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Manish Bhandari makes a strong argument for having gold in your portfolio

‘Gold shoots up when you have a negative real interest rate’

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Last Updated: Jun 05, 2020, 06.30 PM IST
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Manish Bhandari Vallum
I have been talking about having a portion of allocation into gold for the last two years. (Photo: Company website)
Gold for the last decade has only grown 1% per annum from the supply side, says Managing Partner and CEO, Vallum Capital Advisors.

You are building a strong argument to have some gold in the portfolio. Tell us why you like gold right now.
I have been talking about having a portion of allocation into gold for the last two years. We wrote that in our annual letter. If you look at the way the stage has been set up on the macroeconomic environment front, you have a huge debasement of currency. If you have to look at the US dollar, which usually acts as a proxy of gold, there is a huge debasement; 7x increase in the central bank balance sheet of the Federal Reserve in the last 10 years and close to 50% increase in the last six to nine months or so. That is a huge size. So is the case with the ECB. So that is one thing which has changed significantly.

The second thing is that the world is seeing a perpetually low interest rate and negative interest rate. It is close to half a decade where the experiment of the negative interest rate has happened. Also, look at what has changed on the globalisation front in the last two year; this weakens the US dollar’s position because the US dollar is the currency of choice for trade. So add all these arguments together. On top of it, gold as a metal has only grown one percent per annum from the supply side for the last decade or so.

So you have a very low interest rate, high probability of US dollar depreciation, which makes a case that money would flow into an asset which has stood the test of time for the investor over a period of time versus an asset which is not stable at this point of time, which is the US dollar. From a central bank’s position, the gold outstanding to the central bank’s monetary expansion and to the monetary outstanding reserves is lowest at this point of time. So it makes all the more sense to look at gold as a portion of allocation for any investor at this point of time.

Macro watchers are saying that gold may be in for a decent time. What is the setup looking like right now for gold? Why are you so bullish on it?
Yes, this is one of the most interesting and billions dollar questions. What everyone would have in their mind is why gold now seeing what I have been arguing for five years or so. The most interesting part in the gold theory is that you have a situation where there is a negative interest rate; a low interest rate and a negative interest rate. Gold does its spurts and gold shoots up when you have a negative real interest rate and there is a difference between a negative interest rate and negative real interest rate.

Look at a situation where the US treasury was giving you a positive yield for a considerable period of time and that was the issue. The US did so well; so the US dollar-denominated assets did so well. US equities did so well because you have a dollar-denominated asset which is doing very well and giving a positive yield. Now we are in this situation; so how do you calculate a negative yield as a 10-year treasury minus the US CPI, which is the consumer price.

I am referring to the US back and forth only because that has been an alternative to gold for some point of time. Now that we are going to see a negative interest rate scenario and a real negative interest rate; if you look at 2011 to 2012, we saw a negative interest rate and there have been seven or eight occasions in the world when you see a big spike in gold because look at what gold is. Gold does not give you any kind of yield and it has a storage cost. So if the world and the monetary order gives you a negative yield or a real negative yield, then it is a time for gold to shine. We are seeing the conditions which are finally hinting towards a spurt in gold prices.

What if the central bankers start selling gold because they are holding big portions of gold themselves? What happens to gold prices? Is that a risk? How do you analyse this argument?
I am not too sure why someone would make an argument that there can be a huge selling of the gold by the central bankers. If I look at the data, in the last decade or so, they are the net buyers. In the last calendar year, they bought close to 600 tons, which is the highest in the history of the central banks in terms of the size of gold they have accumulated. My sense is close to 3,500 tons is the total accumulation of gold central banks have. There was a period when central bankers buy gold and there are periods when they sell gold.

RBI also has an option to buy an asset which gives you a positive yield, which was the US treasury for some period of time and even in the last decade when the US yield was positive, people kept on building up their gold reserves. So if there is an argument that because of a liquidation event, a central banker could sell some of its gold, then there is all the more reason because gold thrives when there is chaos and we are building up a case and you are seeing a situation where we are talking about real negative interest rates. So all the more reason that the probability of you losing money holding a dollar asset is significantly higher versus owning gold and you should ideally see a positive return in gold.

So if there is a corresponding sale by a central banker then I see a situation that selling can easily get absorbed. There are enough buyers in the financial markets and if you look at it today, close to $187-190 billion of EPF money is into the gold ETFs. So you would have enough buyers of gold if there is a big seller. So, I doubt why a case would be made of central bankers selling gold. In fact it should be a time when central banker would be holding gold.


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