Gold: the ultimate currency? - Part 3

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From the course by University of Geneva

Understanding Financial Markets

1959 ratings

University of Geneva

Understanding Financial Markets

1959 ratings

Course 1 of 5 in the Specialization Investment Management

In this course, you will learn what the main financial markets and their characteristics are as well as how they are linked to the economy. Our very diversified team of experts will start by teaching you how the price of stocks and bonds are computed and why they move while you will become increasingly aware of the notion of risk and why it matters when measuring an investment's performance. The focus will then move to less popular markets such as gold, emerging markets, real estate, hedge funds and private markets. These will be analyzed with an emphasis on their particular risks and return opportunities as well as how they can help in building efficient portfolios. Finally, the policies of central banks and their impact on financial markets will be presented to you along with the link between the economy and the price of financial assets. All along these different steps, experts from UBS, our corporate partner, will show you how the concepts you just acquired are effectively applied in a leading global bank. This focus on practicality means you will not only understand what is going on in global financial markets but also start to figure out how you can use them to achieve financial goals, be it a client's or your own.

From the lesson

Other Financial Markets

What you will learn in this module1:25

Emerging markets: stocks10:39

Emerging markets: bonds7:16

Gold: the ultimate currency? - Part 17:19

Gold: the ultimate currency? - Part 27:20

Gold: the ultimate currency? - Part 37:34

Meet the Instructors

University of Geneva- Ines Chaieb
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Jonas Demaurex
Teaching Assistant
Geneva Finance Research Institute
University of Geneva- Rajna Gibson Brandon
SFI Senior Chaired Professor of Finance and Managing Director of the GFRI
Geneva Finance Research Institute
University of Geneva- Michel Girardin
Lecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
Geneva Finance Research Institute
University of Geneva- Martin Hoesli
Professor of Real estate investments
Geneva Finance Research Institute
University of Geneva- Olivier Scaillet
SFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
Geneva Finance Research Institute
University of Geneva- Philip Valta
SFI Assistant Professor of Finance
Geneva Finance Research Institute
Dirk Effenberger
UBS Guest Lecturer, Head CIO Cross-Regional Investment Office
Chief Investment Office, UBS Wealth Management
Mark Haefele
UBS Guest Lecturer, Global Chief Investment Officer
Wealth Management and Wealth Management Americas
Brian Nick
UBS Guest Lecturer, Strategist
Chief Investment Office, UBS Wealth Management Americas
Mike Ryan
UBS Guest Lecturer, Chief Investment Strategist
Chief Investment Office, UBS Wealth Management Americas
Simon Smiles
UBS Guest Lecturer, Chief Investment Officer UHNW
Chief Investment Office, UBS Wealth Management
Themis Themistocleous
UBS Guest Lecturer, Head European Investment Office
Chief Investment Office, UBS Wealth Management
Thomas Wacker
UBS Guest Lecturer, Head CIO Credit
Chief Investment Office, UBS Wealth Management
Chris Wright
UBS Guest Lecturer, Cross-Asset Strategist
Chief Investment Office, UBS Wealth Management
University of Geneva- Tony Berrada
SFI Associate Professor of Finance
Geneva Finance Research Institute

[MUSIC]

Hey, you know what?

If we want to talk about gold, we have to, we just have to, mention ketchup.

And to be more specific, ketchup inflation.

Now, let me illustrate this.

Now you remember the Big Mac?

The Big Mac we showed?

There were three actually when we talked about currencies?

I'm sure you've been through this experience before,

it's quite a difficult experience, but I'll show you what I mean.

You have this, ketchup and

you want to add a bit more on this Big Mac, because you think it's a bit dry.

So, you start taking the bottle, and you start shaking it.

And you keep on shaking it.

And you keep on shaking it and nothing happens.

And there you go.

So this is the story of ketchup inflation and we'll see what we mean by that.

Actually it's a story of central banks when they put in money.

This is the ketchup inflation, this is it.

[SOUND] So now that you have a sense of what ketchup inflation is,

we'll see how you can hedge against this type of very nasty event.

But before we have a look at this kind of hedge, let's see what gold can

provide you as an insurance against some type of nasty events, and

one of the example here is the stock market.

Indeed we can see from this chart that gold

can hedge you against adverse movements in the equity market.

What you see from this chart is the red, the evolution of the price of

gold in US dollar and in percentage term year over year.

And we have the same percentage term year over year for the blue line and but

that's the world index as captured by the MSCI.

Again, now you know me a bit [LAUGH].

I use this funny scale, the right-hand scale is inverted,

so and a fall in the red line is actually an increase of the value of gold.

And we can see that we have two of these periods when

the stock market went through a severe crisis.

We can see that for instance when the stock market tumbled by 20% at

the beginning of the year 2000,

the gold price rose by an equivalent percentage of 20%.

And also during the so-called great recession,

when the stock market collapsed by more than 30%,

the price of gold rose by the same percentage.

So there is, indeed, this good correlation, by and large,

between the evolution of gold and that of the stock market.

But I would say if there is one reason to own gold, it's the insurance against this.

Now what is this?

This is a black swan.

You remember the introductory video we did, the park?

And when we saw that black swan.

Well, the black swan idea in finance is one of a very unlikely event

but if it happens it has very, very nasty consequences.

This is for instance, the Fukushima in Japan.

The nuclear plant which bursts and leads the country into a severe recession.

So black swans should not be underestimated because

they are very unlikely, and more often than not people stop their and

say, it's very unlikely therefore I should not bother too much about it.

But no, that's wrong because you should combine the probability, but

also the damage that it leads to.

The two combined makes you that you should consider black swans.

A very unlikely event, but very nasty consequences.

Now let's have a look at another example then for

Fukushima, as the black swan.

And one of these example is the so-called Ketchup Inflation.

Now you saw in the introduction video what it means [LAUGH].

Why we use this idea, you can Google ketchup inflation,

you will see what it actually means.

Well, what does it mean?

Well, ketchup inflation comes when central banks print money.

We know that indeed, there's always a link between money creation and inflation.

Normally this link is stable.

Central banks can embark on excessive money printing, for

instance if they have to finance public deficits.

They embark into this quantitative easing, this unconventional policies and

money supplies goes through a staggering increase.

So if you print too much money, at some point maybe

there is a risk that people lose faith in this paper currency, and

they say it's not worth even the ink which is used to print those currency.

So what happens then is that people, when they get their wage,

they start rushing to the shops and buying goods, because they fear that,

maybe at the end of the month, the price will have risen.

And so what we get is a so-called increase of the velocity of circulation of money.

The money is given as a wage and people spend it at an increasing pace.

And this increasing space of spending the money,

of circulating the money, leads to a spiraling inflation.

Inflation starts increasing and increasing and

increasing and ends up in hyper inflation.

So, ketchup inflation is precisely that.

At the beginning your pre-money, you shake the bottle and nothing happens.

But you keep on shaking it and suddenly splash, inflation is there and

once it's there, it's kind of self feeding.

Inflation today leads to more inflation tomorrow.

So this is the kind of very nasty event.

A black swan, meaning something very unlikely but with very nasty consequences.

So by now, you know what is the main reason

why we call this set of three videos Gold, the Ultimate Currency.

If this very unlikely event happens, there is a rationale to think that gold would

be used again as an anchor to the International Monetary System and

would be considered as a stable currency.

So, in conclusion, we've seen with this side of free videos,

that gold as served many purposes in finance.

But basically as a means of exchange throughout history going back to 3000 BC.

But it can also serve as a hedge against many things.

Against the collapsing Dollar, against political tension,

against rising inflation, against stock market crashes, and

last but not least, against so called black swans.

Very unlikely event, but if they do materialize, hey, watch out.

This is a very, very bad thing that can happen to you.

[MUSIC]

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