There is an interesting statistic in Morgan Stanley’s latest note “the case for gold”.
Not only does Morgan Stanley appear to have joined the brigade of renewed bullion believers Goldman Sachs, Citi, UBS and Merrill Lynch — based on its belief that the risk of a return to high inflation, albeit small, can no longer be easily dismissed — the analysts point out:
The result of the current financial crisis has been a destruction of world wealth which on our calculation has since mid 2007 amounted to approximately US$20trn (or down 16% from its peak, which has been estimated at US$125trn by the United Nations).
This is the largest absolute and percentage decline in world wealth since the physical destruction of WW2. For the US component of world wealth, the primary source for these data is the US Federal Reserve’s Z1 report. This is currently available through end Q3 and shows a US$7trn decline from the peak. Factoring in the large declines in the S&P in October, further falls in house prices and credit-related securities (e.g., RMBS / CMBS), we estimate a further US$5.5trn decline in Q4 to around US$51.4trn (down from a peak of approximately US$65trn).
While the US has seen the biggest shock to housing wealth, most other countries now also have negative trends in this key element of global wealth. Moreover, the US$ value of local equity indices fell by more than the S&P 500 in almost all cases in 2008.
$20,000bn, just gone – wow. The analysts also point out:
On our calculations, the only episode approaching the current one in magnitude in terms of shock to net worth was 1974. During that period, conventional policy easing led to negative interest rates in the short end of the curve for five years, leading to higher inflation and a bull market for gold. Given the low level of nominal interest rates prior to this recent crisis, policy has been forced into unconventional territory. Quantitative easing of one form or another has begun in the US, UK and Japan already.
Accordingly they have five key cases for why gold’s a buy:
1) Gold has been accepted as a store of value for humans for at least 10,000 years, hence it is a good defence against the tail risk of higher inflation
2) Production of gold is not easy, in fact production has been declining in each of the last three years.
3) Governments have been selling down their gold, while households have been increasing stock.
4) Relative to the current value of the stock outstanding, gold appears to be largely unlevered at present (most gold miners have ceased their forward sales of gold).
5) Gold is not much of an input to the production side of the real economy – so unlike other commodities is relatively shielded from further declines in economic activity.
Related links
Goldman Sachs bullish on ‘currency of last resort’ gold – FT Alphaville
Gold-to-oil ratio – FT Alphaville