Is there an alternative after all?
Corona Recovery Fund
This morning, after four days of meetings and negotiations, the European heads of government reached an agreement on the Corona Recovery Fund. The fund has a size of EUR 750 billion and will be made available to member states through grants and loans to promote economic recovery after the crisis. It is not the first stimulus plan to see the light of day in this crisis. For example, the Bank of America calculated that central banks have made a total of 150 interest rate cuts since the outbreak of the virus. In addition, central banks and governments have stimulated 18,000 billion dollars in monetary and fiscal stimulus. These measures have prevented a hard landing of the world economy. Despite the fact that the crisis is not yet over, the stock markets have shown an unprecedented recovery rally since the bottom of March.
Wall of money
Although investors are enjoying this rally, there is some unrest, especially among the authorities. For example, the Bank for International Settlements – the bank of central banks – warns against too much optimism in the financial markets in its annual report. The prices would be very far ahead of economic reality. The unprecedented “wall of money” seems to turn ancient economic laws completely upside down. For example, the actual abolition of interest rates is an important reason for the bustle at the entrance to the stock market. After all, there is no longer a serious alternative to investing in equities. Savings make people poorer and bonds are no way to build up a fortune.
Negative real interest rates
Although a 0.6 percent interest is still paid on a ten-year US government loan, the real – inflation-adjusted – interest rate is now negative. After deducting inflation, the real interest rate in the United States is now 0.8 percent negative. Since 2012, the interest rate has not been so low. Now, low or even negative real interest rates are normally a reason for investors to seek refuge in the most popular precious metal, gold. This is also the case now. Recently the price of gold rose beyond 1800 dollars per 100 Troy ounces. A rate that has not been put on the boards since, indeed, 2012. The negative real interest rate then pushed the gold price to a top of 1900 dollars.
Gold turns out to be a good investment this year. Where all the attention seems to be focused on the relentless advance of the Nasdaq, the price of gold does nothing less than that. Both are 20 percent higher this year. The large-scale support operations create a double feeling among investors. On the one hand, the stock exchanges list one All-Time High after the other, but on the other hand, the well-known ports of refuge such as government bonds and gold are strong. Already in the first half of the year, an amount of 40 billion dollars flowed into gold funds. This broke the record of 2009 – during the credit crisis – both in tonnage and in money.
Gold no longer ignored
Gold was often ignored by many – mainly professional – investors as an interesting investment because it does not pay interest or dividends. This argument has now disappeared. Savings accounts, bonds, and several shares no longer pay out anything these days. Add to that the uncertainty about the virus. As a safe haven, the importance of gold is increasing. But there is more. Anyone who knows the laws of scarcity knows that when there is too much of something, its value decreases accordingly. So does money. Since the previous crisis, banknote presses running at full speed have added so much money that more and more investors are starting to worry about its value. And they are looking for assets that could keep their value, including gold.
S & P in gold
On the site of Macrotrends, it is possible to get a graph of the S & P 500 index, not expressed in dollars but in gold. Thus, the world’s most important index has risen from 1469 to 3251 points in twenty years since the turn of the century, an increase of 121 percent. However, in gold terms, the S&P 500 fell from 4.5 in 2000 (per 100 Troy ounces) to 1.78 now. Well, has the stock market risen this way in the last 20 years, or has the dollar become worth much less now? And do you buy less and less index for that dollar? Investors who believe the latter are increasingly seeking refuge in gold.