In the face of a potential crisis of trust, in addition to the central bank’s increased gold surplus, some international financial institutions and enterprises will also purchase gold to enhance and stabilize their credibility and mitigate potential market risks.
We believe the significant part of investors are not familiar with the monetary, commodity, and hedging attributes of gold. However, the credibility attribute of gold is a misunderstanding part for many investors.
Some people could be against investing in gold, for example: “Be careful when investing in gold because gold has no interest rate return.” In fact, those who promote such a thesis do not completely understand the value of the investment in gold, misunderstand interest rate returns, or have a biased point of view.
From the perspective of economics and finance, the interest rate is a figure of risk. Investing personal capital in any assets, you will face external risks, in addition to human risks, there are also insurmountable natural risks. For example, the deposits that made in banks or stocks recently bought, these all are under the risk of failure and loss, while fixed assets have a probability to face assets price adjustments, unstable political factors, or natural disasters. When potential risks rise and the market is in a normal condition, much more interest rate returns need to be paid in order to balance risks that investors encountered.
Simply speaking, the return on the investment interest rate reflects the risk of the asset’s potential loss. If an asset provides a 5% annual interest rate return (after deducting inflation), it means that the asset has zero risks in the next 20 years. If the interest rate is 10%, there is no risk within 10 years; if the real annual interest rate is 20%, there will be the risk that the value of the asset will be zero within 5 years. Of course, the actual situation may be different.
Therefore, interest rate returns are not actually sufficient to compensate investors risks. But, most investment products have collaterals, and central banks purchase gold, especially the US central bank purchase quite a large amount of gold, which is a signal for a market that the country’s currency has gold as security, that is the only gold do not possess risks. This idea is the evolution from the Bretton Woods currency system and the credit standard system to credit endorsement of multi-asset portfolio allocation.
While the global economy rises under the circumstances of high currency and corporate credit rates in many countries, various investment projects set interest rate returns through market mechanisms, and interest rate returns may also be affected by the liquidity of market capital. During this period, gold has no interest return and its investment value is under high pressure, but there is no holding risk, gold also has the value in commodities and currencies.
However, under the current economic downturn, the decline in the currency credit of the countries, the high leverage of financial assets, and the decline in the collateral value, the financial market is facing a crisis of trust and the credit characteristics of gold will increase. On the threshold of a potential crisis of trust, in addition to the central bank’s increased holdings of gold, some international financial institutions and enterprises will also purchase gold to enhance their credibility and resist potential market risks.