Insights – what Wirecard teaches us about life post-Covid
June 30, 2020
Gold Market Update
As we round out the financial year, gold continues to test the waters above the USD $1750 mark, and last week’s larger than expected US unemployment number was a source of stock market worry as are the escalating virus case numbers in a number of U.S. states.
Gains for the yellow metal have come despite a rebound in equities amid the gradual restart of business activity in the wake of the coronavirus pandemic, but investors have expressed worry that the rebound for riskier assets has come too far too fast, with cautious investors viewing gold as a hedge against a reversal of equity bullishness.
Monetary stimulus (i.e. money printing) from global central banks and extremely low or negative interest rates for the foreseeable future, which was confirmed in last week’s testimony by U.S. Fed chairman Jerome Powell, also helped to raise the appeal of precious metals even though they do not offer a coupon (do not pay interest).
Gold Price this month in AUD
What Wirecard teaches us about life post-Covid
This week we discuss the collapse of banking provider Wirecard and how it might raise some important questions for people buying gold in an ETF:
Gold in the News
Here are a few articles trending on the subject of gold.
- Nine private banks spoken to by Reuters, which collectively oversee around $6 trillion in assets for the world’s ultra-rich, said they had advised clients to increase their allocation to gold. Of them, four provided forecasts and all saw prices ending the year higher than they are now: https://www.reuters.com/article/us-health-coronavirus-gold-wealth-analys/worlds-ultra-wealthy-go-for-gold-amid-stimulus-bonanza-idUSKBN23P253
- Incrementum’s Ronald-Peter Stoeferle said that “every gold dip should be bought right now” in his keynote at the World Gold Forum. “The second public participation stage is the longest”, noted Stoeferle, “and that is when most trend-following investors jump into the market. Prices start to rise rapidly in this phase and the news becomes more optimistic, and analysts raise their price forecasts”:
- Saxo Capital Markets Eleanor Creagh says “there is a very limited margin of safety provided by extended valuations across developed market equities. I would readily admit that the risk/reward is not that attractive for equities. We are however expecting fresh all-time highs for gold by year-end.”:
This week we highlight the article “Owning Gold is as Much about Diversification as it is about Capital Appreciation” by Knowledge Leaders Capital.
The article explores a theme we at SendGold have been discussing for a while: that gold may benefit from a “bond substitution” trade. The bond market is roughly ten times the size of all of the world’s share markets combined so the potential is very large:
Gold provides a layer of diversification
“These days, gold as an asset class is in an entirely unique position to not only provide upside potential but also provide a layer of diversification within a portfolio that neither stocks nor risk-free nominal bonds can achieve on their own or even together.”
The death throes of the 60/40 portfolio?
“Indeed, with risk-free rates so close to zero (even on the long end), bonds simply don’t have enough convexity (aka capital appreciation potential) left in the tank to act as a sufficient diversifier of equity risk. After all, if the 10-year bond yield drops to 0.00% from the current 0.68%, that would provide owners of that bond with a whopping 6% capital appreciation, which is not nearly enough to cushion a 20% or 30% equity selloff.”
With interest rates at or near zero, Treasury bonds are no longer an effective hedge
“It used to be that long-term Treasury bonds could be used as a diversification tool to cushion the blow of equity selloffs because they typically appreciated a lot during market drawdowns. That negative correlation is what you want from a hedge, or diversifier. But you also need capital appreciation potential from that hedge. Bonds don’t have that anymore.”
To read the full Knowledge Leaders Capital article, click here:
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