Let’s start with how you interpret this perfect storm of inflation and energy crisis, on top of war and various other climate issues, creating real macro headwinds for the global economy at the moment.
To some extent, I think the best description is the genie is out of the bottle. And it won’t be inflation for just a short period of time. Inflation is here to stay because it’s not only driven by all the issues. We are very well aware of the energy problems, the war, Russia, Ukraine. Some problems with supply and demand here and there. This certainly is a trigger, but we have a lot of very structural issues, which at least in Europe, and maybe globally, will lead to a higher inflation level than the one most investors have been used to over the course of the last 20 to 30 years.
It’s certainly driven by momentum and deglobalization. We all are aware of what’s happening around the power structure between the U.S. and China. We try to rearrange our supply structures here that will lead to perfect de-escalation.
The second driver is all the debates about a less carbonized world to save our planet. And this is costly. This will lead to massive shifts in our energy supply. Most people only now start to realize that this will have an impact to their consume balance sheets.
And thirdly, I think that’s predominantly an issue here in Europe. It’s the demography. We have very weak birth rates. The new generations, in terms of head count, are much smaller than the one which are retiring at the moment, and this will cause some problems, and especially some better negotiation power of the workforce and inflation on the second-round effect level, which we are absolutely able to observe right now. I think these three structural issues will stay and will need to higher inflation rates for the next decade, at least.
Within your role as a strategist and how you advise your various funds within the firm, how would you think institutional investors are reacting at the moment? Is the strategy pivoting to a hedging approach? Is it a rush for safe haven assets? Or are there still opportunities out there where there are pockets of growth depending on the sector?
I think the most stupid investment decision these days, at least if you are a long-term investor, would be to just fly to safety, or fly to cash and nominal assets. We are convinced that inflation will last much longer than the marked consensus is anticipating right now. And that’s the reason why you should load your portfolio as far as possible, as far as the regulator or your restrictions allow you, with real assets, because these are the only asset classes which are able to protect your real wealth.
If you are a company who has more or less monopoly in the product you are producing, or the quality of product you are producing, you are able to set prices and these companies can protect their earnings. And the earnings grows even in such inflationary and such problematic geopolitical periods. If you are price taker, then you only can try to improve your cost management, which most companies is already at a quite decent level.
Let’s look at where gold and maybe precious metals might sit within that. Historically, they’ve been a hedge or a flight to security. But are there attributes of precious metals and gold that can sit in a portfolio now? And also, why did we get this strange reaction where with a war and a crisis, the gold price actually dropped? Conventional wisdom would assume that the price should be going through the roof right now.
The only asset precious metal we are using for our asset allocation is gold, and wherever and whenever possible, physical gold. For us, it’s not a flight to safety investment. It’s just an insurance against the known and unknown risks of our financial system. And on top of that, obviously a decent medium and long-term inflation protector.
We don’t think it’s a hedge against geopolitical risks. Gold is not reacting to the invasion of Ukraine by Russia. Gold is not reacting if political turbulence. But if a banking system or a currency system is getting into the danger zone, then the gold price reacts to the upside. That’s the reason we hold it and we have tried to measure the inflation protection capability of gold since the 1970s.
And it’s still doing a decent job. Not month over month, quarter over quarter, or even year over year; but if you look into 10-year periods, then the difference between the performance of gold and the performance of the inflation rate is plus or minus 1.5%, which I think is quite decent, especially if you are afraid about a more aggressive hike in inflation than the one I’m expecting.
With real assets, you have some kind of inflation protection, given that you have real assets, which obviously are not as liquid and as homogenous gold is. But they provide quite a decent inflation protection already by themselves. If you have only government bonds, then the risks of an instability in the financial system and inflation is not covered by the return which you’re able to achieve.
