What does it mean if a central bank 'prints money' and how does it affect your investments?

Stephen Grootes is joined by David Shapiro (Sasfin Wealth) and Vincent Anthonyrajah (Differential Capital).

Amid geopolitical tensions, the resulting record price of gold and also changing views around bitcoin as a value store; central banks around the world are under pressure.

Against this backdrop, The Money Show's Investment School takes a look at the issue of printing money and how to protect the value of your investments if this were to happen.

Stephen Grootes gets input from veteran stockbroker David Shapiro (Sasfin Wealth) and Vincent Anthonyrajah, CEO of Differential Capital.

Anthonyrajah firstly points out that printing money today, is not actually physically printing money.

"The amount of physical coins in circulation is not that much relative to the amount of electronic money in circulation. We're talking about all the money that sits in the ledgers of all your various bank accounts in the commercial banks that we all use, but most importantly the reserve bank or central bank."

Vincent Anthonyrajah, CEO - Differential Capital

In the interests of context, Shapiro refers to the financial crisis of 2007-08 when the US Federal Reserve resorted to printing money to mitigate the fallout.

"At that stage they started to print money literally to create more money and make sure that the banks were well funded. US Fed chair Ben Bernanke acted ahead of other central banks which allowed America to come out of that in a strong position, but there were deep concerns at the time that they were making money far too easily."

David Shapiro, Sasfin Wealth 

Anthonyrajah differentiates between  the 'excusable' reason a government might want to increase money supply so that people can afford things to help a struggling economy recover, and a case of irresponsibly pumping out more money with the result that the costs of real goods and services increase.

"If an economy just consists of ten apples for example and the price of each apple is R1, and we suddenly double the amount of rands that's available, eventually the price of those two apples will become R2 each."

Vincent Anthonyrajah, CEO - Differential Capital

In a scenario where the value of money is decreasing, what should people do to protect their investments?

The first thing to do is to look at what goods or services have the most pricing power, Anthonyrajah says.

"Some might say it's actually gold and commodities, and that may be right. Or you can look at the other end of the spectrum - companies like Microsoft for example who're able to increase their prices."

Vincent Anthonyrajah, CEO - Differential Capital

"Look for commodities and people who make commodities as well as companies with really strong pricing power. The worst kind of companies are the kind of that make highly commoditised things who can't easily pass on those price increases, for instance like food retailers."

Vincent Anthonyrajah, CEO - Differential Capital

Listen to the two experts' advice in the interview audio at the top of the article (skip to 1:01:08)