Gold is money, everything else is credit. (2024)

The title of this article is a quote from J.P. Morgan; the man, not the financial institution. With the US printing more than 4 times the existing money supply within 1 year (see chart), the sense of value of money should at least have become more uncertain.

Please note that the chart has a log-scale.

Any discussion on whether money creation will lead to inflation should be concluded with; inevitably at some point in time.

Ray Dalio has made an outstanding video on the principles for dealing with a changing world order.https://www.youtube.com/watch?v=xguam0TKMw8In this video he mentions the printing of money in order to cope with the downturn. The video contextualize the phase in which we currently are. This video together with “How the economic machine works” also from Dalio should, in my opinion, be included in the standard curriculum of all high school students.

My call to hold Gold is not only motivated by money printing. There has to be a good reason to pick Gold as an alternative for cash. Crypto currency is no alternative. I refer to one of my previous articles https://www.linkedin.com/pulse/bitcoin-emperors-clothes-fernand-van-immerzeel/?trackingId=Y23VzpaIQk6iKscY1zkN0A%3D%3D. The difference in behaviour of Gold and Crypto as a save haven during the Ukraine war is just exemplary. I am not going to time Gold or promote Gold because of the Ukraine crisis. Nor is this article motivated by the recent price increase of Gold. In my opinion in this phase of the life cycle of the monetary system it has become a strategic decision to allocate to precious metals and in particular Gold.

Gold has proven itself for 4000 years as a storage of wealth. Gold is always accepted by everyone, everywhere. Owning Gold means you have exposure outside the monetary system. If every payment system fails; Gold will replace it. When faith in the monetary system is lost, the new monetary system has to earn credibility. It is likely that Gold will play a role forming a new monetary system.

The last monetary reset was in 1971 when the US discontinued the dollar link with Gold. Fiat currency became the norm. From then on basically money fully depend on trust. The current system is now 51 years old. In those years Central Banks have built a substantial credibility. This credibility has become increasingly infirmed. I would argue that the monetary system especially the USD as the reserve currency has become vulnerable. This does not mean a disaster is imminent. What it does mean is that a 5% allocation to Gold functions as an insurance premium for the risk of a monetary event. In my view this risk now is higher than ever before in the post WWII era. My position is: the opportunity loss that comes with holding a 5% allocation to Gold is far less than the benefits..

So far I did not mention holding Gold as a hedge against inflation. Gold is indeed a long-term hedge against inflation. It is strategic (multiple years) not tactical (up to 3 years). The current inflation spike we are witnessing is the inevitable result of money printing not due to the Ukraine crisis. A crisis merely accelerate existing trends. We were already in a substantial rising inflation environment before the Ukraine crisis began. So yes the spike is due to the war, but I would say you would have had this inflation spread over time anyway. It is convenient for politicians to blame crisis for trends that are inevitable.

I don’t expect inflation to run out of control from here. I do expect inflation to become sticky at an uncomfortable level for the structural (low) economic growth. Central Banks will not match interest rates to the level of inflation for years to come. Savers will continue to experience negative real rates despite rate hikes. Any real returning asset will become (or stay) very expensive. Wages will go up as labour is also an increasingly scarce real returning asset.

Holding Cash or Bonds is a guaranteed way of losing money in real terms. Gold will protect real spending power on a long term horizon. Gold is also an insurance against very adverse scenarios. My advise is to hold a minimum of 5% in precious metals. I like alinement of interests so to put my money where my mouth is: I hold at around 10% exposure in precious metals.