While the central banks around the globe are tightening their monetary policy by raising interest rates, Japanese central bank is the one continues to keep their short-term interest rate as low as in the past decade. To me, this situation is just a mirror of an aging society, which takes longer time to change the habit of elderly. This habit is created because Japan has been in the ultra loose monetary policy after the financial crisis happened in 2008.

Since 2008, Japanese central bank is the main buyer of local government bonds, at the same time, Japanese central bank also printed a lot of money to buy local ETFs from the stock market. Come to the year of 2023, despite Japanese major stock market index Nikkei225 increased 25.73% by YTD, their currency was declined 10.33% against USD over the same period. For those return measured in USD, the YTD return would be reduced to 12.74% only.

Another side effect of the ultra loose monetary is the flooding of fiat money in the market, and then causes the true value of a currency reduced year on year. In my view, I believe gold could be a benchmark of currency value. Over the last 20 years, the gold price measured in JPY was increased approximately 460%, see pic below. Despite gold as a commodity does not generate any cash flow, the historical return is better than many type of assets.

However, if the gold price is measured in USD, over the same 20 years of period, gold price was increased approximately 290%.

Based on this simple observation, in my point of view, adding gold into our portfolio could help us to increase our portfolio return over a long investment horizon. Furthermore, according to some academic research, commodity such as gold could help us to reduce portfolio return volatility due to low correlation with other assets, likes equities and bonds.

Although I maintain my view on Japanese equities have their true value, I think the commodity assets such as gold could help us to hedge naturally the depreciation value of Japanese Yen currency. This strategy could replicate to other portfolio in different region where the money supply is aggressive.

No one knows this historical pattern of gold will continue further or not, but if compare to crypto-assets, personally I feel more comfortable toward gold. Low cost gold ETF is now added to my watchlist.

Lastly, Happy Merdeka Day to all Malaysians.

This post originally published on my personal blog: https://wordpress.com/post/streetanalystblog.wordpress.com/1801​