Need to reassess ‘risk free’ assets, says World Gold Council
Investors should re-examine the recent performance and outlook for traditional ‘safe’ assets and instead explore gold’s credentials as an asset that can provide a long-term trusted alternative, says Juan Carlos Artigas, global head of Investment Research at the World Gold Council.
Western investors and asset managers have historically considered government bond yields as the benchmark risk-free interest rate, against which other asset classes were to be measured.
True to form, over the past year, two national bond markets have provided shelter from turbulence in global risk assets: US Treasuries and German Bunds, allowing investors to preserve capital while riskier assets have floundered. Certain hard currencies have also historically been seen as a reliable and stable store of value due to the long-term stability of their purchasing power.
In 2012, we have seen behaviour supportive of this with the US dollar, the Japanese yen and the Swiss franc benefitting from de-risking inflows.
However, being an asset of last resort is not without consequences. In particular, investors seeking ‘safer’ assets must also recognise that the ever-increasing supply of both currency and debt deplete the value of these assets. Furthermore, as declining yields approach zero, bond holders will at best get their capital back in nominal terms if they hold the bond to maturity.
And in fact, they will more likely be negatively impacted by two factors: first, a loss of purchasing power in real terms as inflation erodes capital; and second, a fall in price for the bonds they hold when conditions normalise and yields start to rise.
Developments in the euro-area crisis so far in 2012 have led markets towards the realisation that most outcomes in this on-going saga will be painful not just for the peripheral countries, but also for core economies – particularly Germany.A brief but sharp drop in German Bunds dragged down by troubled peripheral government bonds during June and August alarmed some investors during the second quarter.
Although other factors may have been at play, it highlighted the fact that whatever the outcomes in the euro area saga, Germany’s liabilities are large and likely to increase as a result of burden sharing.