Day Two

Gold, Central Bank digital currencies and the evolving global reserve system

The digitization of the financial system is happening, and central banks are set to play a key role. Dr. Ousmène Jacques Mandeng, Senior Advisor to Accenture’s Blockchain and Multiparty System practice, gave an overview of how this technology can be used going forward. He explained that blockchain enables trust to migrate away from the transacting parties to the blockchain. There, validation takes place based on rules and a consensus mechanism. Central bank digital currencies (CBDC) are a blockchain application that:

  • expand functionality and utility of central bank money
  • would allow central bank reserve managers to hold central bank money outright.
  • can serve directly in foreign exchange market interventions.
  • could be the preferred medium in foreign exchange markets.

Digital currencies collapse payment, clearing, netting and settlement into a single transaction and afford peer-to-peer payments.

Gold remains subject to uncertainty in terms of its provenance and mining conditions. As another blockchain application, responsible gold could strengthen confidence in gold as an investment. With this technology, all the information along the supply chain is traceable, so there's transparency with regard to mining including health, safety and labor standards, and the impact on the environment.

Panel discussion: When will it be gold's time to shine?

In times of uncertainty, gold is on the minds of many investors, and central banks are no exception. In the UBS Reserve Management Seminar Survey, participants were asked how they see the role of gold following the recent geopolitical events. For 65%, the role of gold doesn't change going forward, while 35% expect a rising importance. Philipp Salman, Strategy and Advice, Global Sovereign Markets, introduced Kurtulus Taskale Diamandopoulos, a former central banker and now Director at the World Gold Council. She shared her insights on the solid start gold markets have had in 2022. Gold demand in Q1 2022 was more than 30% above Q1 2021 figures, driven by strong ETF inflows. Central banks were also among the top buyers, adding 84 tons in Q1 2022, so they continue to view gold favorably as a reserve asset class. 25% of central banks plan to increase their gold reserves in the next year.

Investment-related reasons for holding gold differ substantially between central banks in developed market countries and their counterparts in emerging market countries. For the latter, the role of gold as an inflation hedge in their portfolios is much more important than for the former.

The panel also addressed the different concerns that currently hold back central banks from further adding to their gold reserves, including volatility, illiquidity and operational issues and outlined available mitigation strategies. Finally, the issue of provenance of gold and ESG issues around gold were discussed.

Recent developments in digitization

Digital technologies affect everyone, everywhere and at all times. That's why the financial industry is preparing for the digitization of assets. Virtual assets, are they a hype, a threat or do they offer real opportunities? Malte Holzberger from the Virtual Assets and Intelligence team at UBS Asset Management, gave a definition of this term first. Virtual assets are a digital representation of a value; they are transferable, storable and can be traded electronically using blockchain technology. Malte Holzberger also emphasized that most of today's asset classes can be digitized in the future.

It's good to know that last year more than USD 30 billion of venture capital was invested in startups pursuing business plans in the virtual asset space. And what’s UBS doing? One example of our activities is a pilot project on buying physical gold via a mobile app. The idea is to make gold available to investors, even in small fractions of a gold bar.

We all agree that the current level of inflation is high. However, experts have different opinions on whether higher inflation is just transitory or here to stay. Two Keynote speakers with different views presented their arguments.

The great demographic reversal

Manoj Pradhan, Founder of Talking Heads Macroeconomics and member of the "it's here to stay" camp highlighted how important demographic developments are for inflation. Globally, demography led to a huge labor supply by the mid-2000s, and since then the trend has reversed. He referred to two groups of people. The dependents, whether young or old, consume, but don't produce. On the other side, there are the workers who consume, produce and save. When there are more dependents than workers, as the situation is now, inflation rises, so says the theory based on the research by Stolper Samuelson. In Manoj Pradhan's view, important drivers of inflation such as demographics or cyclical events that can last longer have been overlooked. Besides these general rules, single countries have divergent sets of policies to fight inflation. When it comes to the current crucial topic of energy security for example, France with its strong nuclear power capacities is less impacted by energy-related inflation than Germany that has just started to reduce its dependency on Russian oil and gas.

Inflation and the changing global economy

On the nature of inflation, Paul Donovan, Chief Economist at UBS Global Wealth Management and member of the "transitory camp" took the opposite view. He laid out why he thinks that we’re now going through a high inflation episode that will go away. He mentioned that the pandemic triggered the biggest demand shock for goods in 75 years. The surge in demand exceeded supply, and global supply chains didn't "lie in shattered ruins", as he remarked. Instead, global trade in relation to GDP was at an all-time high. The problem: record supply was outweighed by even higher demand. Paul Donovan also advised not to treat inflation as a single number. An inflation rate for a consumer is different from an inflation rate for a borrower. Moreover, he thinks that the 4th industrial revolution, characterized by digitization and its implications, will have a disinflationary effect. It's different to previous industrial revolutions, as the objective of the next 20 years is to improve economic and environmental efficiency, or in a nutshell: doing more with less.

In the panel discussion moderated by Massimiliano Castelli, Head of Strategy and Advice Global Sovereign Markets, the economists were asked to share their view on the outlook for the economies of China and India. Paul Donovan indicated that after winning the 3rd industrial revolution by positioning itself as the "factory of the world", China is now in a more challenging situation. Future success would require a critical review of what has been done before. Manoj Pradhan mentioned the big potential of India to become a real economic powerhouse. The demographics are favorable and there are lots of inefficiencies to be harnessed. However, he sees politics and the lack of governmental efficiency as the main challenge.

The changing competitiveness of countries

Finally, in his keynote speech Arturo Bris, Professor of Finance and Director at the IMD World Competitiveness Center (WCC) in Lausanne presented the results of the latest World Competitiveness Ranking 2022. The ranking measures the performance of 63 countries by analyzing numerous pieces of hard data and survey results, and groups them along four factors (economic performance, government efficiency, business efficiency and infrastructure), each with several sub-factors.

Arturo Bris outlined that Denmark took the lead for the first time in the 34-year history of the ranking, as the country has acted extremely aggressively on the sustainability front and benefits from being a small country with strong institutions that have access to the large European market.

When it comes to other countries, Switzerland came in 2nd (from 1st in 2021), Singapore 3rd (up from 5th) and Sweden fell two places to 4th place.
Another major finding across the economies is that inflationary pressures are having a greater impact on businesses than the pandemic or concerns about greenhouse emissions and socio-economic disparities have.