The harm of quantitative easing

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How printing more money could backfire – and how to weather the storm.

We all know that diversification is an important part of any investment portfolio, but what does it really mean and how best to do it? Tony Coleman, Managing Director of New Zealand Gold Merchants gives his point of view.

Diversification is one of the most vital parts of an investment portfolio – and getting it right is essential.

Good diversification means that a well-managed portfolio will have some invested in an area or areas that are not strongly aligned with the majority of other investments.

What does it mean? Property and stocks generally move in unison, so they are said to have a strong correlation. This is great when the markets are bullish, but it can be disastrous when market sentiment turns bearish.

To protect your investments, it’s important to understand why diversification is necessary and how to achieve it without losing sight in times of low risk.

The five main categories of investment are:

  1. Actions
  2. Property
  3. Securities
  4. Merchandise
  5. Crypto-currencies

Investments that generally have a low correlation with stocks and goods are precious metals such as gold and silver and possibly Bitcoin. Investing in these helps smooth out unanticipated declines in other investments and quickly realize cash flow in case you want to, say, buy more stocks on a downside.

So let’s take a look at one of the most recent examples of how this protective diversification works: The advent of Covid-19 in February-March of last year was a huge shock to markets around the world – and they fell. The Dow Jones Industrial Average fell 35% in March 2020 before massive financial stimulus (trillions of dollars) propelled markets to new highs.

While the Dow Jones fell 35%, gold fell only 12% – before it too was propelled to new highs. Bitcoin fell more than 50% before recovering; it then stabilized before going supersonic. Unfortunately, since it peaked in April, it has dropped by more than 50%.

BITCOIN PERFORMANCE SINCE CREATION

Bitcoin chart.  Image / Supplied.
Bitcoin chart. Image / Supplied.

Gold’s ability to absorb initial market shocks and accelerate upward is one of the primary reasons it is used to diversify a balanced investment portfolio.

There are of course other reasons:

• Gold is the old school, it’s analog in the digital age
• There is no password to remember
• It cannot be hacked
• It is an excellent store of value
• It’s really easy to buy and sell, the payout is immediate.
• It can be stored in a secure facility – but has a global currency. If, for example, you needed funds to travel to children abroad or to deal with an emergency, you could easily sell some and have the funds moved anywhere in the world.

I look at how much debt is created by central banks and I just know it’s not sustainable, something has to give way.

Central banks print mind-boggling amounts of money (called quantitative easing) and you must be asking yourself the question: How does this not devalue the currency or become inflationary?

I think it’s inflationary; quantitative easing has pushed up asset values ​​and will inflate consumer prices. A higher demand for products and services and a lower supply lead to higher prices.

So what will happen to interest rates? In another age, they would have increased to tighten the money supply. Now? Who knows? The economy has been turned upside down.

All I see is risk, traditional investment markets are in a bubble to end all bubbles – so I’m looking for the anti-bubbles and I think gold is one.

Banks now offer an interest rate that is much lower than nominal inflation, so you are guaranteed to lose money (purchasing power) on term investments.

This seems wrong considering that when you deposit funds in your bank, you are nothing more than an unsecured creditor. Too bad (for you) if the bank runs into problems – and it is known.

Gold may be analogous, but it has protected wealth for centuries – and will continue to do so in the future.

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