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Luc de la Durantaye, Chief Strategist and CIO for Multi-Assets and Currency Management at CIBC Asset Management.
In this recent development of central banks rekindling with lowering interest rates [and] quantitative easing, this certainly is pushing real interest rates lower. Gold has an inverse relationship with real rates, so the lower real rates, the higher gold, all else equal. The other aspect of gold is, as central banks in a way continue or restart quantitative easing, they’re essentially supplying more fiat currency, so in a way devaluing their own currency, their own fiat currency. In that context and in the context of global uncertainty with a trade war and geopolitics with Iran and North Korea, gold certainly should be part and is part of our multi-asset strategy as a hedge and a protection and in portfolios.
Other protection in portfolios: certainly in the current environment of low yields and even negative yields in a broad spectrum in Europe, there’s a number of countries that their interest rates go negative up to 10-year maturities—same in Japan—then quality emerging-market currencies and bond markets could provide a degree of income, a degree of return. And so, again, in our strategy we are selecting the quality part of emerging-market bonds because as developed-market bond yields continue to plumb new lows, then the spread with emerging markets is attractive for the quality emerging markets.
The same thing for currencies related to that: if some investors are going to look into some emerging-market bonds by definition by buying their bond market, they will also be buying their currency. So we would also favor some of these currencies. So currencies of Indonesia, India are of good quality providing high yield. Mexico as well. Although there’s certain fiscal issues in Mexico, Mexico provides a very high yield and it can be attractive in this environment. So it’s part of the well-diversified portfolio.
And finally, if we’re in this environment and given that the yield curves are very flat and now are even inverted, then there’s nothing wrong with cash. Cash is a low-volatility asset. You’re not being paid to go out the yield curve in many government bond markets, given the flatness and even the inversion of yield curves, and so retaining some flexibility in liquidity and having some cash to take advantage of dislocation or market prices improvement, then cash is also part of our strategy.