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Speaker 1: Welcome to Fear and Greed Sunday feature, oh Michael Thompson.

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Speaker 1: This week's Sunday feature is an interview with Sally Old

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Speaker 1: published back in April of this year. Now. At the time,

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Speaker 1: Sally was chief investment Officer at JB Weir, which is

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Speaker 1: the wealth management business owned by NAB. I've chosen this

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Speaker 1: interview today for three reasons. Number one, this week Sally

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Speaker 1: was announced as National Australia Banks new Chief Economist, succeeding

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Speaker 1: veteran economist Alan Osto, who's retiring after more than three

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Speaker 1: decades in the role. The second reason is that this

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Speaker 1: interview is probably the best explanation I've heard of the

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Speaker 1: value of gold and what is the value of bitcoin?

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Speaker 1: That basically the fundamentals of the two assets. The third

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Speaker 1: reason is that it's actually quite remarkable because we spoke

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Speaker 1: to Sally back in April, because at the time gold

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Speaker 1: and bitcoin were both booming, both setting records, which is

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Speaker 1: perhaps a little bit odd considering they would typically be

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Speaker 1: considered at opposite ends of the risk spectrum. You're fast

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Speaker 1: forward now to the end of the year and it's

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Speaker 1: happening again. There's a few differences. Obviously, inflation is coming down.

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Speaker 1: Donald Trump has been elected, but bitcoin is booming once again,

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Speaker 1: passing the one hundred thousand US dollar milestone. Gold is

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Speaker 1: now much higher than it was even back in April

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Speaker 1: when it was setting records. This is a fascinating conversation

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Speaker 1: between Sean Aylmer and Sally Auld. I hope you enjoy it.

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Speaker 2: Welcome to the Fearing Greek Business Interview. I'm Sean Aylmer.

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Speaker 2: Both gold and bitcoin have surged recently. In fact, both

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Speaker 2: have hit new records. It's a little unusual because many

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Speaker 2: would consider gold and cryptocurrency to be kind of at

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Speaker 2: the opposite ends of the risk spectrum. So why are

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Speaker 2: they rallying simultaneously and how should investors think about them both.

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Speaker 2: Remember this is general information only, and you should always

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Speaker 2: seek professional advice before making your own investment decisions. All

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Speaker 2: is the chief investment officer at JB Were Sally. Welcome

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Speaker 2: to Fear and Greed.

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Speaker 3: Thank you, Sean.

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Speaker 2: Let's have a look at the fundamentals of the two

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Speaker 2: asset classes. First, what's behind the rise in the price

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Speaker 2: of gold and what does gold trade off? What are

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Speaker 2: the fundamentals of gold?

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Speaker 3: So think of the short term, there are probably a

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Speaker 3: couple of drivers of the gold price. One is often,

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Speaker 3: I guess, fear around rising inflation. So gold is often

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Speaker 3: viewed by many investors as quite an effective hedge against inflation.

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Speaker 3: And so I guess we're in an environment where we

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Speaker 3: have had, at least in the US, a couple of

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Speaker 3: inflation numbers that have come in on the stronger side

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Speaker 3: of expectations. And when you look at short term inflation

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Speaker 3: expectations in the market in the US, they look like

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Speaker 3: they've risen over the last couple of months. So perhaps

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Speaker 3: that's behind some of the lift in the gold price.

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Speaker 3: Another thing that we often associate stronger gold prices with

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Speaker 3: is just maybe a little bit of just worry about

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Speaker 3: geopolitical concerns or broader uncertainty about the geopolitical environment. You know,

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Speaker 3: investors like to own gold. They see it as a

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Speaker 3: bit of a safe haven in a world that you know,

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Speaker 3: might appear a bit fractious like it is at the moment.

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Speaker 3: And so I guess with the ongoing war between Israel

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Speaker 3: and Palestine, and then obviously the lingering conflict between Russia

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Speaker 3: and Ukraine, you know, perhaps that's behind some of the

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Speaker 3: bid to gold. But I think there's also an interesting

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Speaker 3: structural story, which you know, we've talked a bit about

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Speaker 3: in our work at Jbweir, which is that we have

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Speaker 3: seen you know, very much so pre financial crisis, but

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Speaker 3: also just recently in the last couple of years, and

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Speaker 3: underlying bid to gold by central banks, and one of

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Speaker 3: the biggest participants in that dynamic when you look at

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Speaker 3: the at the data, has been actually the People's Bank

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Speaker 3: of China. So China has been quite a noticeable accumulator

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Speaker 3: of gold in recent years. So I think short term

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Speaker 3: drivers are pretty constructive for the gold price, but longer term,

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Speaker 3: we think there's a bit of a structural bid to

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Speaker 3: gold which has helped get higher over the medium term

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Speaker 3: as well.

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Speaker 2: Going even broader than that. I had a schoolmate's father

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Speaker 2: used to when he learned I was becoming an economist,

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Speaker 2: always asked me, Sean, what's the intrinsic value of gold?

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Speaker 2: Which I never had a good answer for. But is

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Speaker 2: it a scarcity thing? Why is gold held in such esteem?

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Speaker 2: Is it because ever since Breton Woods it has become

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Speaker 2: kind of literally the gold standard, it's kind of the

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Speaker 2: absolute backup currency.

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Speaker 3: Yeah, I think that's exactly right. So I think fundamentally,

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Speaker 3: you know, it's a true reserve asset. And it's interesting

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Speaker 3: because one of the reasons we think central banks or

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Speaker 3: some central banks have been increased buyers of gold is

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Speaker 3: just to you know, I guess reflect on what happened

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Speaker 3: in early twenty twenty two when Russia invaded Ukraine, both

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Speaker 3: the US and European authorities said, well, now that you've

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Speaker 3: done that, we're going to freeze the FX reserves that

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Speaker 3: you guys have, which are denominated in US dollars and

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Speaker 3: in euro and prevented Russia from accessing those. And I

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Speaker 3: guess many other central banks in particular parts of the

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Speaker 3: world might have observed that dynamic take place and say, well,

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Speaker 3: you know, perhaps we don't want to have to ever

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Speaker 3: be as vulnerable or in the same position, and so

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Speaker 3: maybe it makes sense to perhaps transfer some of our

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Speaker 3: affects reserves out of US dollars, out of euro and

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Speaker 3: into gold, in the sense that if it's sitting there

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Speaker 3: in gold, no one can actually take that away from you.

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Speaker 3: So it is a true reserve asset, and I think

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Speaker 3: that's in large part what gives it its intrinsic value.

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Speaker 3: But also, you know, and quite importantly is also what

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Speaker 3: distinguishes it from some of the cryptocurrencies as well.

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Speaker 2: So we'll get on to kryptos in a moment. The

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Speaker 2: long term outlook for gold, then if we have demand

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Speaker 2: from central banks, I get the inflation expectations, though we've

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Speaker 2: had a few prints recently which have been above expectations,

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Speaker 2: but generally inflation is trending lower. So shouldn't that kind

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Speaker 2: of take some of the steam out of the goal price? Yeah?

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Speaker 3: It should. I mean, I think you're exactly right. And

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Speaker 3: the other thing that we observe with gold is that

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Speaker 3: it has in the past been very highly correlated with

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Speaker 3: movements in real interest rates. So typically when real interest

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Speaker 3: rates rise, the gold price goes down. And that's largely

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Speaker 3: just a bit of an opportunity cost story. So you know,

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Speaker 3: if you can put your money in the bank and

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Speaker 3: earn good interests on it, then you know the option

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Speaker 3: of perhaps just holding gold isn't as attractive because you forego,

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Speaker 3: you know, a lot of that interest income, and that

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Speaker 3: opportunity cost is obviously a lot higher as interest rates

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Speaker 3: are rising. And conversely, when real rates come down, often

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Speaker 3: the gold price rallies, and so you know that that

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Speaker 3: had been a pretty tight relationship, you know, for the

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Speaker 3: better part of a decade at least, but it's broken

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Speaker 3: down a little bit. But notwithstanding that, you know, if

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Speaker 3: we look back over a sort of three or six

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Speaker 3: month period, real rates are still you know, a good

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Speaker 3: fifty basis points off their peaks, and so that might

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Speaker 3: be providing a little bit of support to the gold price.

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Speaker 3: Just this notion that you know, the Fed look like

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Speaker 3: they're finished raising rates. We can maybe debate when they're

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Speaker 3: going to start rate cuts and how quickly those rate

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Speaker 3: cuts will come. But I think most investors are sort

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Speaker 3: of broadly comfortable with this view that the peak and

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Speaker 3: rates is in for the cycle, and so therefore it means,

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Speaker 3: you know, the opportunity cost of holding gold in the

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Speaker 3: future is not going to be as high.

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Speaker 2: So I'm going to put you on the spot here, then, Sally,

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Speaker 2: does gold go higher at this point?

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Speaker 3: Well, it's had a pretty good run, and so I

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Speaker 3: would be reluctant to sort of say it's going to

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Speaker 3: go a whole lot higher, And we wouldn't be at

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Speaker 3: jab we're you know, recommending to our clients that they

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Speaker 3: introduce gold into their portfolios at these levels in the

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Speaker 3: gold price. So I think we feel like the risks

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Speaker 3: look a little bit asymmetric, and particularly I think, you know,

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Speaker 3: if we saw central banks come out and you know,

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Speaker 3: if we saw Power speaks later this week, and if

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Speaker 3: we saw him say, look, you know, let's just remember everyone,

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Speaker 3: we're pretty serious about getting back to the inflation target.

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Speaker 3: Two percent is the number, and we're not going to

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Speaker 3: sort of tolerate protracted deviations from that. You know, that

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Speaker 3: might provide some of the reassurance that the market is

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Speaker 3: looking for in a world where you know, US growth

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Speaker 3: still seems to be pretty strong, commodity prices are rising again,

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Speaker 3: inflation expectations a little bit, and so maybe the rise

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Speaker 3: in the gold price reflects some anxiety that, you know,

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Speaker 3: this sort of residual fear that people might have that

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Speaker 3: central banks aren't going to be true to the mandate

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Speaker 3: might actually realize.

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Speaker 2: Stay with me, Sally, we'll be back in a minute.

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Speaker 2: I'm speaking to Sally Old, chief investment officer at JB wir. Okay,

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Speaker 2: let's switch to bitcoin. The introduction of ets involving cryptocurrencies,

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Speaker 2: particularly bitcoin, has been the driver in the price of cryptos,

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Speaker 2: particularly bitcoin. How far does that go and are there

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Speaker 2: other factors that play here.

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Speaker 3: That's a great question, because unlike gold, which has been

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Speaker 3: around a really long time, you know, we've seen how

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Speaker 3: it behaves through economic cycles, we don't really can't really

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Speaker 3: say the same. But bitcoin, it hasn't been around that long,

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Speaker 3: and it's been pretty volatile. So had big rally in

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Speaker 3: twenty twenty one, big collapse twenty two, and then another

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Speaker 3: big rally in twenty three twenty four. So it's got

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Speaker 3: a very short history, and so it's not clear what

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Speaker 3: the fundamental drivers of bitcoin are. But I certainly think

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Speaker 3: the introduction of these ETF products, which have allowed investors

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Speaker 3: much easier and much more conventional access to bitcoin, have

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Speaker 3: probably contributed to the rise in the price of bitcoin.

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Speaker 3: There's also talk of, you know, what people call a

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Speaker 3: bitcoin harving event, which is an event that doesn't happen

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Speaker 3: very often, but when it does happen, what it means

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Speaker 3: is that the rate of production of bitcoin declines. And

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Speaker 3: so maybe there's a sense out there that you know,

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Speaker 3: that this is a sort of thing that's in scarce supply,

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Speaker 3: and so that can can maybe add to the price

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Speaker 3: support for bitcoin. And I think also, you know, we're

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Speaker 3: in a world at the moment where financial conditions have loosened,

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Speaker 3: rates of fall and equities have risen, credit spreads have narrowed,

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Speaker 3: and easier financial conditions I think probably also helped with,

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Speaker 3: you know, supporting the prices of some of those more

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Speaker 3: specuative assets such as bitcoin.

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Speaker 2: We talked about the intrinsic value of God, I'm going

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Speaker 2: to ask you about the intrinsic value of bitcoin. Is

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Speaker 2: there one or is it too early to tell to

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Speaker 2: answer that question?

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Speaker 3: I think, I mean, I don't know the answer to that,

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Speaker 3: and at the moment, I think my answer is, you know, no,

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Speaker 3: I don't know what the intrinsic value of bitcoin is.

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Speaker 3: You know, we're used to in the world of sort

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Speaker 3: of investment strategy being able to model the fair value

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Speaker 3: of most financial instruments, you know, based on fundamental drivers,

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Speaker 3: you know, whether they're macroeconomic drivers or other market variables,

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Speaker 3: and so you know, it's not clear what actually drives bitcoin.

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Speaker 3: You can see some correlation between changes in real yields

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Speaker 3: and what bitcoin is doing. What we do know is

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Speaker 3: that's pretty highly correlated to ups and downs in the Nasdaq,

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Speaker 3: So it tends to behave you know, a bit more

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Speaker 3: like a growth asset or a risk asset in a portfolio,

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Speaker 3: and that it does seem to rise when equity markets

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Speaker 3: are rising and it seems to fall when equity markets

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Speaker 3: are falling. But in terms of pinning down what that

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Speaker 3: intrinsic value is, I don't have a good answer for that.

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Speaker 2: Okay, So let's bring this back to my final question,

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Speaker 2: which is about when you're investing, how do you think

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Speaker 2: of these two asset classes just parking the valuation, which

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Speaker 2: you can never do when you're investing. You know, you

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Speaker 2: mentioned before the goal's quite pricey to start putting into

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Speaker 2: your portfolio. But let's sort of what I really want

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Speaker 2: Sally Feud to answer is how should investors think about

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Speaker 2: gold as an asset class and how should they think

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Speaker 2: about cryptocurrency slash bitcoin as an outset class in their portfolios.

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Speaker 3: Sure, so, for gold, we think of that as a

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Speaker 3: genuine diversifier to a multi asset portfolio, and it's one

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Speaker 3: which has approven ability over many cycles to hedge draw

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Speaker 3: downs and equity markets. So when equities for gold tends

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Speaker 3: to rally and so you get that nice offsetting effect

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Speaker 3: in your portfolio. So we really like gold and the

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Speaker 3: role that it can play, and some of the work

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Speaker 3: that we've done at JAB weird tells us that regardless

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Speaker 3: of what time period you look at over the last

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Speaker 3: forty or fifty years, basically our analysis is that at

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Speaker 3: any point in time, you should probably hold somewhere between

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Speaker 3: five and ten percent of your portfolio in gold. So

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Speaker 3: we really like that, and we've been advocates of having

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Speaker 3: gold in portfolios for the last couple of years. I

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Speaker 3: think bitcoin is a more difficult proposition. One thing to

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Speaker 3: remember about bitcoin is that it is a very volatile asset,

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Speaker 3: So it runs depending on what measure you use, whether

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Speaker 3: you look at it in US dollars or Aussie dollars,

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Speaker 3: it runs anywhere from four to five times the level

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Speaker 3: of realized volatility relative to gold, So it's highly volatile.

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Speaker 3: Now people might say, well, it does move a lot,

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Speaker 3: so that offsets the volatility, but I think you have

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Speaker 3: to acknowledge that if you add it to the portfolio,

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Speaker 3: you don't want to add anywhere near as much as

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Speaker 3: you would be adding for gold, just simply because it's

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Speaker 3: more volatile, as we talked about before, really highly correlated

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Speaker 3: with the Nasdaq, for example. So I think what that

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Speaker 3: would do was make you question the diversification benefits it

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Speaker 3: brings to the portfolio. And then I think the other

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Speaker 3: thing we've got to talk about is the ESG aspect

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Speaker 3: of bitcoin, and people often think about this in terms

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Speaker 3: of the energy consumption that's required to do all the

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Speaker 3: mining behind the discovering of bitcoin. But I think it's

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Speaker 3: also important to look at what the chair of the

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Speaker 3: SEC said about bitcoin when they approved those ETS products,

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Speaker 3: which is basically, it's volatile expeculative and it's used effectively

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Speaker 3: for criminal purposes, for terrorism, for money laundering, for trafficking,

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Speaker 3: sanctions evasion, And I think, you know, for investors who

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Speaker 3: really care about the ESG aspect of their portfolio, that's

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Speaker 3: a really important thing to remember because you know, in

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Speaker 3: most investors processes, when they look at ESG, bitcoin would

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Speaker 3: probably fall at the first hurdle.

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Speaker 2: Sally, thank you for talking to Fear and Greed A pleasure, Sean.

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Speaker 2: That was Sally Old, chief investment officer at JB Weir.

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Speaker 2: This is the Fear and Greed Business Interview. Remember this

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Speaker 2: is general information only, and you should seek professional advice

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Speaker 2: before making investment decisions. Join us every morning for the

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Speaker 2: full episode of Fear and Greed Daily business news for

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Speaker 2: people who make their own decisions. I'm Sean Almer. Enjoy

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Speaker 2: your day.