BlackRock is the world’s largest asset manager with almost $7 trillion in assets under management as of today. To compare its economic power, it’s worth knowing that the Fed’s balance sheet amounts to $4 trillion, while the ECB’s balance sheet amounts to almost €5 trillion.
In September 2019, an article was published on www.blackrockblog.com about the Central Bank’s monetary policy that is more or less near end and the implications as far as investing is concerned.
The article was written by Rick Rieder (Managing Director, BlackRock’s Chief Investment Officer of Global Fixed Income and Head of the Global Allocation Investment Team), with contributions from Russell Brownback (Managing Director, Head of Global Macro positioning for Fixed Income) and Navin Saigal (Vice President, analyst and portfolio manager on BlackRock’s Global Macro Strategies Team).
Even if it would be an exaggeration to depict this article as Blackrock’s semi-official position on gold and its place within an investing strategy, we should take note of the fact that these are among Blackrock’s most influential directors.
In it, Rieder and his colleagues
a) warn that a monetary debasement is probable;
b) note that this wouldn’t have been possible under the gold standard;
c) advise investing in assets that maintain their real value (stocks, real estate, and commodity currencies).
Two Ways to Produce Inflation
According to Rieder, inflation is created in two ways. The first is the consequence of demand stimulus (e.g. through lower interest rates). As far as this kind of inflation is concerned, it seems that the traditional monetary policies aimed to support demand aren’t working, as the rate of aggregate demand growth is low (and in some places, it is even contracting) while supply stays level. The second way to create inflation is debasing the currency and its purchasing power (e.g. through “helicopter money“). Rieder concludes that what we are facing is an endgame in terms of this monetary debasement.
Rieder remarks that such monetary debasement wouldn’t be possible under the gold standard, as every new currency unit would have to be backed by physical gold coming either from mining output (a very slow and expensive process) or from existing (but limited) stockpiles. On the contrary, money today is created by printing presses or, even simpler, computer keystrokes.
Rieder adopts the Quantity Theory of Money when he states that, “In order to debase a currency, money needs to be created at a faster pace than goods and services are” (essentially, liquidity growth needs to exceed world GDP growth).
Suitable Investment Strategies
As Blackrock is no scientific academy but an investment management corporation, the reader expects some form of investing advice. Rieder advises to hold not financial but real assets that cannot be created at will (stocks, real estate and commodities): “How should one position themselves for such an endgame?”
Rieder’s answer: “As is probably evident, any nominal instrument will be devalued in real terms, so the solution is to hold an asset that maintains its real value, meaning an asset that cannot be printed. This would include stocks (dividend yields are set on payout ratios, companies have some degree of pricing power, and outstanding shares are limited in number), real estate (it is difficult and expensive to expand the stock of real estate), and even commodity currencies, like gold (again, limited supply and expensive to extract).”
The use of the expression commodity currencies is interesting, as it reminds us of monetary metals used usually within “goldbugs” circles. It’s just as well that gold and silver are the only two metals that traditionally get ascribed to a monetary function, so these are the only two commodities to have a function as currencies.