1 00:00:02,520 --> 00:00:10,280 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll, and 2 00:00:10,400 --> 00:00:12,720 Speaker 1: this is Here's Why, where we take one new story 3 00:00:12,760 --> 00:00:14,800 Speaker 1: and explain it in just a few minutes with our 4 00:00:14,840 --> 00:00:21,480 Speaker 1: experts here at Bloomberg. In a world of increasingly complex 5 00:00:21,520 --> 00:00:24,200 Speaker 1: ways to invest your money, it's easy to forget that 6 00:00:24,239 --> 00:00:27,520 Speaker 1: one of the most trusted assets is still a metal 7 00:00:27,760 --> 00:00:28,760 Speaker 1: dug out of the ground. 8 00:00:29,040 --> 00:00:32,159 Speaker 2: Gold continues to go from strength to strength once again, 9 00:00:32,280 --> 00:00:33,519 Speaker 2: all time records highs. 10 00:00:33,680 --> 00:00:36,480 Speaker 3: Heading towards recession by some of this rock. 11 00:00:36,760 --> 00:00:38,040 Speaker 1: Was it just gold for everyone? 12 00:00:38,200 --> 00:00:40,120 Speaker 2: Yeah, it certainly seems that way. 13 00:00:40,360 --> 00:00:45,280 Speaker 1: We see four things. Stocks go down, bonds go down, 14 00:00:45,960 --> 00:00:50,040 Speaker 1: the dollar goes down, and gold goes up. During the 15 00:00:50,080 --> 00:00:53,160 Speaker 1: market turbulence that's followed Donald Trump's return to the White House, 16 00:00:53,200 --> 00:00:57,120 Speaker 1: gold has shone more brightly than ever. Investors seeking refuge 17 00:00:57,120 --> 00:01:00,480 Speaker 1: from wild swings in stocks, bonds, and currencies have put 18 00:01:00,600 --> 00:01:05,280 Speaker 1: gold prices to record after records. Not everyone's a fan, though. 19 00:01:05,360 --> 00:01:09,240 Speaker 1: Here's legendary investor Warren Buffer speaking at Berkshire Hathaway's annual 20 00:01:09,280 --> 00:01:11,199 Speaker 1: meeting in two thousand and five. 21 00:01:11,959 --> 00:01:14,399 Speaker 3: I don't see gold as a store of value. And 22 00:01:14,440 --> 00:01:17,120 Speaker 3: it's the truth is, it hasn't worked very well, turning 23 00:01:17,120 --> 00:01:20,360 Speaker 3: out about three or four thousand tons of gold a year. 24 00:01:20,440 --> 00:01:22,759 Speaker 3: And you know, we take it out of the ground 25 00:01:22,760 --> 00:01:24,560 Speaker 3: in South Africa and we put it in the ground 26 00:01:24,560 --> 00:01:27,760 Speaker 3: at Fort Knox or someplace New York, vin and it 27 00:01:27,760 --> 00:01:29,960 Speaker 3: doesn't do much along the way for anybody. 28 00:01:30,240 --> 00:01:33,560 Speaker 1: And yet gold's appeal hasn't faded in the twenty years 29 00:01:33,560 --> 00:01:37,800 Speaker 1: since it's actually increased. Here's why investors can't get enough 30 00:01:38,120 --> 00:01:43,319 Speaker 1: of gold. Our precious metals reporter Jack Ryan joins me 31 00:01:43,360 --> 00:01:46,160 Speaker 1: now for more. Jack, first of all, remind us why 32 00:01:46,360 --> 00:01:48,680 Speaker 1: is gold considered a safe haven. 33 00:01:49,200 --> 00:01:52,160 Speaker 2: I think I should start by saying that most financial 34 00:01:52,160 --> 00:01:55,160 Speaker 2: assets derive their value from the future income stream they're 35 00:01:55,200 --> 00:01:57,400 Speaker 2: going to grant you. So you buy a bond, it's 36 00:01:57,400 --> 00:01:59,760 Speaker 2: for the future income stream. You buy a share, it's 37 00:01:59,760 --> 00:02:02,600 Speaker 2: for a share of the future profits, and you're ultimately 38 00:02:02,600 --> 00:02:05,880 Speaker 2: relying on your counterparty to deliver on that. And so 39 00:02:05,960 --> 00:02:08,160 Speaker 2: when you enter environment like we've seen over the last 40 00:02:08,200 --> 00:02:11,200 Speaker 2: few weeks and months, where the future becomes very uncertain, 41 00:02:11,400 --> 00:02:14,520 Speaker 2: you might start to question your counterparty's ability to do so. 42 00:02:14,720 --> 00:02:17,840 Speaker 2: And then in that environment, gold becomes appealing because there 43 00:02:17,880 --> 00:02:20,520 Speaker 2: is no counterparty, you're not relying on anyone else. It's 44 00:02:20,600 --> 00:02:22,440 Speaker 2: just you and your gold. But then, of course, in 45 00:02:22,520 --> 00:02:25,360 Speaker 2: reality it doesn't really work like that. There's also just 46 00:02:25,400 --> 00:02:29,000 Speaker 2: the historical relationship of gold to various other assets during 47 00:02:29,040 --> 00:02:32,200 Speaker 2: periods of market stress. When COVID broke out, it rallied. 48 00:02:32,440 --> 00:02:35,640 Speaker 2: When Russia invaded Ukraine, it rallied. So the belief that 49 00:02:35,720 --> 00:02:37,960 Speaker 2: it is a safe even becomes a reality and traders 50 00:02:38,000 --> 00:02:40,240 Speaker 2: turn to it when markets run into trouble or due 51 00:02:40,280 --> 00:02:42,760 Speaker 2: political tensions run high. I should say that when you 52 00:02:42,760 --> 00:02:45,200 Speaker 2: get a severe sell off, gold does tend to get 53 00:02:45,200 --> 00:02:47,040 Speaker 2: caught up on that in the short term because there's 54 00:02:47,040 --> 00:02:50,440 Speaker 2: a dash for cash. Hedge funds have margin calls to meet. 55 00:02:50,639 --> 00:02:53,760 Speaker 2: Gold is liquid, it's easy to sell. But then after 56 00:02:53,919 --> 00:02:56,880 Speaker 2: those kind of periods of turbulence, then you start to 57 00:02:56,880 --> 00:02:59,040 Speaker 2: see it. Right, So that's what you saw this month, 58 00:02:59,160 --> 00:03:01,840 Speaker 2: and that's what you saw, for example, in the global 59 00:03:01,840 --> 00:03:02,600 Speaker 2: financial crisis. 60 00:03:02,600 --> 00:03:05,840 Speaker 1: Well, let's try to understand how this recent rally fits 61 00:03:05,880 --> 00:03:11,240 Speaker 1: into historical trends. What does it tell us about investor 62 00:03:11,360 --> 00:03:12,440 Speaker 1: sentiment at the moment. 63 00:03:12,800 --> 00:03:15,320 Speaker 2: So the current rally has been really strong, you have 64 00:03:15,400 --> 00:03:18,720 Speaker 2: to go fairly far back to find kind of parallels. 65 00:03:19,160 --> 00:03:21,600 Speaker 2: You could argue after the global financial crisis in the 66 00:03:21,639 --> 00:03:25,400 Speaker 2: years twenty nine twenty ten, gold had a similar performance, 67 00:03:25,520 --> 00:03:27,800 Speaker 2: and then further back than that, I mean, the best 68 00:03:27,800 --> 00:03:30,280 Speaker 2: time ever for gold was the nineteen seventies when you 69 00:03:30,360 --> 00:03:33,200 Speaker 2: had stagflation actually across a lot of the West. That decade, 70 00:03:33,760 --> 00:03:37,080 Speaker 2: Richard Nixon abandoned the gold standard and gold rose tenfold. 71 00:03:37,360 --> 00:03:39,920 Speaker 2: So at the moment, there's some factors obviously moving in 72 00:03:39,960 --> 00:03:44,200 Speaker 2: gold's favor. There's war in Europe, there's obviously dupolitical attentions 73 00:03:44,240 --> 00:03:46,840 Speaker 2: across the Middle East. You have some people who believe 74 00:03:46,960 --> 00:03:49,680 Speaker 2: that inflation is going to be structurally more elevated for 75 00:03:49,720 --> 00:03:51,560 Speaker 2: the next couple of years than it's been for the 76 00:03:51,640 --> 00:03:54,680 Speaker 2: last thirty years. And all of that, then combined with 77 00:03:54,760 --> 00:03:57,440 Speaker 2: this trade war, all that stands to benefit gold. 78 00:03:57,920 --> 00:03:59,520 Speaker 1: What do we know about who's buying gold? 79 00:04:00,160 --> 00:04:02,680 Speaker 2: The most important driver of the rally has been central banks. 80 00:04:02,880 --> 00:04:07,040 Speaker 2: Central banks hold gold in there foreign exchange reserve alongside dollars, euros, 81 00:04:07,160 --> 00:04:11,720 Speaker 2: yen other assets. But basically the situation is rich countries 82 00:04:11,800 --> 00:04:13,720 Speaker 2: that were part of the post war gold standard, so 83 00:04:13,760 --> 00:04:16,760 Speaker 2: that Bretonwood system have a lot of gold. The US 84 00:04:16,839 --> 00:04:20,359 Speaker 2: has nearly nine hundred billion dollars worth of gold. Germany 85 00:04:20,400 --> 00:04:23,360 Speaker 2: has nearly half that, Italy has a lot, Switzerland has 86 00:04:23,360 --> 00:04:26,200 Speaker 2: a lot, not so much the UK unfortunately, because a 87 00:04:26,200 --> 00:04:28,240 Speaker 2: lot of it was sold about thirty years ago by 88 00:04:28,279 --> 00:04:30,640 Speaker 2: Gordon Brown famously for about a tenth of the price 89 00:04:30,640 --> 00:04:34,240 Speaker 2: it is now. But that leaves other developing economy central 90 00:04:34,279 --> 00:04:38,119 Speaker 2: banks relatively underweight. So China, for example, has less gold 91 00:04:38,160 --> 00:04:40,960 Speaker 2: and its official reserves than Italy. So in the last 92 00:04:41,000 --> 00:04:45,920 Speaker 2: fifteen years central banks have been big buyers China, India, 93 00:04:45,960 --> 00:04:48,480 Speaker 2: Poland the Czech Republic. They've all been adding a lot 94 00:04:48,520 --> 00:04:52,360 Speaker 2: of gold. And that's actually sped up in particular since 95 00:04:52,520 --> 00:04:57,520 Speaker 2: the invasion of Ukraine by Russia, because Russia's foreign exchange 96 00:04:57,520 --> 00:05:01,080 Speaker 2: reserves held in euros held in dollars were free from them, 97 00:05:01,320 --> 00:05:03,960 Speaker 2: and that I think woke up a lot of central 98 00:05:03,960 --> 00:05:06,760 Speaker 2: banks around the world to the fact that their foreign 99 00:05:06,800 --> 00:05:09,479 Speaker 2: exchange reserves, which were predominantly held in dollars and also 100 00:05:09,520 --> 00:05:12,960 Speaker 2: in euros and pounds, were vulnerable to the long arm 101 00:05:13,040 --> 00:05:17,599 Speaker 2: of European sanctions or US sanctions. But again, it's just 102 00:05:17,720 --> 00:05:20,760 Speaker 2: you and your gold. If you are keeping your gold 103 00:05:20,880 --> 00:05:24,040 Speaker 2: in a safe within your own territory, it can't be seized. 104 00:05:24,080 --> 00:05:28,040 Speaker 2: It can't be taken. It's universally accepted, and so it's 105 00:05:28,080 --> 00:05:32,320 Speaker 2: a way to diversify your risk and to bring some 106 00:05:32,400 --> 00:05:34,919 Speaker 2: of your foreign exchange reserves out of the kind of 107 00:05:34,960 --> 00:05:37,480 Speaker 2: long arm of some of the western countries. 108 00:05:37,600 --> 00:05:39,640 Speaker 1: I'm just picturing this idea of people sitting in rooms 109 00:05:39,720 --> 00:05:42,279 Speaker 1: full of gold now. But are there practical issues with 110 00:05:42,520 --> 00:05:44,720 Speaker 1: holding gold? Given that? As he pointed out, one of 111 00:05:44,720 --> 00:05:46,840 Speaker 1: the musual things about it is it's a physical asset. 112 00:05:47,120 --> 00:05:49,080 Speaker 2: So there's a number of ways to hold it. I mean, 113 00:05:49,080 --> 00:05:51,480 Speaker 2: for most the most practical way is probably through a 114 00:05:51,600 --> 00:05:54,120 Speaker 2: gold back to ETF basically by a share in a 115 00:05:54,120 --> 00:05:56,920 Speaker 2: fund that holds a big pile of gold. It's easy 116 00:05:56,960 --> 00:05:59,520 Speaker 2: to buy, it's easy to sell. One drawback is that 117 00:05:59,560 --> 00:06:02,320 Speaker 2: there are with it because you're paying someone essentially for 118 00:06:02,720 --> 00:06:05,479 Speaker 2: storing the gold. Also, if you're some sort of doomsday 119 00:06:05,480 --> 00:06:07,960 Speaker 2: prepper type of buyer, which there are plenty of in 120 00:06:08,000 --> 00:06:11,000 Speaker 2: the gold market, you don't have direct custody over your gold, 121 00:06:11,080 --> 00:06:13,560 Speaker 2: So if that's important to you. I always think, though, 122 00:06:13,600 --> 00:06:16,599 Speaker 2: in a doomsday scenario, you're better off buying tinned food 123 00:06:16,640 --> 00:06:17,600 Speaker 2: and guns. 124 00:06:17,279 --> 00:06:20,080 Speaker 1: Because I don't know how doomsday you're preparing for. 125 00:06:20,560 --> 00:06:22,839 Speaker 2: I don't know how useful really gold would be if 126 00:06:22,880 --> 00:06:26,120 Speaker 2: everything goes wrong. You can also buy fifty thousand dollars 127 00:06:26,240 --> 00:06:29,159 Speaker 2: half kilo bar from Costco or any other bullion dealer. 128 00:06:29,240 --> 00:06:32,800 Speaker 2: Costco has become really popular. They charge gold shopping. Yeah, 129 00:06:32,839 --> 00:06:34,960 Speaker 2: you can go gold shopping, but Costco charge about a 130 00:06:35,000 --> 00:06:37,640 Speaker 2: two percent premium over the spot price. That's not bad, 131 00:06:37,800 --> 00:06:41,160 Speaker 2: but then there's practical issues like security and then crucially 132 00:06:41,200 --> 00:06:44,440 Speaker 2: reselling because obviously you'll go to a bullion dealer, but 133 00:06:44,520 --> 00:06:47,760 Speaker 2: they might only offer you a couple of percent below 134 00:06:48,000 --> 00:06:50,520 Speaker 2: the spot price. So again that's kind of a friction 135 00:06:50,600 --> 00:06:51,480 Speaker 2: to buying and selling. 136 00:06:51,880 --> 00:06:53,600 Speaker 1: We heard from Warren Buffet a little bit earlier talking 137 00:06:53,600 --> 00:06:57,000 Speaker 1: about his views on gold and the question of what 138 00:06:57,160 --> 00:06:59,719 Speaker 1: utility it really has and how it rates as a 139 00:06:59,720 --> 00:07:02,599 Speaker 1: store of value. Is there many people that share his 140 00:07:02,720 --> 00:07:04,520 Speaker 1: view on gold and the question of utility. 141 00:07:05,120 --> 00:07:07,640 Speaker 2: I mean, I think he's right. Basically, it's not that useful. 142 00:07:08,080 --> 00:07:11,920 Speaker 2: A small amount is used in technology. It has ornamental values, 143 00:07:12,000 --> 00:07:14,920 Speaker 2: it's quite beautiful, has its distinctive color, it doesn't tarnish. 144 00:07:14,960 --> 00:07:18,440 Speaker 2: It's very valuable, so it's good for jewelry it does, 145 00:07:18,760 --> 00:07:21,600 Speaker 2: but its value, you know, three five hundred dollars an 146 00:07:21,600 --> 00:07:24,520 Speaker 2: ounce is far in excess of its actual utility. What 147 00:07:24,640 --> 00:07:27,040 Speaker 2: it does have going for it is scarcity. It's quite 148 00:07:27,120 --> 00:07:29,400 Speaker 2: rare in the Earth's crust. It's quite difficult to get out. 149 00:07:29,640 --> 00:07:35,360 Speaker 2: It has obviously historical importance, the cultural salience millennia of history, 150 00:07:35,400 --> 00:07:37,880 Speaker 2: as a store of value, as something that has been 151 00:07:37,920 --> 00:07:40,440 Speaker 2: perceived to be valuable, and so I guess you could 152 00:07:40,480 --> 00:07:43,520 Speaker 2: say in some senses the use case is a bit 153 00:07:43,560 --> 00:07:46,080 Speaker 2: like bitcoin, where you don't have a counterparty. As I 154 00:07:46,120 --> 00:07:49,200 Speaker 2: mentioned earlier, Bitcoin obviously also requires some effort to mind. 155 00:07:49,320 --> 00:07:51,880 Speaker 2: But the difference is that, I mean, gold has a 156 00:07:51,920 --> 00:07:54,960 Speaker 2: track record of rising during periods of market stress, it's 157 00:07:55,000 --> 00:07:59,200 Speaker 2: not massively volatile, and it has strong cultural importance in 158 00:07:59,360 --> 00:08:01,520 Speaker 2: parts of the world economy that are growing very quickly, 159 00:08:01,600 --> 00:08:04,320 Speaker 2: so China and India and Pakistan. 160 00:08:04,760 --> 00:08:07,559 Speaker 1: What about the risk of a gold bubble? What could 161 00:08:07,560 --> 00:08:10,720 Speaker 1: disrupt this rally that we've seen that's pushed gold to 162 00:08:10,840 --> 00:08:12,679 Speaker 1: record high after record high. 163 00:08:13,240 --> 00:08:16,840 Speaker 2: The fact that it's nearly been a unbroken line upwards 164 00:08:16,920 --> 00:08:20,640 Speaker 2: since early twenty twenty four, some people in the market 165 00:08:20,680 --> 00:08:23,200 Speaker 2: think that a pause or a period of consolidation might 166 00:08:23,200 --> 00:08:26,080 Speaker 2: be likely. Some of the things that could be bearish 167 00:08:26,160 --> 00:08:29,120 Speaker 2: for the price if you had major easing of the 168 00:08:29,120 --> 00:08:33,199 Speaker 2: trade war, for example, any de escalation in major conflicts, 169 00:08:33,280 --> 00:08:36,360 Speaker 2: so in particular the war in Ukraine. That could lead 170 00:08:36,400 --> 00:08:39,440 Speaker 2: to a selloff if people perceived geopolitical tensions to be 171 00:08:39,480 --> 00:08:42,440 Speaker 2: easing somewhat. But I think the thing that would do 172 00:08:42,520 --> 00:08:45,959 Speaker 2: lasting damage, but it's really a tail risk, is if 173 00:08:46,000 --> 00:08:49,559 Speaker 2: you had some of the large developed economy central banks, 174 00:08:49,720 --> 00:08:52,160 Speaker 2: so the US, which has a lot of gold obviously, 175 00:08:52,280 --> 00:08:55,920 Speaker 2: or Germany or Italy, if for whatever reason one of 176 00:08:55,960 --> 00:08:59,440 Speaker 2: those countries decided to start selling their gold into the rally, 177 00:09:00,040 --> 00:09:03,040 Speaker 2: for example, if they had a debt crisis or some 178 00:09:03,160 --> 00:09:07,360 Speaker 2: other reason to do so, that would be extremely burish 179 00:09:07,360 --> 00:09:10,200 Speaker 2: for the price. And any news or hints towards that 180 00:09:10,320 --> 00:09:12,920 Speaker 2: I think would be very damaging to the price. And 181 00:09:13,000 --> 00:09:15,959 Speaker 2: that was actually what drove gold's bear market through the 182 00:09:16,040 --> 00:09:19,120 Speaker 2: nineteen nineties right up to two thousand. Everyone was selling 183 00:09:19,160 --> 00:09:21,280 Speaker 2: their gold and the consensus was that gold is a 184 00:09:21,320 --> 00:09:23,200 Speaker 2: relic and the smart thing to do is sell it 185 00:09:23,240 --> 00:09:25,120 Speaker 2: and take dollars what you can. And that was the 186 00:09:25,200 --> 00:09:27,439 Speaker 2: environment in which the UK sold its gold for such 187 00:09:27,480 --> 00:09:29,719 Speaker 2: a low price. Central banks have been buying for the 188 00:09:29,800 --> 00:09:32,840 Speaker 2: last fifteen years, that's been the key driver of price. 189 00:09:33,400 --> 00:09:36,040 Speaker 2: I think the only thing that will really halt and 190 00:09:36,120 --> 00:09:38,720 Speaker 2: reverse gold would be if that trend stops. 191 00:09:39,000 --> 00:09:42,080 Speaker 1: Okay, Jack Ryan, our Precious metals reporter, thank you very much. 192 00:09:42,600 --> 00:09:44,880 Speaker 1: For more explanations like this from our team of three 193 00:09:44,880 --> 00:09:47,560 Speaker 1: thousand journalists and analysts around the world, go to Bloomberg 194 00:09:47,559 --> 00:09:52,079 Speaker 1: dot com slash explainers. I'm Stephen Carroll. This is here's why. 195 00:09:52,160 --> 00:09:54,520 Speaker 1: I'll be back next week with more. Thanks for listening.