[Jan 2023]
In uncertain times, it is common knowledge that gold is considered a safe investment. In the first half of 2022, there was some speculation regarding gold as an asset class, but in the last three months, it has become obvious that gold is back on track. We, at Flyboat, tried relating this to the unfolding events.
1. Possibility of a new gold backed currency
Since the early 1970s, most currencies have been based on fiat and have stopped mounting gold as collateral whenever they print money. This, together with the regularisation of oil commerce, gave the United States a tremendous edge and the freedom to print any amount of money without fear of inflation. They had outsourced portions of their value chain to numerous developing economies. In recent years, simply too much has been printed to manage. The cumulative effects of their trade war with China, the epidemic, and the ramifications of the Russia-Ukraine war have alarmed the Federal Reserve. Russia and China are hinting at a new gold-backed currency that might replace the US dollar's fiat monopoly and increase actual gold demand.
2. Changing global order
Over the past decade, China has emerged as a major player in the global order. BRICS with Saudi is more powerful than ever. Movement of commodities and capital across international borders is now simpler than ever before. Most emerging economies have grown from the bottom of the supply chain and have less bargaining leverage to retain profits, if you take note. For instance, the majority of earnings from a shirt made using cotton from India and manufacturing facilities from China, promoted and sold globally by a US-based company, would remain in the United States. During economic downturns, however, the bargaining power moves to the producers and manufacturers at the beginning of supply chains. Additionally, technology transformed the marketing and sales of products. Cloud has transformed the manufacturing and distribution of goods. This effectively destroyed oligopoly in many areas, consequently bolstering the position of local firms from emerging nations on global markets. In the future, therefore, all three reasons why the United States has remained a superpower are endangered.
Monopoly over oil trade
Monopoly over international securities trading
Profit flow from across the globe to companies headquartered in the US.
3. A different kind of ‘Recession’
The impending recession has a sense of irreversibility this time around. In contrast to the 2008 housing crisis and the 2000 dot-com bubble, which were mostly precipitated by systemic failures and inflated valuations, this one is triggered by external events such as the pandemic and the Russia-Ukraine war. It is probable that the purchasing power of nations will not be the same before and after this recession. As has been argued in several forums, a new multilateral world order may be on the horizon.
4. Correlations from the past
The majority of dominating economies throughout the past five hundred years have been dominant for roughly a century, i.e. one long-term economic / credit cycle. The United States has been a superpower for nearly a century, and its current economy has striking similarities to the past downfalls.
5. No other investment options left
With downfall of crypto, tech stocks, uncertainty in interest rates, freezing real estate, and degrading currencies, investors are left with barely any investment opportunities to protect their wealth.