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Between 2013 and 2015, Goldman Sachs seemed to delight in talking down gold's price while buying large quantities. Now, two of Switzerland's biggest banks, Credit Suisse and UBS, have some interesting takes on gold.
In the second quarter, Credit Suisse sold around 37% of their holdings in the world's largest paper-gold fund. Profit taking? Who knows?
Meanwhile, Credit Suisse's end-of-July forecast for gold was quite bullish and based on things that have been the talk of the markets for over a year. The bank's team said that they expect gold to pass $2,000 by the end of the year, based on:
· Continued falls in bond yields
· Loose monetary policy (aka quantitative easing)
· Ongoing at-or-below-zero after-inflation interest rates (as I'm typing, the real interest rate on the U.S. 10 Year Treasury is not only negative, it's just 2bps above its all-time low)
Credit Suisse analysts have also touted gold's role as a hedge against a growing number of risks, including but not limited to financial and investment risks.
On the other hand, UBS has doubled down on its gold investment in what was already a massive precious metals portfolio, with the 4.85% increase bringing their gold holdings to over $1 billion.
UBS accompanied their eight-figure gold purchase by saying that gold could fall to $1,600. In their own words:
If we assume that the world is changing for the better - why do we need an investment that is primarily used as portfolio insurance?
That's a pretty big if ! Probably to the point where it strains belief. Nonetheless, UBS seem to be saying that a great global economic recovery is underway and therefore gold is going to be swept aside for more industrial metals like platinum and palladium.
Changing for the better as opposed to when, one might ask? Gold was outperforming in 2019 long before the global crisis hit, largely on the back of the bond market collapsing and sovereign bonds giving out negative yields. Expecting that the world will return to 2019 requires childlike naivete these days. Yet even then, during the pre-pandemic "good old days," gold's price was driven up by solid economic factors.
Gold must be a whole lot more than "portfolio insurance," or UBS wouldn't own more than $1 billion worth. But even if gold wasn't good for anything else, "portfolio insurance" alone is a solid reason to buy gold. By the UBS argument, we should buy homeowner's insurance after the fire's already started, or shop for car insurance after a fender-bender.
The UBS argument against gold simply falls apart. We have to assume they were talking gold down in the hopes of adding to their hoard at lower prices.
Most of our customers don't buy gold bullion and coins because they're pretty, or because they always wanted their very own pirate treasure to lock in a steamer trunk and buy in the back yard. They buy gold as a form of financial insurance, a Plan B. Insurance is supposed to protect (or "hedge" if you read The Economist) against "black swan events," those low-probability but very high-stakes catastrophes that seem to come out of nowhere. And unlike some horror stories we've heard about insurance claims processes, you don't have to worry whether gold will still be there when you need it.
Listen: if you're confused by the games Credit Suisse and UBS are playing, you can ignore them.
Here's the take-away:
· Gold is often purchased to diversify savings, and as "portfolio insurance" against economic disasters
· If you agree with the economic recovery angle, both platinum and palladium are primarily industrial metals that tend to rise when manufacturing rises
Physical precious metals are one of the few investments you can hold in your hand that don't disappear when the lights go out. Prudent folks know better than to try to insure their burning home, and they also know the right time to get themselves some "portfolio insurance" is before the next crisis.