If you’ve got a spare 30 minutes or so, do have a listen to my Citywire podcast interview with Dan Grote and Gavin Lumsden. I probably sound a bit bearish, which isn’t really quite accurate. Cautious would be my favourite adjective.

Anyway, you can listen to the podcast via this link – enjoy:

https://open.spotify.com/episode/3QkkiLbfHiptxI4hqs5S9G

What I am surprised by is that even I have started quietly, in piecemeal fashion, started buying into gold and gold securities. I’m not an enthusiast by any definition of the world but I suppose my PM related exposure has gone from a big fat zero to say 1% or 2%, largely through gold shares, in large cap stocks which pay out a dividend.

What I haven’t done quite yet is buy into physical gold. One of many reasons why I haven’t done that is that I’m ever so slightly worried about the effect of volatile FX markets on the net return from gold. The cable rate for instance, has ranged in 2020 from a high of over 1.32 at the start of the year to a low of just under 1.15 according to Invesco. As Invesco adds, “Currency fluctuations can have a material impact on investors. Quoted in US Dollars, the gold price has risen by 16.7% over the first six months of the year but is up by 23.7% over the same period when converted to Sterling.” That beneficial uplift in sterling has worked to UK investors favour but it could easily work in the opposite direction.

So a hedged way of buying physical gold makes some sense – and Invesco have this week stepped up to the challenge with a new GBP hedged physical gold ETC. Details below.

My interest in gold has been piqued because I am growing ever so slightly nervous about the outsized role that central banks, QE and monetary easing are playing in the modern economy. We’ve moved from a world where huge intervention and experimentation is infrequent to one where it is systemic. The news that the BoE is thinking about digital money with digital direct accounts is just one more sign that we are potentially heading towards some form of helicopter money, which might in fact be absolutely necessary.

But I worry more about the huge balance sheet holdings of risky assets owned by central banks. This is helping to underwrite bulging equity valuations but is also opening up the banks to potentially huge losses if markets sour. Gold seems like one of many hedges against that nightmare scenario.

Obviously I’m not the only observer worrying about this ‘new monetary system’. Yesterday I picked up some comments by a EDHEC academic, Professor Riccardo Rebonato. He notes that central bank balance sheets are now “full of asset bought at prices that are unlikely to reflect future cashflows. Would future central bank losses matter?”. On paper banks could always just print more money to meet those liabilities but that can “only happen, however, if the central banks liabilities remain a liquid and trusted method of settlement. Recent academic studies show a link between central bank losses and inflation outcomes. And rising inflation would, of course, make the now-easily-serviceable national debt no longer so easy to service. Which, finally, brings us back to the long-term risks for nominal Treasury bonds worldwide.”

Here we have the nexus of many worried observers. What happens if govie yields start to rise again rapidly, partly as insurance against rising inflationary expectations? At that point the cost of servicing all that debt would prove to be increasingly problematic. No doubt FX rates would take some of the strain – thus the need for hedging – and I have no doubt that governments could assist by increasing (wealth) tax rates. But sooner or later we need to find a way to boost productivity rates, so we can boost growth, so we can climb over the mountain of debt.