How Billionaire Investors Hedge Against Geopolitical Black Swans
Investors must always be comfortable with the idea that the market bears risk.
Sometimes this risk flies under the radar and isn’t as pronounced as it probably should be.
However, in other cases, the topic of risk can catapult to the forefront of discussion. There can be specific events or signals unfolding that give investors the jitters – and during these times, investors will make adjustments to their portfolios to avoid getting caught off guard.
How Billionaires are Hedging
In the following infographic from Sprott Physical Bullion Trusts, we explain the particular geopolitical risks that have the world’s most elite investors concerned today – and what moves they are making to protect themselves from black swans.
The world isn’t predictable at the best of times – but after unanticipated occurrences such as Brexit and the election of Trump in 2016, the geopolitical tea leaves are getting even more difficult to read.
The world is approaching a major inflection point and the intense amount of global angst we’re experiencing now stems from deep, structural forces that have been building over decades.
– Reva Goujon, VP Global Analysis of Stratfor
According to Reva Goujon, VP Global Analysis of Stratfor, we are experiencing the perfect storm of “-isms”: nationalism, nativism, protectionism, and isolationism.
As a result, the following potential geopolitical risks are at the top of the agenda for experts and top investors:
Unpredictability of the Trump administration, government inaction, a trade war with China, and NAFTA renegotiations
Economic nationalism, further “exits” from the EU, Russia and China seeking to assert authority, terrorism, escalation of Middle East conflicts, and North Korea’s nuclear ambitions
Elite Investors Taking Action
With these risks perceived to be on the table, some of the world’s most elite investors like Ray Dalio and Warren Buffett are taking action. Here’s what they are up to:
Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, had this to say:
When it comes to assessing political matters we are very humble.
-Ray Dalio, Aug 2017
Dalio’s advice: to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. He also recommends a 5%-10% position in gold.
The Oracle of Omaha has a similar but very different perspective.
No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.
– Warren Buffett, Feb 2017
With this in mind and with equities expensive, the seasoned value investor holds onto piles of cash to prepare for potential buying opportunities. Berkshire Hathaway now has $99.7 billion in undeployed cash, the most in the company’s history.
Billionaire hedge fund manager Bill Ackman took a position in “out of the money” call options on the VIX.
This will protect against stock market risk.
– Bill Ackman, Aug 2017
The billionaire founder of Greenlight Capital says he is keeping gold as a top position.
The (Trump) administration comes with a high degree of uncertainty.
– David Einhorn, Feb 2017
Lastly, the famous value investor Howard Marks warned his clients to move into lower-risk investments to protect against future losses.
The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.
– Howard Marks, July 2017
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)
|#7||🇸🇦 Saudi Arabia||180||3%|
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, 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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