July 2020

Gold is more attractive than paper currencies


A flood of money is driving the stock markets and gold. Gold stocks in particular should benefit from monetary policy staying aggressively stimulative. As long as the virus continues to spread, the Fed and other central banks will continue to wage “war on their own paper currencies” in a mass attempt at competitive devaluation and economic stimulus.


High money supply growth rates in Euroland

May data show M1 money (i.e. money owned by non-banks) rose by 12.5% year on year. The more comprehensive M3 money supply measure, which among other things includes shorter-term bank deposits and money market instruments, grew by almost 9%. Rapid monetary growth, coupled with an increased savings rate among private individuals, has fueled excess liquidity and hence stock markets. But we also see growth in the more narrowly defined monetary aggregates as a sign of stress in the real economy. Lending to “non-banks” and sight deposits have grown sharply indicating a panic demand for liquidity as economic agents have sought to survive lock-downs and any future virus-combatting measures. Many companies, skeptical about their options for obtaining loans and liquidity in future, have decided to access credit while they can.


Debt problems have intensified

The BIS, the “private bank of the central banks”, has published its data for 2019, including global debt ratios. The ratio of global gross debt to global GDP rose from 216.4% (2018) to 220.9% (2019), thus exceeding 2016’s record high of 218%. While the indebtedness situation of private households improved slightly (-0.6%), in practically all countries debt ratios for the corporate and public sectors deteriorated significantly last year. In aggregate, corporate debt-to-GDP rose 11.1% with the equivalent ratio for public sector debt rising 11.9%. Within the corporate sector, banks have cut their leverage while non-banks have massively expanded their loan assets.

It is concerning that a deterioration in the debt situation had already taken place before the onset of the Covid-19 crisis, i.e. during an expansion phase. Over the last ten years, the overall debt situation has only improved in Germany, Spain and India. Over the same period, the ratio of gross debt (excluding the financial sector) to GDP rose most sharply in China, France and Switzerland, although the starting point for Swiss overall debt was low. Nevertheless, the high debt ratio of Swiss households, at 132% of GDP, could be problematic. Equivalent household debt figures for the US and Spain are 75.4% and 56.9% respectively.

With the exceptions of Turkey, Sweden and Germany, governments have not used the decade since the Great Financial Crisis to reduce their borrowing. Thus, the world economy was already in a bad situation at the onset of the Covid-19 crisis. Gigantic government bailout packages and a slump in corporate revenues will lead to a significant increase in debt ratios in 2020. That is why practically all central banks have “declared war” on their own paper currencies.


Covid-19 problems in the southern United States

Unfortunately, due to inadequate lockdowns in terms of both their operation and duration, the virus is now spreading quickly in the southern United States. In Arizona, Texas, Kansas, Louisiana and North Carolina, opening plans have had to be postponed. Additional restrictions have also had to be implemented in California, for example Walt Disney has decided to postpone the reopening of its theme parks indefinitely.

So far, the pandemic has resulted in more than half a million deaths and the cumulative number of recorded cases is over 10 million. And the virus is still spreading rapidly, especially in South and Central America.

But a large part of the measured increase in cases can be attributed to increased testing. It is also a positive that death rates have dropped significantly in practically all countries. A University of Oxford study ,for example, estimates the covid mortality rate in English hospitals has dropped from a 6% peak to 1.5% in June.


Yet again Germany is facing a triple surrender

The project to launch a Eurozone joint liability corona bond is gaining momentum. And Germany wants to raise euro 146 bn. of debt in Q3 to stabilize its economy.

Surrender on its austerity, debt sharing, and fiscal stimulus goals looks a real prospect for Germany. The position of the Federal Constitutional Court in Karlsruhe (on Germany’s participation in ECB bond buying) may well be lost as there is little support from Germany’s politicians. All traditional party groupings in the Bundesrat have signed up to a non-binding proposal to allow Germany’s Bundesbank to participate in ECB bond purchase programs. This proposal should pass. For euro-area stocks, this development will probably be positive in the short term but negative over the long term.

In the medium term, the right wing AfD should benefit from being able to criticize Germany’s mainstream parties for an “unconditional surrender” over Eurozone debt pooling. In the long term, a system that distributes debt liabilities across the Eurozone without creditor countries having a say in national budgets is fraught with risk, not least because it will promote the political radicalization of voters in creditor countries.

A system whereby Europe’s creditors would have a say in the budgets of the chronically indebted might work in theory. But in practice this pooling of sovereignty is unacceptable to voters and politicians in debtor countries.


Increased geopolitical risks …

Tensions involving Hong Kong, China and the US have risen sharply again. China’s influence on Hong Kong continues to expand. In Peking the Standing Committee
of the People’s Congress has passed the controversial “Law for the Protection of National Security” in Hong Kong. This law came into effect immediately on being gazetted in Hong Kong, thus by-passing the Hong Kong legislature. Critics see Hong Kong’s autonomy as seriously endangered and consider that China, by enacting this law, has violated the 1984 treaty whereby the former British colony was returned to the Chinese mainland. Peking naturally sees this differently, arguing that its right to pass laws on national security issues covers Hong Kong as well. In its view, the new law will serve to protect the “one country, two systems” principle, because it can be used to anticipate separatist aspirations and thus protect the civil order from violence.

In response, the US has talked of abolishing Hong Kong’s special trade status and has already implemented some measures, banning defense exports and restricting Hong Kong’s access to US technology. Britain and other countries have said they stand willing to offer residency and possibly nationality to a large proportion of Hong Kong’s population.


… also between China and India

Deadly skirmishes between China and India have prompted India to ban the use of dozens of Chinese software applications and to prepare further measures.


And now – what are the conclusions?

  1. Due to the enormous flood of money, and the ongoing undisguised market manipulation of central banks aiming to achieve a positive wealth effect, we consider only a small underweight in equities is appropriate.
  2. Gold should occupy a prominent place in the currency allocation. Gold stands to benefit from the monetary explosion as well as current high geopolitical risks. But we view gold as a “currency substitute” and not an investment. Gold is a better currency than fiat currencies because it cannot be printed.
  3. Gold stocks should outperform broad stock markets in the context of ongoing monetary policy experimentation.



Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44

Disclaimer: The information and opinions in this document come from sources that are considered to be reliable. Nevertheless, we cannot guarantee the reliability, completeness or accuracy of these sources. The information and opinions in this document do not constitute and shall not be construed as a solicitation, offer or recommendation to purchase or sell any investment or to engage in any other transaction. We urgently recommend that interested investors consult their personal investment advisor before making any decisions based on the document so that personal investment objectives, financial situation, individu-al needs, risk profile and other relevant information can be duly taken into account in conjunction.