In response to this, major central banks have employed rate hikes and reduced their balance sheets to curb rising prices. While inflation is gradually decreasing, the pace is not as swift as expected, given the decline in money supply mixed with increased interest rates.
The divergence of fiscal policy from monetary policy, a rare occurrence in decades, poses a potential source of future challenges. The current optimism among investors anticipates Federal Reserve rate cuts and a projected economic soft landing. A soft landing is a significant decline in the aggregate money supply, resulting in reduced credit and capital access for families and businesses while curbing inflation. However, historical data since 1975 indicates that soft landings are infrequent, with seven out of nine rate-hike cycles leading to recessions.
Gold emerges as the sole reliable hedge against the erosion of fiat currencies’ purchasing power. While Bitcoin has experienced a surge in 2023, its correlation with stocks and bonds raises concerns. Recognizing the potential for additional currency devaluation in 2024, central banks have recorded unprecedented gold purchases, surpassing 800 tons in the first three quarters of 2023, a 14 percent increase from 2022 levels.
This surge in central bank gold purchases reflects a strategic move to strengthen and diversify reserves, mitigating exposure to sovereign debt and ensuring stability and rising purchasing power over time. In contrast to Bitcoin, stocks, and bonds, gold stands out as a hedge to counter the ongoing and inevitable currency devaluation.
With central banks exploring their own digital currencies, gold remains essential in portfolios seeking a hedge from the impending collapse of traditional currencies. The events of 2023 highlight the failure of central bank policies, particularly in achieving price stability. As we look ahead to 2024, the rarity of soft landings, coupled with the delayed impact of monetary contraction and rate hikes, signals a pivotal year where investors must address the increasing risks of deficits, rising debt, and continued currency reduction.
Gold V.S. Cash
Cash and gold have unique characteristics when it comes to risk factors, inflation, durability and usability. Here is a quick reference summarizing how they compare on key investment criteria.
Cash- The choice of storing wealth in a bank account involves inherent risks such as defaults, potential bank collapses, capital controls, and even the risk of confiscation in adverse scenarios. On the other hand, physical cash avoids institutional risks but is susceptible to theft, misplacement, or natural disasters. While fiat currency carries counterparty risks, its widespread acceptance contributes to the convenience of using cash.
An emerging concern revolves around banks exerting control over individuals’ spending habits. Increasingly, banks are intervening to regulate how money is spent, asserting their right to block payments if they disapprove of certain transactions. Often justified as measures to prevent ‘fraud’ or ‘loss,’ this trend raises questions about financial autonomy and security.
Gold- Gold investments offer a unique asset class with limited counterparty risks. Direct ownership of physical gold hedges investors from institutional risks like bank failures, capital controls and hyperinflation. Volatility in gold prices poses a market risk, but gold has maintained its purchasing power over centuries despite economic uncertainty. Responsible storage limits risks of theft and loss.
Cash- The financial assets in the form of cash are extremely vulnerable to high inflation, which steadily gnaws away at their purchasing power. Hyperinflation has destroyed entire life savings in cash. Even moderate inflation can dent cash returns over longer periods. Central Banks around the world are able to utilize Quantitative Easing to turn on the money supply when they like, undermining cash’s delicate supply/demand equilibrium.
Gold- Gold has a centuries-long track record of maintaining its purchasing power and appreciating in inflationary periods as investors flock to it as a safe haven. Limited supply and high production costs lend intrinsic value to gold. You simply can’t just discover and mine more gold if demand is rising. This makes gold a reliable inflation hedge over the long run.
Cash- Cash has poor durability. Paper currency eventually deteriorates and needs replacement. Coins also erode, chip or bend over the years, lowering their face value. The physical lifespan of cash is less than a decade on average before needing replacement. Admittedly, the digital age has led to the use of physical cash gradually being replaced by the use of debit cards and phone payments.
Gold- Gold shines when it comes to durability. It does not corrode, tarnish or decay over time. Gold artefacts dating back thousands of years to ancient times retain their radiant shine and properties. This indestructibility makes gold an ideal investment for passing on lasting value to future generations.
Cash- Cash is limited in universal use by exchange controls, capital restrictions and currency availability. Converting paper money into local currency worldwide involves fees and exchange rate risks. Carrying large amounts of cash during travel is cumbersome and risky.
Gold- Gold is accepted worldwide as a store of value without conversion fees. It transcends borders, cultures and governments. Gold coins like Krugerrands are traded globally. Gold bars and bullion can be transported easily. Gold is the epitome of a universal asset.
Gold not only reaffirms its role as a hedge of value and means of payment but emerges as one of the few assets poised to hedge investors during a recession. The prevailing threat in 2023 has been inflation, and as we anticipate 2024, the primary risk on investors’ radar is currency devaluation. Reagan Gold Group today for a comprehensive discussion about precious metals such as Gold and Silver can diversify your portfolio. Contact Reagan Gold Group today to learn more about Gold’s ability to hedge against inflation when the cost of living continues to rise. Book a FREE consultation today and leave paper currency in the past.
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