Speaker 1: Welcome to Merendalks Money, the podcasting which people who know
Speaker 1: the markets explain the markets.
Speaker 2: I'm maren' unset web.
Speaker 1: This week I'm speaking with John Reid, the World Gold
Speaker 1: Council's senior market strategist for Europe and Asia. John has
Speaker 1: over thirty five years experience in the gold industry. He's
Speaker 1: worked for mining companies, he's worked for investment banks, he's
Speaker 1: been a gold strategist, and he's worked as an asset
Speaker 1: manager as a portfolio manager. So fair to say, if
Speaker 1: anyone knows gold, it's probably John. And the precious metal,
Speaker 1: as you know, is really moving. It is up well
Speaker 1: over twenty percent since the beginning of the year. It
Speaker 1: is smashed through the five thousand dollars an ounce level
Speaker 1: for the first time this week. There is a lot
Speaker 1: going on, so we are hoping John will put the
Speaker 1: rally into some context and maybe give us some insight
Speaker 1: into where gold will go next, which of course is
Speaker 1: actually the only thing we really want to know.
Speaker 2: John. Welcome to Merrin Dogs Money.
Speaker 3: Thank you very much, Merily.
Speaker 1: So let's start at the beginning. Just answer for me
Speaker 1: the basic question, what an earth is going on? What
Speaker 1: started this massive bill? Rarely and why is it going
Speaker 1: so far so fast.
Speaker 3: Well, it's interesting because that goal's been running pretty strongly
Speaker 3: now for over three years, but the reasons why it's
Speaker 3: been going up have been changing. I mean, I think
Speaker 3: it started off by central banks dramatically increasing the amount
Speaker 3: of gold that they were purchasing following the Russian invasion
Speaker 3: of Ukraine, and the reason for that, I think was
Speaker 3: the sanctions that were placed upon the Central Bank of Russia.
Speaker 3: It really made many central banks around the world think, hmm,
Speaker 3: am I really happy having such a large proportion of
Speaker 3: our foreign exchange reserves invested in the Western financial system,
Speaker 3: which can be sanctioned at the stroke of a pen.
Speaker 3: That was the first trigger I think for this move.
Speaker 3: We then saw tremendous investment buying in gold coming from
Speaker 3: emerging markets and even from time to time strong jewelry
Speaker 3: demand as well. So emerging market economic strength was the
Speaker 3: second wave I think behind the move higher and gold,
Speaker 3: and then from well last year was about Western investors
Speaker 3: getting onto the bandwagon a bit late, to be honest,
Speaker 3: but joining the bandwagon and buying gold largely in reaction
Speaker 3: to what's been coming out of the United States, whether
Speaker 3: it's economic policy, whether it's interest rate cuts or whether
Speaker 3: it's pronouncements from President Trump and his administration.
Speaker 2: Okay, so three constantly moving reasons.
Speaker 1: And the central banks are still buying, right, so that
Speaker 1: demand is still there, still coming.
Speaker 3: They're still buying, and they're bought just a little bit
Speaker 3: less last year than they have done for the previous
Speaker 3: three years. So there's still an important component of the
Speaker 3: move higher and gold. But they're not the only story
Speaker 3: in town. And that's something I like to say upfront,
Speaker 3: because the number of people that say to me, oh, well,
Speaker 3: central banks are buying gold, we should buy gold too,
Speaker 3: It's like, yes, but it's not as simple as that.
Speaker 3: There are other factors too.
Speaker 2: Yeah, and it's a bit of a backstop to the price,
Speaker 2: very much.
Speaker 3: So, and probably one of the reasons why the goal
Speaker 3: price doesn't go down very much when it does correct,
Speaker 3: because you know, when it like this year, for example,
Speaker 3: the goal price has gone up very rapidly. I don't know,
Speaker 3: but I doubt central banks have been driving the price higher.
Speaker 3: But I'm sure that they're sitting below the market waiting
Speaker 3: to step in on any correction, and that prevents the
Speaker 3: price from falling like it usually would have done. When
Speaker 3: people take profits.
Speaker 1: And if it is true as many people say that
Speaker 1: the Chinese Chinese Central Bank continues to build its gold
Speaker 1: reserves in the anticipation of conceivably launching a gold back
Speaker 1: currency at some point, there will be a way to go.
Speaker 3: Look, that's one of the theories about why China has
Speaker 3: stepped up its goal purchases. It's a gold back currency.
Speaker 3: I see the arguments about backing a currency is sometimes misunderstood.
Speaker 3: The only reason you back a currency as an out
Speaker 3: of weakness, not out of strength. If you think about
Speaker 3: all the countries in the world that have backed that currency,
Speaker 3: and Zimbabwe is a great example, they back it with
Speaker 3: a dollar every now and again, then the peg fails.
Speaker 3: They've tried to back it with gold and then that
Speaker 3: peg fails. It's always done because you're in a weak position.
Speaker 3: And China's many things, but I don't think it's in
Speaker 3: a particularly weak position. Where I think the logic of
Speaker 3: a gold back currency could come in is something that
Speaker 3: might be used for trade within countries that don't want
Speaker 3: to depend upon the dollar. And look, China's a massive
Speaker 3: current account surplus country, so that would mean China would
Speaker 3: get more gold through settling this these this crossbook border trades.
Speaker 3: So again it's not clear that China's buying gold for
Speaker 3: this purpose. It is one of the potential reasons it
Speaker 3: could be.
Speaker 1: I suppose, okay, so let's leave central banks. Then we
Speaker 1: accept that they're buying for a variety of reasons, but
Speaker 1: particularly geopolitical instability, independence from the dollar, all these things,
Speaker 1: and that they will continue to buy it to a
Speaker 1: certain level emerging markets.
Speaker 2: I mean that demand continues.
Speaker 1: As long as there is good GDP growth in emerging markets,
Speaker 1: you will see demand for gold as a savings product effectively.
Speaker 3: That's true, but also sometimes when other savings and investment
Speaker 3: choices are less attractive. And I think the story in
Speaker 3: China has been the weakness in the property market, which
Speaker 3: I'm sure you've spoken about many times over the last
Speaker 3: few years. Traditionally, Chinese savers and investors buy real estate,
Speaker 3: they buy apartments. That's their saving and investments vehicle of choice.
Speaker 3: But probably price has been going down now for what
Speaker 3: two three years, so that's taken away, you know, the
Speaker 3: backstop of where a Chinese saver would put their money.
Speaker 3: Now there are other alternatives, of course, but gold is
Speaker 3: benefiting I think enormously from this, and that's been very
Speaker 3: much a story of the last few years.
Speaker 2: And that's interesting.
Speaker 1: You know, we often talk about demographics on this program,
Speaker 1: and one of the reasons why the Chinese property markets
Speaker 1: can continually in a state of gradual decline is because
Speaker 1: of the rapidly falling household formation numbers and that we
Speaker 1: saw recently these very low number of births in China.
Speaker 1: So there's a strong suggestion that household formation will continue
Speaker 1: to fall in China, and therefore the property market will
Speaker 1: continue to languish, and therefore it seems likely that savings
Speaker 1: will continue to shift into other.
Speaker 2: Products, not the golds of products, but do you know
Speaker 2: what I mean?
Speaker 1: It will continue to be a savings product of choice
Speaker 1: in China and possibly other parts of the emerging world,
Speaker 1: where of course populations are also statical falling.
Speaker 3: Yeah. And look, that's a really interesting point as well,
Speaker 3: because I've spoken about investment for gold in China, but
Speaker 3: historically jewelry demand has been a bigger component. And if
Speaker 3: I think about demographics, demographics worry me in the long
Speaker 3: term for jewelry demand in China.
Speaker 2: Yes, for the regions that.
Speaker 3: You've pointed out in India, but much later. India is
Speaker 3: in the middle of a demographic dividend at the moment
Speaker 3: that lasts until about twenty forty. If you look at
Speaker 3: the structure the pyramid of the population in India, it's
Speaker 3: very young, much much younger than China. It's now that
Speaker 3: I think the largest country in the world in terms
Speaker 3: of population. It's the second largest gold consumer. They love gold,
Speaker 3: and if I look at all the marriages coming down
Speaker 3: the line, I'm very confident about media and long term
Speaker 3: jewelry demand out of India, irrespective of the price in China.
Speaker 3: As I say, it's really important that investment demand continues
Speaker 3: to grow and continues to gain market share there because
Speaker 3: of the demographic challenges.
Speaker 1: Okay, right, Let's move on then to the third and
Speaker 1: the thing that's really been pushing the price recently, which
Speaker 1: is West of the investors suddenly getting in on the game.
Speaker 2: What did they notice.
Speaker 1: Did Western investors suddenly start listening to this podcast, or
Speaker 1: did they notice the price going up and suddenly get
Speaker 1: fomo or is it the genuine reaction to geopolitical change?
Speaker 3: I think all of the above, and I think your
Speaker 3: podcast has been highly influential. But seriously, I think about
Speaker 3: the drivers behind Western investment demand. It's been very much
Speaker 3: concerns about the US dollar, about what's happening with monetary
Speaker 3: policy in the States as interest rates get cut, and
Speaker 3: then what's going to happen with FED independence in the
Speaker 3: medium term. If we get to a situation where the
Speaker 3: US economy runs hot, so we get strong economic growth,
Speaker 3: but inflation interest rates too low, that can get nasty
Speaker 3: really quickly. And I think that that's one of the
Speaker 3: things that's attracted Western investors towards gold. And I think
Speaker 3: the second thing is FOMO. As you say, this is
Speaker 3: to a large extent, a momentum trade. At the moment,
Speaker 3: I mean, we advocate that investors have a sensible allocation
Speaker 3: to gold in their portfolio. It's a strategic asset for
Speaker 3: the long term. We don't do that because we expect
Speaker 3: gold prices to go up sixty five percent in one
Speaker 3: year or twenty percent in one month. There's no doubt
Speaker 3: that investors have jumped on the bandwagon to a degree,
Speaker 3: although not to the degree that they have in silver,
Speaker 3: which is, to be frank quite crazy what's going on there.
Speaker 3: But yes, there's an element of short term speculation in
Speaker 3: the gold market. As well, and that's that's been Western
Speaker 3: investors that could deploy an awful lot of capital at
Speaker 3: a very short space of time. We've seen that to
Speaker 3: a degree over the last nine months.
Speaker 1: I'd say, well, we'll come back to sil related because
Speaker 1: that's that's ridiculous and kind of exciting and also fascinating
Speaker 1: and definitely a momentum tride for now.
Speaker 2: But let's talk about where gold might go.
Speaker 1: So you're at we're at the point in this cycle
Speaker 1: where everyone who didn't think gold was going to do
Speaker 1: this is suddenly trying to catch up. And you've got
Speaker 1: the strategists and investment banks or raising their targets for
Speaker 1: this year always going to go to five thousand, Oh,
Speaker 1: whop's missed that?
Speaker 2: Six thousand, Oh, I don't know, maybe seven thousand, And.
Speaker 1: Then you've got the people saying, well, well, we'll hit
Speaker 1: ten thousand before you know it, etc. And of course,
Speaker 1: even if that were to happened, it's not going to
Speaker 1: be a smooth past. We know there's always always fairly
Speaker 1: significant draw downs in im momentum markets like this, but
Speaker 1: what how do you figure out.
Speaker 2: What the right price is or where it should be?
Speaker 1: And there's so many different methods of attempting to value
Speaker 1: gold something without a cash flow and therefore impossible to value.
Speaker 1: You can look at it as a percentage of the
Speaker 1: value of the US dock market, for example. So we
Speaker 1: now see it running at what fifty percent of the
Speaker 1: value of the US dock market is the total market
Speaker 1: capitalization of the gold above ground, So you can look
Speaker 1: at it like that, and at the moment.
Speaker 2: It's been way higher in the past.
Speaker 1: But on the other hand, the US market is you
Speaker 1: could argue significantly if we're valued at the moment, so
Speaker 1: that changes the way that ratio works. And then I
Speaker 1: was very taken by George Cooper at Aquatile. He has
Speaker 1: got this gold dinner, a gold dinner at the Savoy
Speaker 1: grill ratio right and back in nineteen seventy one, he says,
Speaker 1: you could get hang on, I think three dinners at
Speaker 1: the Savoy for an ounce of gold. Now you can
Speaker 1: get fourteen dinners at the Savoy for an ounce of gold.
Speaker 2: Maybe gold is cheap, you know what I mean.
Speaker 1: There are so many different ways of trying to value gold,
Speaker 1: but basically it's impossible, right.
Speaker 3: It's it doesn't fit into conventional valuation frameworks. As you say,
Speaker 3: it doesn't produce a yield or a dividend, so you
Speaker 3: can't do a discounted cash flow on it. We've spent
Speaker 3: a lot of time in the last probably the last
Speaker 3: seven or eight years, but in particular, trying to come
Speaker 3: up with different ways to think about gold valuation, and
Speaker 3: particularly from a long term perspective. So if you're an
Speaker 3: asset allocator, you know, you could make assumptions and think, Okay,
Speaker 3: what is my bond portfolio going to give me, I
Speaker 3: don't know, three four percent? Well, what are equity is
Speaker 3: going to give me? Maybe six seven percent over the
Speaker 3: long term? And what about gold? And it's like not sure.
Speaker 3: So the work that we've done, and it's all available,
Speaker 3: by the way, on our website goldhub dot com under
Speaker 3: the tools section, we've put together something which we call
Speaker 3: glitter very good at acronyms in our shop. So gold's
Speaker 3: expected long term return and what that works on is
Speaker 3: it thinks about the structure of the gold market. So
Speaker 3: all the gold that's ever been mined, who owns it,
Speaker 3: who's buying it, who's bought it, and what are the
Speaker 3: drivers of that demand and what the conclusion that we
Speaker 3: come to is in the long term, you should be
Speaker 3: expecting gold to deliver US inflation plus about two to
Speaker 3: three percent per annum, so somethink in line with nominal GDP.
Speaker 3: Now that's very different from the sort of returns that
Speaker 3: we've seen over the last few years. So nineteen percent,
Speaker 3: twenty six percent, sixty five percent, and then twenty percent
Speaker 3: year to day. So one of the questions that we
Speaker 3: face a lot internally is like, well, if you think
Speaker 3: the long term returns are going to be in that
Speaker 3: order of magnitude of four to five percent, assuming US
Speaker 3: inflation is two maybe a bit more of US inflation's
Speaker 3: a bit higher, what do you do after gold has
Speaker 3: gone up so as much as this, And what I
Speaker 3: say to people under those circumstances is, look, gold has
Speaker 3: had a long track record of benefiting your portfolio through
Speaker 3: diversification and returns and helping prevent you against bad things happening.
Speaker 3: It is impossible, like everything else, to forecast where it's
Speaker 3: going in the short term. I mean, we're at I
Speaker 3: think one hundred and three all time highs now in
Speaker 3: gold since the beginning of twenty twenty four. If you'd
Speaker 3: have bought gold at any time in twenty twenty four,
Speaker 3: twenty twenty five, you're up so in Otherwise, just because
Speaker 3: gold's at an all time high doesn't mean that it
Speaker 3: can't go up any higher. But what I do say
Speaker 3: to people is you shouldn't expect the sort of returns
Speaker 3: that you've seen over the last three or four years
Speaker 3: to continue. Don't buy gold expecting it to deliver fifty
Speaker 3: percent per annum. It's much more likely to deliver over
Speaker 3: the long term five or six percent. Now in terms
Speaker 3: of twenty twenty six, what's the likelihood going forward? What
Speaker 3: we said but the start of the year is that
Speaker 3: if you look at the drivers of gold last year,
Speaker 3: if you look at the reasons people were buying gold,
Speaker 3: and I've listed some of them before, looks pretty certain
Speaker 3: that they're going to continue. We're going to see more
Speaker 3: policy announcements out of the United States which are likely
Speaker 3: to rattle the markets from time to time. So why
Speaker 3: wouldn't people keep buying gold under those circumstances?
Speaker 1: Fair enough, I mean, a dollar is weakening, But let
Speaker 1: me take you back to what you said about US inflation.
Speaker 1: Surely one of the reasons why the why gold is
Speaker 1: going up so much is the assumption that US inflation
Speaker 1: will at least in the medium term, be very significantly
Speaker 1: higher than two percent a year.
Speaker 3: Potentially, in that case you can expect better returns. But
Speaker 3: if you think of US inflation plus two to three
Speaker 3: percent over the long term, maybe if inflation's five percent,
Speaker 3: which would be historically very high over the long term,
Speaker 3: you're still only getting seven or eight percent return in gold.
Speaker 1: Okay, you said earlier that everyone should have a sensible
Speaker 1: allocation to gold.
Speaker 2: What does that mean? Is that five percent, that two,
Speaker 2: ten percent, fifteen percent?
Speaker 3: What is it sure? And I guess the starting point
Speaker 3: is it depends what else is in your portfolio. If
Speaker 3: you have a very risky portfolio of all equities, or
Speaker 3: maybe all NASDAK equities, or maybe NASDAK equities plus some crypto,
Speaker 3: the risky of the portfolio you've got, the higher. The
Speaker 3: ideal allocation to gold is based on work we've done
Speaker 3: looking in the UK, the US, Europe, pretty much every
Speaker 3: major country in the world, looking at historic returns of
Speaker 3: gold and other the assets that are available for people
Speaker 3: to buy. You get to put an ideal or an
Speaker 3: optimal allocation somewhere between four and maybe just over ten percent.
Speaker 3: Now four percent allocation would be if you had a
Speaker 3: very heavy bond or fixed income portfolio, and the sort
Speaker 3: of ten twelve percent would be of you're much more
Speaker 3: riskier than that sort of like sixty forty or seventy
Speaker 3: thirty in portfolio terms. So that's the sort of allocation
Speaker 3: that we've suggested is sensible or would have been sensible
Speaker 3: for people in the past. Now, obviously those sorts of
Speaker 3: calculations are done on the basis that what's happened in
Speaker 3: the past will continue in the future. And you know
Speaker 3: the risk disclaimer that you get at the bottom of
Speaker 3: every financial product. You know, just because it's happened in
Speaker 3: the past doesn't mean that happened in the future. So
Speaker 3: start to think about where we are now. Equities, as
Speaker 3: you mentioned, particularly US equities where most people have most
Speaker 3: of their equity exposure, are quite expensive. Think about the
Speaker 3: outlook for government bonds. We've just come out of a
Speaker 3: forty year bullmarket for bonds that arded in nineteen eighty
Speaker 3: and probably ended in twenty twenty one. We're probably not
Speaker 3: going to see the same sort of returns that we've
Speaker 3: seen in government bonds as we've seen in the past.
Speaker 3: And that's before you start thinking about government deficits and debts.
Speaker 3: So maybe that historic five to ten percent allocation for
Speaker 3: gold is looking a bit low, and indeed, I think
Speaker 3: that's probably where the potential for gold to continue to
Speaker 3: prosper is going to come from. There was an article
Speaker 3: produced last year by Morgan Stanley's chief investment officer that said,
Speaker 3: the sixty forty portfolio is dead. The idea of having
Speaker 3: sixty percent of your assets in equities and forty percent
Speaker 3: of your assets in bonds is dead. The new portfolio
Speaker 3: should be sixty twenty twenty, sixty percent inequities, twenty percent
Speaker 3: of government bonds, twenty percent in gold. And that really
Speaker 3: excited us because, first of all, we'd never suggested such
Speaker 3: a high potential allocation to gold, but it comes. But
Speaker 3: the reason that Morgan Stanley have been highlighting this is
Speaker 3: something we recognized a few years ago and published on,
Speaker 3: and that's the breakdown of the negative correlation between equity
Speaker 3: markets and bond markets. That's what the whole sixty to
Speaker 3: forty portfolio was based on. Buy your equities, hedge yourself
Speaker 3: with bonds. When equities do poorly, bonds will probably do well.
Speaker 3: But that's not happening as reliably as it used to. Therefore,
Speaker 3: think about other alternatives that tend to do well when
Speaker 3: equities do badly. And indeed that's what's been happening in
Speaker 3: the last few years, and you know, and that's why
Speaker 3: gold is such a good inclusion. So coming back to
Speaker 3: your argument before about about valuation and gold, and we
Speaker 3: don't look at the US stock market on its own,
Speaker 3: and we certainly don't look at the total stock of
Speaker 3: gold out there in comparison. We look at the stock
Speaker 3: of investment gold and lords how much what is the
Speaker 3: total value of the investment gold out there that people
Speaker 3: have bought, bars and coins and ETFs and everything else.
Speaker 3: And then we look at the market capitalization of the world,
Speaker 3: both equities and bonds. Now, last time we looked at
Speaker 3: that number, it was about one and a half percent.
Speaker 3: Gold's up a lot since then. Other stuff's moved to
Speaker 3: it's probably about two and a half percent now. So
Speaker 3: you can see where the potential is for more investment
Speaker 3: to come into gold. Even if you get up to
Speaker 3: the lower end of the historical recommended allocation that's five percent.
Speaker 3: If you think about the higher end of it, of
Speaker 3: the historical allocation that's ten percent, And if you listen
Speaker 3: to Morgan Stanley, maybe it should be closer to twenty.
Speaker 3: So there's a lot more room for investors to diversify
Speaker 3: into gold, particularly if they don't trust the outlook for
Speaker 3: government bonds. And I don't know about you, but one
Speaker 3: of the things that's been frustrating me tremendously in a
Speaker 3: post pandemic world is the fact that governments are running
Speaker 3: such large budget deficits in comparatively good economic times, and
Speaker 3: the stock of debt seems to be rising inexorably.
Speaker 1: So effectively, gold is becoming the new safe haven asset
Speaker 1: for a lot of people. So it replaces in the
Speaker 1: old days, your safe haven with treasuries or other government bonds.
Speaker 1: You bought these, that was your safe haven and something
Speaker 1: went wrong, you knew you had those as your backup.
Speaker 1: But in this new environment, with these incredibly high levels
Speaker 1: of debt that we get increasingly concerned might not be
Speaker 1: server's long term gold becomes your new safe haven asset.
Speaker 3: And you can see that in the performance as well. Historically,
Speaker 3: when the US equity market had a really bad down day,
Speaker 3: the US dollar would tend to strengthen as people were
Speaker 3: putting money into the dollar. Now because the US equity market.
Speaker 3: When it does have these corrections, it's often because of
Speaker 3: something that's coming out of Washington. The dollar tends to
Speaker 3: weaken as well, so you're getting hit in both ways.
Speaker 3: So bonds aren't your safe have. The US dollar isn't
Speaker 3: the safe haven that it was, and gold's benefiting at
Speaker 3: their expense to a degree.
Speaker 1: Interesting, and it's also it's part of a of a
Speaker 1: shift in general away from investors thinking to themselves digital
Speaker 1: assets or the answer, software assets are the answer, and
Speaker 1: beginning to think, actually, physical assets are the answer. And
Speaker 1: this environment so it's not just about gold, as we've discussed,
Speaker 1: talk a little bit more about that. It's about silver,
Speaker 1: it's about other industrial metals. It's about stuff manufacturing, about factories,
Speaker 1: about physical commodities. So as part of that general mind
Speaker 1: shift as well, isn't it.
Speaker 3: I think it is. I'm a little bit cautious about
Speaker 3: some of these industrial metals, by which talking particularly copper,
Speaker 3: but arguably silver as well. A lot of the gains
Speaker 3: that we're seeing in silver are touted on the basis
Speaker 3: of its industrial uses, but the global economy isn't growing
Speaker 3: that quickly at the moment, and my experience in covering
Speaker 3: commodities for many years now is industrial users of metals
Speaker 3: are very good at reducing the amount that they use
Speaker 3: when the price goes up a lot. You know, even copper.
Speaker 3: Copper prices have gone up a lot in the last
Speaker 3: couple of decades. There's a lot less copper used in
Speaker 3: water piping than they used to be. For example, now
Speaker 3: there's a lot of plastic used even in this even
Speaker 3: in some places they're using it for they're using aluminium
Speaker 3: for electrical conductivity, although not in the UK. But the
Speaker 3: cure for high prices and commodity markets is high prices
Speaker 3: because substitution comes in.
Speaker 2: Although interestingly, can I just go pick you up on
Speaker 2: it briefly?
Speaker 1: Is it in the past when they said the solicient
Speaker 1: high prices and commodity markets is high prices, part of
Speaker 1: what they meant was not so much substitution. They meant
Speaker 1: that supply would rise significantly because everyone would say, oh,
Speaker 1: look cop has gone up, I'll just go dig myself
Speaker 1: another copper mine.
Speaker 2: And of course you can't do that anymore. You can't
Speaker 2: do that.
Speaker 3: You can easily.
Speaker 1: Yeah, you've got a very long timeframe. Planning is going
Speaker 1: to take you significantly longer than it used to. So
Speaker 1: you can't have a new copper mine up and running
Speaker 1: in eighteen months. Is going to take you ten years,
Speaker 1: fifteen years, whatever it is. So it's a very different
Speaker 1: supply environment and that has to make a difference, doesn't it.
Speaker 3: It does, and I think it does for metals where
Speaker 3: you don't have a pool of potential recycling to come
Speaker 3: back to the market. And in the case of copper,
Speaker 3: there's lots of recycling that takes place. If you, you know,
Speaker 3: knocked down a building, they take out the copper wires
Speaker 3: and they send that off and get recycled and it
Speaker 3: turns up in another building somewhere else in electricity or piping. Fine,
Speaker 3: but there's not a potential flood of copper to come
Speaker 3: back to the market on the recycling side. There is, however,
Speaker 3: in silver, and that's something I think that that some
Speaker 3: of the silver fanatics have been missing, is the fact
Speaker 3: that pretty much every silver refinery in the western world
Speaker 3: is closed to accepting new scrap at the moment because
Speaker 3: it's full. So we're seeing these these announcements coming from
Speaker 3: the refineries or the scrap collectors saying we're going to
Speaker 3: close down for a week or two, because you know,
Speaker 3: we can't get this stuff refined at the moment. There
Speaker 3: is so much silver coming back to the market. Now,
Speaker 3: I'm not saying that that means the price is going
Speaker 3: to go down, but it does mean that there's a
Speaker 3: lot of a lot of Granny silverware which is being
Speaker 3: sold into these high prices at the moment, a lot
Speaker 3: of US coins because you know the coinage system in
Speaker 3: the US prior to the seventies, you know, silver dollars,
Speaker 3: silver quarters, silver nickels, or at least containing decent quantities
Speaker 3: of it. So that stuff is coming back at such
Speaker 3: a speed that the refineries can't cope with. At the moment,
Speaker 3: they will process it, it will come to the market.
Speaker 3: There is supply being brought to the market by higher prices,
Speaker 3: as you suggest, So do you.
Speaker 1: It feels to me like you're suggesting that silver might
Speaker 1: be well into the mania phase.
Speaker 3: Look, there's no doubt that we are seeing enormous retail
Speaker 3: demand for silver in various ways, whether it's via investment products,
Speaker 3: whether it's by physical silver. In China, I was talking
Speaker 3: to one of my colleagues, Rajr. Who's head of China Research,
Speaker 3: and he was saying that in Shenzen, which is one
Speaker 3: of the centers of the precious metals market in China,
Speaker 3: they're moving silver around on these trolleys so much so
Speaker 3: that the roads are getting destroyed because of the weight
Speaker 3: of silver that's being shipped around as people are trying
Speaker 3: to get their hands on physical silver to invest. So, yeah,
Speaker 3: there's no doubt there's tremendous investment demand for silver at
Speaker 3: the moment. But if you look at historically at the
Speaker 3: performing of all precious metals, to be frank, you do
Speaker 3: get these phases when people buy them with great enthusiasm,
Speaker 3: expecting the prices to go up forever and then there's
Speaker 3: a correction. And we don't give investment revice, we don't
Speaker 3: make short term forecast, but let's put it this way.
Speaker 3: I'm looking at the silver price with disbelief at the
Speaker 3: moment and waiting at least for a decent correction. Not
Speaker 3: saying it's over, but wow, you know, one hundred and
Speaker 3: ten dollars an ounce.
Speaker 1: Yeah, we got so excited on this podcast and it
Speaker 1: went through fifty.
Speaker 3: Well, fifty was the Yeah, fifty was the previous all
Speaker 3: time high back to nineteen eighty. Absolutely, so it was
Speaker 3: a big number to go through, but then again, so's
Speaker 3: one hundred.
Speaker 2: Well, well, I mean I.
Speaker 1: Think we kind of stopped being excited after seventy and
Speaker 1: started just being mildly incredulism, wishing that we held more
Speaker 1: minus silver, you know, small silver miners and all that,
Speaker 1: which brings me back to the thing that we're going
Speaker 1: to get lots of questions on, which is when you
Speaker 1: talk about having a five to ten percent allocation to gold,
Speaker 1: do we mean actual physical gold or do we mean
Speaker 1: a mix of gold in your hand, hidden in your basement?
Speaker 1: Gold ETFs and perhaps gold miners as well.
Speaker 2: Where are here? What does it mean?
Speaker 3: The work we've done has been on gold, gold in
Speaker 3: all its different forms, but not gold mining companies or
Speaker 3: exploration companies. And there are merits to investing in gold miners.
Speaker 3: Just look at the performance that they delivered last year
Speaker 3: and massively outperforming the gold price. But there are risks.
Speaker 3: Think how many mines have been have I think how
Speaker 3: many minds have been taken away by governments or where
Speaker 3: taxes have suddenly been increased. So there's lots of additional
Speaker 3: risks positive and negative investing in gold miners. So we
Speaker 3: don't make We don't do much studies on that, but
Speaker 3: you know, as I say, at the right time, and
Speaker 3: generally speaking, when the gold price is going up faster
Speaker 3: than their costs, gold mining companies also with mining companies,
Speaker 3: can increase more than the underlying metal. So that's what's
Speaker 3: happened last year. So in terms of gold itself, you
Speaker 3: can buy gold or get exposure to gold in a
Speaker 3: number of ways. You can go and buy physical gold,
Speaker 3: you'll have to pay a premium over the spot goal price.
Speaker 3: That premium, when the market's quite hot, which it is
Speaker 3: at the moment, could be five, maybe ten percent premium
Speaker 3: over the goal price, and when you come to sell
Speaker 3: it back, you might only get the goal price or
Speaker 3: maybe a slight discount. So there's a big bid ask
Speaker 3: spread in owning physical gold potentially, So that's something to
Speaker 3: bear in mind.
Speaker 1: I was just gonna say that, you know a lot
Speaker 1: of people hold gold for armageddon reasons, right, and I
Speaker 1: have my gold because everything's going to go horribly wrong.
Speaker 2: The world's going to collapse.
Speaker 1: It's going to be a massive cyber attack and the
Speaker 1: stock markets will collapse, everything will be gone, etc. And
Speaker 1: if you are that kind of gold buyer, there's really
Speaker 1: only one way to hold gold, and that.
Speaker 2: Is physical, actual physical gold hidden in your house.
Speaker 1: So I think a lot of people are holding their
Speaker 1: gold for is insurance for very bad things. But if
Speaker 1: the very bad things they have in their mind happen,
Speaker 1: their ETF will be of no use to them in
Speaker 1: the immediate exactly.
Speaker 3: And it's when I worked at an investment bank and
Speaker 3: we would see the flows coming through and you could
Speaker 3: see in which way people were buying gold. You could
Speaker 3: see the motivations behind them because you didn't have to
Speaker 3: tell you you could understand what they were doing. Consider
Speaker 3: the bid ask spread or the premium that you're paying
Speaker 3: for physical gold as part of the insurance policy you're
Speaker 3: having to pay for this armorgain. If, however, you don't
Speaker 3: think the financial system is going to collapse, if you
Speaker 3: don't think that there's going to be a huge run
Speaker 3: on banks, then maybe you're interested in buying gold via
Speaker 3: financial product and you can buy futures, you could buy
Speaker 3: gold certificates, you could do derivatives with banks, etc. Or
Speaker 3: you go sort of a halfway house in between the two,
Speaker 3: which is buying a goal backed ETF which is listed
Speaker 3: on the stock market around the world, different ETFs, different
Speaker 3: stock markets, and this gives you the financial performance of
Speaker 3: gold in as close a way as to owning the
Speaker 3: physical yourself without having to pay that premium, without having
Speaker 3: to worry about holding it at home and thinking about
Speaker 3: insurance and theft, etc. So there's a number of different ways,
Speaker 3: and again it depends why you're buying gold. There's lots
Speaker 3: of reasons to do so. We generally speak to investors
Speaker 3: and think about portfolios, and you've got a portfolio, you're
Speaker 3: probably thinking that the financial system isn't going to collapse,
Speaker 3: and in that way, some sort of exposure of ron
Speaker 3: ETF or another financial product is probably the best way
Speaker 3: to think about it.
Speaker 2: If you got gold buried in your garden, John m.
Speaker 3: Couldn't possibly tell you. I do know a story about
Speaker 3: a hedge fund guy I bumped into again when I
Speaker 3: worked at UBS, and this was in the early two thousands,
Speaker 3: when gold has started to go up again. He said,
Speaker 3: I've got fifteen hundred kruegerands buried in my ranch, but
Speaker 3: I can't remember where I put them. So every spring
Speaker 3: I go out there with my metal detector trying to
Speaker 3: work out where they are. So even burying gold in
Speaker 3: your garden is not without risks. Either the gophers have
Speaker 3: got it, or maybe a robber's got it, or you
Speaker 3: can forget where it is.
Speaker 2: Well, that'll be very exciting for future archaeologists, won't it.
Speaker 1: One day somebody will find that and we'll probably everyone
Speaker 1: forgets where they buried their stuff.
Speaker 2: It's like pretty much everyone has that.
Speaker 1: I can't find my jewelry story, and it as I've
Speaker 1: been founded that bottom of some Yeah, everyone has that story. Okay,
Speaker 1: So I want to ask you about a couple more things,
Speaker 1: And the first is an idea of my colleague John's.
Speaker 1: He wrote a piec the other day about how one
Speaker 1: of the reasons that gold is rising so fast at
Speaker 1: the moment, it's a sentiment thing.
Speaker 2: Of course it was a sentiment thing. But gold used
Speaker 2: to be considered to be.
Speaker 1: A right wing metal, and now it's more of a
Speaker 1: left wing metal, a more of a hedge against trump Ism,
Speaker 1: a hedge against political change in the US. So you know,
Speaker 1: if you're anti Trump, you can buy gold to hedge
Speaker 1: the weakness in the dollar that results from his policies.
Speaker 1: So that John wrote about there, I encourage everyone to
Speaker 1: go and read his amusing column on it. But there
Speaker 1: is that sense, isn't there the sort of sentiment shift
Speaker 1: that is bringing a wider audience to gold.
Speaker 3: Yeah, And it's interesting if you look at the physical
Speaker 3: gold demand, so demand for coins and small investment bars
Speaker 3: the one market that really hasn't taken off to the
Speaker 3: same degree as the United States, and it's something that
Speaker 3: we were anticipating actually because we've seen it before. You're
Speaker 3: right that many physical buyers of gold in the United
Speaker 3: States tend to be Republicans. They tend to buy gold
Speaker 3: as well as guns and ammunition actually during democratic presidencies
Speaker 3: because they're worried that the US is going to hell
Speaker 3: and they'll be unable to buy guns and ammunition soon
Speaker 3: because they'll all we banned. And during a Republican leadership
Speaker 3: or Apublican government, everything's going to be fine. So they
Speaker 3: don't need to buy guns because they can get them,
Speaker 3: and they don't need to buy gold because everything's wonderful
Speaker 3: in America. So you're right in a way, I think that,
Speaker 3: and John is right here is that it is a
Speaker 3: bit of a right wing metal. It's a bit of
Speaker 3: a male metal as well, certainly in the West, and
Speaker 3: it's a bit of an older metal emerging markets. Of course,
Speaker 3: it's very different to you if you speak. When I
Speaker 3: go to India and speak to groups of investors there,
Speaker 3: I sometimes do presentations only to Indian women, high net
Speaker 3: worth individuals and their own right and talk to them
Speaker 3: about why everything they think that they think about gold
Speaker 3: is wrong because they hone it's jewelry. Should be considering
Speaker 3: it as an investment asset as well.
Speaker 2: But don't they consider jewelry to be an investment asset.
Speaker 2: They should carry a wealth.
Speaker 3: It is how you carry a wealth, and when it
Speaker 3: becomes seriously rich, you don't have enough gold. So you
Speaker 3: can't physically own enough jewelry to diversify your portfolio effectively.
Speaker 3: So you should think about financial exposure to gold as well.
Speaker 3: Always fun talking to Indian women about gold. They know
Speaker 3: far more about it than I do.
Speaker 1: Okay, fascinating. I think we have a reasonably high female audience. So, ladies,
Speaker 1: that your bracelets aren't.
Speaker 3: Enough exactly, okay, John.
Speaker 2: Now a lot of the listeners to this podcast will
Speaker 2: have been buying gold. They will have a lot of gold.
Speaker 2: They may now have too much gold.
Speaker 1: So let's say you've been holding it a while, it's
Speaker 1: now probably going to be thirty thirty five percent of
Speaker 1: your portfolio. Of you've been holding a long time, it
Speaker 1: was going to feel tough to sell, right. You can
Speaker 1: see that price moving up and up and up. But
Speaker 1: maybe you know in your heart it's time to top
Speaker 1: size at least to diversify some of that away from gold.
Speaker 2: How do you manage that?
Speaker 3: Well, what I said of people is and this question
Speaker 3: has come up a lot, and twenty thirty percent is
Speaker 3: actually low compared to some of the questions that I get.
Speaker 3: I bunt into one guy at a reception the other week.
Speaker 3: He said, you know, you know put lots of my
Speaker 3: pension into gold and silver a few years ago and
Speaker 3: it's done really well. And I said to him, well, look,
Speaker 3: think about the reasons why you own gold. Think about
Speaker 3: it from the perspective as a diversifier, As a strategic asset.
Speaker 3: You always want to hold a certain proportion of it.
Speaker 3: And if you thought maybe you wanted to put in
Speaker 3: ten or fifteen percent of it and it's now worth
Speaker 3: forty five percent, then you know, think about reducing that perhaps,
Speaker 3: think about are the better reasons to own gold than
Speaker 3: there were when I put in fifteen percent of it
Speaker 3: back in the day, and maybe there are, but there's
Speaker 3: probably not forty five or fifty percent allocation. And he
Speaker 3: said to me, oh, I've got eighty percent. I said, well,
Speaker 3: to be frank, yeah quite. By the way, this was
Speaker 3: if you had eighty percent, it's probably more like ninety
Speaker 3: now because this was a few months ago, you know.
Speaker 3: And I think the point there is is that gold
Speaker 3: has a role in a portfolio. It shouldn't be your
Speaker 3: entire portfolio. Then you are just basically betting your farm
Speaker 3: on one asset class. And you know that, as we
Speaker 3: all do, the best way to invest is to have
Speaker 3: an appropriately diversified portfolio, and then you know, you flex
Speaker 3: those weights a bit. But with the performance that gold
Speaker 3: has had, and particularly the outperformance that gold and silver
Speaker 3: have had of other assets in the last eighteen months
Speaker 3: or so, there's nothing wrong with reducing exposure a bit.
Speaker 2: But if you have no gold at all, you should
Speaker 2: buy itself.
Speaker 3: We believe every portfolio will benefit in the long term
Speaker 3: from having an appropriate amount of gold in your portfolio.
Speaker 3: That doesn't mean to say that you buy gold at
Speaker 3: fifty two hundred and fifty dollars an ounce and it's
Speaker 3: guaranteed to go up because it's not. But every portfolio
Speaker 3: that we've looked at would have benefited past tense from
Speaker 3: having gold in that portfolio over the last five, ten, twenty,
Speaker 3: or since nineteen seventy one when we came off the
Speaker 3: gold standard.
Speaker 1: John listen, Okay, here comes a difficult question. You ready,
Speaker 1: how does bitcoin fit into all this? I mean you
Speaker 1: will remember not that long ago we had to put
Speaker 1: up on this podcast with and as people telling us
Speaker 1: that bitcoin was digital gold, and then of course we
Speaker 1: got our kicks by calling gold physical. Yeah.
Speaker 2: Have you get your laugh somewhere right now? Bitcoin and
Speaker 2: gold are clearly not the same thing.
Speaker 1: It is clearly not digital gold. It is not moving
Speaker 1: in the same way. These are different things.
Speaker 2: What's going on?
Speaker 3: Absolutely? So first of all, i work for the World
Speaker 3: Gold Council, so I'm not going to say anything whether
Speaker 3: I think you should own bitcoin or not. Fine, that's
Speaker 3: not my job. But what I would say is they
Speaker 3: are different and as you've pointed out, they move in
Speaker 3: different ways. So I got really irritated with bitcoin being
Speaker 3: described as gold two point zero because it isn't. Bitcoin
Speaker 3: and other digital assets are. As one of my friends,
Speaker 3: Charlie Morris would say, they are tech stocks effectively, or
Speaker 3: at least they perform like tech stocks. If you've had
Speaker 3: if you've added bitcoin to your portfolio, you've increased your
Speaker 3: effective equity exposure. And in fact, what you've really done
Speaker 3: is you've increased your effective tech exposure more. That's fine,
Speaker 3: that could be a great decision. Bitcoin's done very well
Speaker 3: over the last ten years. But it doesn't behave in
Speaker 3: the same way as gold. It won't diversify your portfolio.
Speaker 3: It will increase the risk of that portfolio. Now again,
Speaker 3: no reason why you shouldn't own it, but do recognize
Speaker 3: that you've added risk to your portfolio. If you've added
Speaker 3: risk to your portfolio, what should you do diversify more?
Speaker 3: What should you consider as a potential diversify gold?
Speaker 2: Have bitcoin by gold?
Speaker 1: I suppose that the other problem with bitcoin, I suppose
Speaker 1: with all cryptocurrencies, one way or another, is that there
Speaker 1: are so many substitutes.
Speaker 2: I mean and with silver, as you say there may substitutes.
Speaker 1: Gold really doesn't have a substitute. It does gold and
Speaker 1: bitcoin can be substituted in many, many ways.
Speaker 3: Sure, there may be finite numbers of bitcoins, but there
Speaker 3: are not finite number of cryptocurrencies. And yes, silver is
Speaker 3: a bit of a substitute for gold. It's a bit
Speaker 3: of a substitute for gold and jewelry. It's a bit
Speaker 3: of a substitute for gold in investment, particularly when the
Speaker 3: silver price is moving like it is. But in the end,
Speaker 3: gold is a much much bigger market than silver and
Speaker 3: always will be in my opinion.
Speaker 2: Amazing, John, Thank you so much, Thank.
Speaker 3: You very much, Maren, great conversation.
Speaker 2: Thanks for listening to this week's maryn Talks Money.
Speaker 1: If you like our show, rate review and subscribe by
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Speaker 1: comments and merror money at Bloomberg dot net. You can
Speaker 1: also follow me and John on Twitter or x I'm
Speaker 1: at Mary Nurse w and John is John Underscore Stepic.
Speaker 1: This episode was hosted by Me Maren zumzep Web. It
Speaker 1: was produced by Samersadi and Moses and sound designed by
Speaker 1: Blake Labels and special thanks to John Read