Many organisations with healthy balance sheets often neglect to monitor their cash flow. There is a significant risk of running out of cash. This in itself is not alarming. But mismanaging this situation can be detrimental.

Understanding the liquidity gap can help optimise risk exposure and take appropriate action to stop a downward spiral. Here we examine the liquidity gap, highlighting its expressions, while proposing a simple solution to protect against it.

What is a liquidity gap?

The term liquidity gap is always used to refer to a shortage of cash or assets that can be easily converted into cash.

This phenomenon can be observed in investment portfolios with mainly illiquid assets and is evident in long-term investments. A very simple example of a liquidity gap is a company with millions of euros tied up in state-of-the-art equipment.

Despite this, it does not have enough cash to pay its staff or suppliers.

Why is this a concern? It can be seen from the point of view of a company or an investor.

It is clear that, since the end of the coronavirus crisis, the financial markets have been faced with a lack of monetary liquidity. There are several reasons for this.

Firstly, it can be explained by the fact that the global economy was put on "pause" during the two years of the Covid crisis: companies and banks had to dip into their own funds, thus contributing to a decrease in their liquidity.

Another phenomenon is that in recent months there has been an imbalance between supply and demand for certain stocks. As a result, prices cannot be formed and this contributes to the lack of monetary liquidity.

There is another reason, a financial one.

Rising prices, inflation and fears of recession in both the US and Europe are reducing investor confidence in the financial markets. As a result, investors tend to withdraw from traditional financial markets and move into safe havens, contributing to a shortage of monetary liquidity.

Diversifying to protect against monetary liquidity risk

It will be virtually impossible to fully protect against a liquidity shortage. It is therefore generally accepted that a diversified portfolio can reduce this risk.

In this respect, investing in precious metals such as gold, platinum or silver is always a preferred option. Gold is known to be a very stable and diversifying asset to balance an investment portfolio.

While traditional financial markets are particularly sensitive to economic crises, financial crises, inflation and recessions, the gold market is not. On the contrary: in times of crisis, the price of gold tends to rise.

Indeed, gold, like other precious metals such as silver, does not suffer from economic and financial crises. This is partly due to its intrinsic value: the yellow metal has a value of its own, unlike a stock market quotation.

In addition, the precious metal has an excellent reputation as a safe haven. It has been noted for a hundred years that gold increases in value in times of economic crisis.

In addition, gold has no shortage of monetary liquidity: it is now particularly easy and quick to buy or sell gold, especially from banks, but also from traders specialising in buying and selling gold.

All these reasons push more and more investors to turn to the gold market in times of crisis, and this, to secure part of their investments.

However, it is above all a very liquid asset, easily sold and which allows debts to be repaid quickly in times of uncertainty.

Thus, more and more investors are focusing on gold in their tactical asset allocation. Several formats are therefore possible, from 1kg gold bars to 100 gram gold bars. But it is undoubtedly the purchase of gold bullion that reflects the most liquid investment choice.