Last Friday marked yet another turbulent episode in the European banking sector, with Deutsche Bank at the heart of the storm. The bank's shares experienced a steep 14% drop before eventually settling 8% lower. In the midst of such financial turbulence, often obscured from public view and understanding, grasping the concept of liquidity is crucial for investors aiming to protect and grow their wealth.
While the focus remains on whether the Federal Reserve will increase interest rates and cease Quantitative Tightening (QT), recent events have emerged, including the bailout of SVB. The ongoing debate questions if this constitutes Quantitative Easing (QE), but the crux of the matter lies in the Fed's clear intent to stabilise the banking situation by activating liquidity flow.
In this light, it is essential to understand the mechanics of liquidity and its impact on the global economy. For instance, how does liquidity impact interest rates, and what is its role in maintaining the financial health of banks? Liquidity is the ease with which assets can be converted into cash without significantly affecting their value. The greater the liquidity, the more likely it is for banks to lend, fuelling economic growth. Conversely, a decrease in liquidity can result in a credit crunch, which may stall economic growth.
Whether through traditional QE methods (printing money to purchase bonds) or by lending freshly created money to banks using their bonds as collateral, the outcome is an influx of new funds into the system to acquire financial assets. This happens as banks are unable to provide interest due to the inverted yield curve. Moreover, the safety of holding cash in banks at this time is worth considering.
Central banks play a pivotal role in maintaining liquidity by setting interest rates and employing various tools, such as QE and open market operations. The main goal is to strike a balance between stimulating economic growth and controlling inflation. The Fed's intervention in the financial markets also raises questions about the long-term consequences of such policies. Will the constant influx of liquidity lead to asset bubbles or inflationary pressures – something which happened during the Covid crisis, and we are now feeling the brunt of.
Michael Howell of Cross Border Capital has provided valuable insights on this matter, suggesting that the Fed's actions ultimately result in monetary inflation. If this is true, then historically, gold has been the go-to hedge against such inflation. However, modern alternatives like digital gold and silver-backed tokens, such as Gold Standard and Silver Standard, offer a more contemporary approach. These ERC20 tokens are likely to be reliable liquidity indicators, closely correlated with liquidity movements, and serve as a liquidity "barometer." As liquidity rises, significant increases in the value of gold and silver, and consequently Gold Standard and Silver Standard tokens, can be expected.
The global liquidity cycle typically follows a pattern of 3.5 years of growth followed by 3.5 years of decline. According to Howell, this cycle bottomed out in October of last year. If history serves as a guide, as it has for decades, we may be on the cusp of a three-year bull market.
As more 'money' is generated and infused into the system, it stands to reason that real money (which cannot be simply printed or created) will gravitate towards digital gold and silver-backed tokens like Gold Standard and Silver Standard. These tokens offer a secure and contemporary and similarly robust alternative to traditional precious metal investments while providing the same safeguard against monetary inflation. Investors can integrate these modern investment vehicles into their portfolios to maintain a diversified approach. Ask us today how you can integrate AUS and AGS into your portfolio.
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