Precious Metals
The 5 Biggest Market Risks That Billionaires are Hedging Against
If you’ve studied the history of markets, you know that sentiment can turn on a dime.
Whether it is an unexpected wake-up call like the collapse of Lehman Brothers, or simply the popping of a bubble that’s blown too big, the tides can shift in a matter of hours or days.
No one knows this better than the world’s most elite investors – and that’s why billionaires like Warren Buffett, Ray Dalio, Bill Gross, Paul Tudor Jones II, and Carl Icahn take the necessary precautions available to protect themselves from these big and unexpected market swings.
5 Risks That Keep Billionaires Up at Night
Today’s infographic comes to us from Sprott Physical Bullion Trusts and it highlights some of the potential market risks that could move markets, as well as how these elite investors are hedging to protect their fortunes.
While these are all market risks that billionaires are concerned about, it’s worth mentioning that these kinds of events are almost impossible to predict or forecast.
Despite the unlikelihood of them occurring, they all have the potential to impact markets – and that’s why elite investors are always active in hedging their investments.
A Note on Net Worth
Why are billionaires so concerned – after all, don’t they have lots of cash to protect themselves?
It’s worth noting that on a relative basis, billionaires often aren’t very liquid at all. In fact, the majority of their net worth is usually tied up in business interests or other investments, and the value of these assets fluctuate with the market.
That means a big market movement could wipe out millions or billions of dollars in the span of hours. For an extreme example of this, just look at Mark Zuckerberg, who saw his net worth plunge $6 billion in just one day in the wake of his company’s most recent privacy crisis.
The 5 Big Market Risks
Here are the risks keeping the world’s most elite investors up at night:
1. The Return of Inflation
Have central banks mastered monetary policy- or is there a chance that inflation could come back with a vengeance? After trending down for decades, billionaire Carl Icahn says that creeping inflation could lead to higher interest rates, which he thinks would be “difficult to deal with for the market”.
2. Record High Debt
The most recent number for global debt is at $233 trillion, and about $63 trillion of that is central government debt.
Bill Gross, the “Bond King”, says that our system is dependent on leverage, and the critical values that affect this are debt levels, availability, and the cost of leverage. He said in a recent interview that “When one or more of these factors deteriorates, the probability of the model’s success and stability go down”.
3. Bond Market Worries
Last year, 84% of investors said that the corporate bond market was overvalued – and 82% said that the government bond market was overvalued.
In a recent interview, hedge fund billionaire Paul Tudor Jones II predicted a price plunge, saying that “Bonds are the most expensive they’ve ever been by virtually any metric. They’re overvalued and over-owned.”
4. Geopolitical Black Swans
Elite investors continue to worry about geopolitical surprises that could impact markets, such as a trade war with China. We looked at this broad topic in depth in our previous infographic on geopolitical black swans.
5. Overzealous Central Banks
Lastly, many world-class investors are also concerned about the unintended aftereffects of massive central bank programs in recent years. With $13 trillion in total QE pumped into global markets since 2008, investors are worried about how much room that central banks have left to maneuver in a situation where the central bank “tool kit” is needed.
Money
Charted: 30 Years of Central Bank Gold Demand
Globally, central banks bought a record 1,136 tonnes of gold in 2022. How has central bank gold demand changed over the last three decades?
30 Years of Central Bank Gold Demand
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Did you know that nearly one-fifth of all the gold ever mined is held by central banks?
Besides investors and jewelry consumers, central banks are a major source of gold demand. In fact, in 2022, central banks snapped up gold at the fastest pace since 1967.
However, the record gold purchases of 2022 are in stark contrast to the 1990s and early 2000s, when central banks were net sellers of gold.
The above infographic uses data from the World Gold Council to show 30 years of central bank gold demand, highlighting how official attitudes toward gold have changed in the last 30 years.
Why Do Central Banks Buy Gold?
Gold plays an important role in the financial reserves of numerous nations. Here are three of the reasons why central banks hold gold:
- Balancing foreign exchange reserves
Central banks have long held gold as part of their reserves to manage risk from currency holdings and to promote stability during economic turmoil. - Hedging against fiat currencies
Gold offers a hedge against the eroding purchasing power of currencies (mainly the U.S. dollar) due to inflation. - Diversifying portfolios
Gold has an inverse correlation with the U.S. dollar. When the dollar falls in value, gold prices tend to rise, protecting central banks from volatility.
The Switch from Selling to Buying
In the 1990s and early 2000s, central banks were net sellers of gold.
There were several reasons behind the selling, including good macroeconomic conditions and a downward trend in gold prices. Due to strong economic growth, gold’s safe-haven properties were less valuable, and low returns made it unattractive as an investment.
Central bank attitudes toward gold started changing following the 1997 Asian financial crisis and then later, the 2007–08 financial crisis. Since 2010, central banks have been net buyers of gold on an annual basis.
Here’s a look at the 10 largest official buyers of gold from the end of 1999 to end of 2021:
| Rank | Country | Amount of Gold Bought (tonnes) | % of All Buying |
|---|---|---|---|
| #1 | 🇷🇺 Russia | 1,888 | 28% |
| #2 | 🇨🇳 China | 1,552 | 23% |
| #3 | 🇹🇷 Türkiye | 541 | 8% |
| #4 | 🇮🇳 India | 395 | 6% |
| #5 | 🇰🇿 Kazakhstan | 345 | 5% |
| #6 | 🇺🇿 Uzbekistan | 311 | 5% |
| #7 | 🇸🇦 Saudi Arabia | 180 | 3% |
| #8 | 🇹🇭 Thailand | 168 | 2% |
| #9 | 🇵🇱 Poland | 128 | 2% |
| #10 | 🇲🇽 Mexico | 115 | 2% |
| Total | 5,623 | 84% |
Source: IMF
The top 10 official buyers of gold between end-1999 and end-2021 represent 84% of all the gold bought by central banks during this period.
Russia and China—arguably the United States’ top geopolitical rivals—have been the largest gold buyers over the last two decades. Russia, in particular, accelerated its gold purchases after being hit by Western sanctions following its annexation of Crimea in 2014.
Interestingly, the majority of nations on the above list are emerging economies. These countries have likely been stockpiling gold to hedge against financial and geopolitical risks affecting currencies, primarily the U.S. dollar.
Meanwhile, European nations including Switzerland, France, Netherlands, and the UK were the largest sellers of gold between 1999 and 2021, under the Central Bank Gold Agreement (CBGA) framework.
Which Central Banks Bought Gold in 2022?
In 2022, central banks bought a record 1,136 tonnes of gold, worth around $70 billion.
| Country | 2022 Gold Purchases (tonnes) | % of Total |
|---|---|---|
| 🇹🇷 Türkiye | 148 | 13% |
| 🇨🇳 China | 62 | 5% |
| 🇪🇬 Egypt | 47 | 4% |
| 🇶🇦 Qatar | 33 | 3% |
| 🇮🇶 Iraq | 34 | 3% |
| 🇮🇳 India | 33 | 3% |
| 🇦🇪 UAE | 25 | 2% |
| 🇰🇬 Kyrgyzstan | 6 | 1% |
| 🇹🇯 Tajikistan | 4 | 0.4% |
| 🇪🇨 Ecuador | 3 | 0.3% |
| 🌍 Unreported | 741 | 65% |
| Total | 1,136 | 100% |
Türkiye, experiencing 86% year-over-year inflation as of October 2022, was the largest buyer, adding 148 tonnes to its reserves. China continued its gold-buying spree with 62 tonnes added in the months of November and December, amid rising geopolitical tensions with the United States.
Overall, emerging markets continued the trend that started in the 2000s, accounting for the bulk of gold purchases. Meanwhile, a significant two-thirds, or 741 tonnes of official gold purchases were unreported in 2022.
According to analysts, unreported gold purchases are likely to have come from countries like China and Russia, who are looking to de-dollarize global trade to circumvent Western sanctions.
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