As the trade war between China and the United States escalate, financial markets are rattled, the world is staring at stagflation and global uncertainty is at its peak. While it is easier to understand the implications of a trade war on our investment, there are many other not-so-obvious economic, geopolitical factors at play which tend to get missed because we don’t understand their implications in entirety.
There is growing evidence of erosion of confidence in the current international economic system, which could have potential ramifications for your money:

Rising economic nationalism

Against a background of geo-economic power shifting from the West to the East, the system of rules that has governed world trade for decades is under threat. Western powers have lost their competitive edge in the global marketplace and are responding with a wave of protectionism. This global resurgence of economic nationalism will make gold attractive as a hedge.

Deteriorating quality of reserve assets

The value of the US dollar is based on unlimited debt creation and money printing. The US national debt exceeded $22 trillion in February 2019, a major increase compared to $12 trillion a decade ago. Simply printing more and more money to repay its debts could lead to significant fall in value for the dollar, accompanied with global loss of confidence in the currency. Preserving its status as a payment instrument in the world economy, gold reduces dependence on fiat currencies and could thus become an asset of choice.

Central banks bolstering their gold reserves

Central banks are reacting to economic uncertainty by increasing their gold reserves. In 2018, central banks added the most gold to their foreign reserves since the end of the Bretton Woods system in 1971.

This is consistent with a recent survey by the World Gold Council in which 76% of central banks said they viewed gold’s role as a safe haven asset as highly relevant, 59% said they thought it was an effective portfolio diversifier and 18% signaled their intention to increase gold purchases over the next 12 months. This central bank diversification away from the dollar is indicative of a potential shift in the international monetary system.

Non-dollar trade agreements

Most international trade is done in dollars; thus the transactions are executed using money-transfer systems controlled by the US itself. This means that when the US imposes a sanction on a country, even if other countries disagree, the US-based banks that those countries need to use for transacting won’t facilitate trading with the sanctioned country. The international economic systems are in desperate need of structural reforms, suggesting a slippery road ahead. And this is when gold, because of its confidence building effect and lack of counterparty risk, becomes relevant again. Gold can play a stabilising and defending role in your investment portfolio in these times of economic and geopolitical crises.

Irrespective of the state of things in the world, there are four qualities that make gold not only a valuable tactical asset, but also a strategic asset to hold at all times: A source of long term return; low correlation to major asset classes in both expansionary and recessionary periods; a mainstream asset that is as liquid as other financial securities and a history of improved portfolio risk-adjusted returns. As gold prices are expected to rise, fueled by the economic worries facing the world today, the gold allocation in your investment portfolio can be a beneficiary-reducing risk and enhancing returns.

The writer is senior fund manager,
Alternative Investments, Quantum AMC