of central banks in gold create the expectation that the Gold price will increase significantly in the near future.
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On behalf of Holland Gold, Paul Buitink interviews various economists and experts in the macroeconomic field. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
