Gold has finally turned the corner. The rally since year end 2015 begins a march to new all-time highs. Why? Investors and savers of all kinds are spooked by negative interest rates and justly fear that radical monetary policies will become even more so. Nearly 25% of world sovereign debt is trading at negative nominal rates, so holders are guaranteed to lose money. In many European countries, savers are being charged to hold cash at their bank. Cash transactions above fairly low thresholds must be accompanied by special documentation. Cash withdrawals from ATMs are limited. Central bankers and policy makers in the US, China and Europe openly discuss how to move to digital currency and how to eliminate high denomination currency notes such as the 500 Euro note and the US $100 bill.

These developments challenge the notion that cash is a liquid, safe asset providing holders maximum optionality. If there is risk to holding what is supposedly the safest asset of all, what is left? The answer: gold, physical gold bars that are stored outside of the banking and financial market grid (but in a legally compliant structure). Gold held in proper form will come to be rediscovered for what it has always been, the only true form of financial wealth insurance and unimpeachable liquid purchasing power.

What all of this portends is a future shortage of physical gold that will be resolved only through much higher paper currency prices. Exchange traded funds, which track the gold price, and must hold physical gold, have been adding gold at rates not seen since 2010 just before gold rose to all-time highs in the following year. Strong flows into gold ETFs is another sign of generalized concern that the fiat paper money currency system that has existed since 1970 and on which global commerce is based is becoming increasingly unworkable. It stems from a growing loss of confidence in fiscal and monetary policy and the practitioners thereof, politicians and central bankers.

A gold shortage is virtually guaranteed by four and a half years of relentless selling by financial market traders (on COMEX and OTC markets) of synthetic gold contracts, options, derivatives and futures that depressed prices with little or no physical gold actually changing hands. Selling and shorting synthetic gold was simply a macroeconomic bet for high frequency traders and their clients. The paper gold deluge depressed the physical gold price with two important consequences: (1) it hobbled the mining industry sufficiently to compromise future mine production. A big rise in the gold price will not be met with a surge in production until at least 2020. (2) Asian investors, attracted by depressed prices, have severely depleted inventories of physical gold vaulted in London and New York. Reserves of gold bars that provided liquidity to meet investment demand typically expressed by money flows into gold ETFs may well prove to be inadequate.

A big rise in the gold price will not be met with a surge in production until at least 2020. (2) Asian investors, attracted by depressed prices, have severely depleted inventories of physical gold vaulted in London and New York. Reserves of gold bars that provided liquidity to meet investment demand typically expressed by money flows into gold ETFs may well prove to be inadequate.

How should investors position themselves? Gold ETFs track the gold price but conflate the counterparty risk inherent to wealth digitized in the financial markets. The March 4, 2016 suspension of share issuance by Blackrock of its gold ETF is a case in point. Financial insurance must be held in a secure format. Paper gold such as ETFs and other derivatives can become dysfunctional for many reasons. In this instance, the ETF structure did not cope well with the recent spike in demand for physical. There will be other issues down the road that expose the shortcomings of paper gold. Investors who want real gold exposure should hold physical metal stored safely in non-banking vaults. This is wealth insurance pure and simple, not a bet on rising prices in terms of paper currencies.

For more dynamic exposure to a rising price, gold mining shares are the obvious choice. The gold industry is not monolithic, however. There are good companies and bad, wealth creators and wealth destroyers. It is unfortunate that the latter have received disproportionate publicity in recent years. Gold mining is a tough industry but some management groups have defied that negative characterization. Good management deals successfully with the inherent challenges of mining. The Agnico Eagle team has amply demonstrated that proposition time and again. In short, the optimal defense against the global war on cash is a balance between physical gold holdings and shares of well managed gold-mining companies, in proportions appropriate for one’s specific risk preferences.