Where can we find stores of value?
Global central banks have eroded “store-of-value” characteristics from traditional financial markets, such as cash and bonds, leaving investors to rely on property and equity as quasi-store-of-value instruments. Negative interest rates raise the attractiveness of the age-old store of value, gold, and the store of value for the digital age, Bitcoin.
Rather than hold cash, we could hold short-term interest instruments. If the instruments yield interest above inflation, we know that our savings can beat inflation. Real interest rates (interest rate less inflation) in the US and South Africa have gradually trended lower, reducing the ability to store value in these short-dated interest instruments. South African investors could store value in rands, but they assume currency risk in this scenario.
Alternatively, we could purchase longer-dated debt instruments (bonds) issued by governments or corporates. If the real bond yields (yield less inflation) are positive, our value might be maintained relative to inflation. It makes sense but the uncertainty and risk increases notably at this point. What if inflation rises? What if government credit risk deteriorates and the bond loses value?
Bond yields are close to record lows across the developed world despite record high debt levels, so the probability that these assets will hold their value over the coming years is low. South Africa isn’t in nearly as an extreme situation as the developed world, but the trend is the same: lower rates, lower growth, higher debt and deteriorating credit risk.
Another alternative to store value is financial assets such as equity and property. These assets are directly linked to economic activity through revenues, rentals and asset ownership, so extended periods when they underperform inflation are rare.
Data suggests that property was a prudent investment strategy before the sub-prime mortgage bubble in 2008, but property markets failed to beat inflation effectively thereafter.
With equity, there are times when real returns are negative, exposing savers to volatility and draw-downs, but they’re certainly positive through time.
Clearly, gold is more volatile than fiat currencies, but, through the cycle, it has a superior ability to maintain purchasing power.
Where people could historically store their savings in money, lower and lower rates implied that investors had to seek out alternative stores of value. Bonds, property, art, classic cars and equity are options, but they all come with their own risks and they aren’t the intended use-case for these assets.
As central banks exacerbate the negative interest rate path and this pushes debt deeper into negative yields, investors will become increasingly interested in stores of value such as gold. Bitcoin is a complex and unregulated technology with a host of risks, but it holds similar constrained-supply-characteristics to gold. Continued global monetary corruption is the primary reason for increasing demand for store-of-value technologies.
Rob Price is an investor at an asset management firm in Johannesburg.