Challenging the current investment framework

Gold continues to make new all time highs, questioning the foundations of the fiat currency system. But it also poses a challenge for investors, that for the last 50+ years, did not have to worry about the currency in which they express the returns they achieve. In the current investment environment is not enough to obtain good nominal returns; it’s imperative to obtain positive real returns. Traditionally, real returns are simply calculated by subtracting inflation, typically CPI, from the nominal return. If we do that to bonds, taking into account the chart below, we will see that a third of all the bonds in the world, typically the safest ones, provide zero or negative real returns, and that assumes no fees involved. But if fiat currencies are being debased vs gold, at a rate of 50% per annum (that’s how much the value of gold has increased in US dollar terms YTD) and bonds provide returns in fiat currencies, the loss of purchasing power of 90% of the bonds outstanding, is gigantic (in fact 100% of bonds). The traditional asset allocation model rests on the solidity of the fiat currency system, providing degrees of freedom in terms of asset class, countries, sectors, factors, styles etc. The primary investment goal is to sacrifice today’s expense to achieve future returns and cope with the time value of money. Can that goal be achieved with a portfolio that owns bonds? Do we need a new investment framework?

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