12
June
Macroeconomic & Systemic Risk
Macroeconomic risk is the risk posed by the business and economic cycle in the form of recessions and monetary threats of deflation, inflation, stagflation and hyperinflation.
Systemic risk are risks that relate to or affect the entire body, the entire organism or the entire global financial system. It is the risk of collapse of an entire system or entire market and not to any one individual entity or component of that system. With increasing fears regarding the very solvency of the US and international financial system, systemic risk has never been more heightened.
Gold is a finite currency and safe haven asset and its basic characteristics make it a unique asset that protect investors and savers against macroeconomic and systemic risk.
Gold is primarily a monetary asset, and partly a commodity. As much as two thirds of gold's total accumulated holdings relate to "store of value" considerations. Holdings in this category include: central bank reserves, private investments, and near investment grade jewelry (fineness 900/1000) bought primarily in developing countries as a vehicle for savings.
Thus, gold is primarily a monetary asset. Less than one third of gold's total accumulated holdings can be considered a commodity: jewelry bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined.
Astute analysts with a knowledge of monetary economics and history think of gold as a "currency without a country' or universal currency. It is an internationally-recognized asset that is not dependent upon any government's promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds which, unlike gold, do have counter-party risk.
Corporations, banks and indeed countries can and do go bankrupt – gold cannot not go bankrupt and this is why it is an essential diversification in a portfolio as per modern portfolio theory. With systemic risk remaining elevated, counter-party risk has not been so high since the Great Depression (and maybe higher than even then) and this is leading to safe haven demand for gold bullion as it is the only asset that does not have third party liability.
As a physical asset, bullion is inherently valuable in and of itself. This is to say, physical precious metals have tangible, intrinsic and innate value in and of themselves, and they are therefore the only asset class that is not some outside entity's or third party's liability (as is the case with a stock or government or corporate bond). Thus, the investor who owns the physical asset directly, and whether held in his/her personal custody or stored safely in his/her name in an insured account at a qualified facility, will enjoy the sense of security one derives from knowing that their investment portfolio is strengthened by the presence of an actual tangible asset with an intrinsic value, and not just a piece of paper, or derivative product dependent on the performance of a third party or the health of the wider economy.
