[MUSIC] So now that we've seen that gold has been used for many, many, many years as a store of value as a backing to the FIAT monetary system, we'd see in this second video that it can also serve as a hedge against various types of events like political tension, inflation or collapsing stock markets. The first of these is political tension. So what we see on this chart is the price evolution of gold between 1978 and 1981. You may remember that during this period, exactly between November '79 and January '81, for 444 days, there was the so called Iran hostage crisis. During this period you can see that gold price rose quite substantially and went from 400 and more than doubled to 800. So, there is always this idea when there is political tension or fear of war. Invest to look for safe investment and they find the answer more often than not in gold. Okay, so now let's have a look at another key hedge which is provided by gold and that's the hedge against inflation. You can see from this chart we have two lines here. The red one is the price of gold. Here it's not in level or in logarithm terms, it's in percentage terms relative to the prior year. And in blue, that's the price of gold also in percentage term, year on year. And you see that the correlation between both lines is actually quite high, 0.65. And you can see, for instance, that in the 70s we have these peaks of inflation rising at double digit numbers. And they correlate pretty well with also peaks in the gold price. Now what is the rational for the hedge of gold against inflation? Well, academic research shows that the reason for this hedge is that investors basically look for a stable, again, currency when central banks embark on excessive money printing, which leads to inflation down the road. So expected inflation increases. And when there is this increase in inflation people look for a currency which supply can not be increased very easily like printing money. This is the reason why and it's proven by imparicle evidence when there is fear that there is going to be inflation down the road people look for a stable anchor. And they found it in gold. So now that we've seen that gold can provide a hedge against inflation, let's look at some other types of hedges which can be provided by gold. But first, a question to you and that's a quiz. For you, what is the cost of owning gold? Let's pause for this for a minute and take about this, if you buy gold is there a cost? When you do so. Now that you know that the custom goal is an opportunity cost, it's basically the return you would yield if you put money in your bank and ideally measured in real terms so, in a nominal interest rates which you're getting on your deposit subtracted by the inflation rate. Let's see if there is a link between this cost of owning gold, and gold itself. And this relation we've put here, and you see the red line is gold, again here at levels. On the right hand scale and in logarithm terms and we put the real federal funds rate, which is, as you know, the benchmark which is used by the US central bank. The key interest rates it uses, short-term interest rates, in real terms and here, yet again, a subtlety the scale is inverted, the left hand scale is inverted so that drop in the blue line like it happened in 1980 is actually an increase in the rear feed from the right. Okay. And as you can see, there's actually a pretty good correlation here too between the cost of owning gold and the performance of gold. For instance, you see here during the 70's the real federal funds rate also yielded quite a bit, but by and large it was largely negative. An average of possibly minus 2%. So indeed here, you can say there was no cost of owning gold, actually, you were even paid in a way, to own gold, because if you leave your money at the bank at the end of the year if you deduct inflation, and since inflation as we have seen in the previous slide was very high during this period, the nominal return you made on the money was a bit below inflation. So in real terms, you actually lost purchasing power. So in this kind of environment obviously it makes sense to own gold and you can see that it went from a staggering increase. It increased by the official rate on the gold standard of $35 to a staggering $800 during the Iran hostage crisis. Then throughout the 80s and I would say up until the beginning of 2000, the real federal funds rate oscillated also quite a bit, but stayed mostly in positive territory. Indeed, quite substantially so in the most part of the 80's when it averaged 5%, which is quite high. So obviously, when you make 5% with no risk or very little risk on leaving your money at the bank, 5% in real term you don't have many incentive to buy gold whose price can fluctuate quite a bit. And then back to 2004, I would say then the real interest rate went negative again fluctuated also quite a bit, but stayed there, and obviously stayed in negative territory as central banks embarked in easy monetary policy. So in this kind of environment it's again attractive to own gold. And just very recently we've see that gold has abated quite a bit, the price has fallen. It almost reached a peak of 2000 and now it's back to 1000. And one of the reason is that, there is this expectation that the US Central Bank will embark on more tightenings of the interest rates as it did just a couple of weeks ago. [MUSIC]