Dual nature of investment portfolios
In investments, both individuals and countries typically maintain portfolios comprising safe and growth assets. Gold, considered a safe asset, plays a pivotal role in this dynamic. As we shall see, it’s not the only ‘safe asset’ in the spotlight.
Role of US Bonds
For many years, US government bonds were also perceived as ‘safe assets.’ Countries like Japan and China invested heavily in these bonds, even as they yielded negligible interest rates. However, the financial landscape underwent a seismic shift in 2020.
The United States embarked on an unprecedented money-printing spree, tripling the amount of liquid currency circulating in its economy. This flood of money had a global impact, effectively exporting the problem of inflation to the world.
SWIFT Shakeup and Search for Alternatives
Countries like Russia faced disruptions in their financial interactions, as they were thrown off the SWIFT system. This incident raised a red flag, indicating that relying too heavily on the US might be a risky proposition.
Quest for a Gold-Based Financial System
In response to these concerns, nations such as Russia have begun exploring the idea of a gold-based financial system, while Japan and China are considering establishing their independent financial systems.
This shift places the United States in a challenging position. Once upon a time, countries were willing to invest heavily in US bonds at almost 0% interest. Now, despite the US offering interest rates in the range of 6-6.5%, the volume of purchases has dwindled.
The Global Impact
This evolving financial landscape has far-reaching consequences. The demand for gold has surged, and the real estate market is experiencing increased demand, which, in turn, impacts rental rates.
Money Printing and the Future of Finance
The era of unrestricted money printing may be coming to an end, and governments are likely to rely more on taxation to fund their activities. This shift has implications for capital allocation, affecting venture capitalists and others in the finance industry. It may also influence the rate of job creation.
Conclusion: The Financial Transformation
The soaring price of gold serves as a barometer of broader changes in the global financial landscape. The shift away from traditional ‘safe assets’ like US bonds is a testament to the evolving dynamics of the financial world. As nations seek new avenues for financial security, the ramifications are felt not only by governments and financial institutions but also by everyday individuals, renters, and job seekers.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.