WEBVTT - Here's Why The Iran War Is Prompting A Safe Haven Rethink

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<v Speaker 1>Hello, add lots listeners. I'm Stephen Carroll, the host of

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<v Speaker 1>Bloomberg's Here's Why podcast, where we break down a key

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<v Speaker 1>story in the news. We borrow Joe for our latest episode,

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<v Speaker 1>so we thought we'd share it with you. If you

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<v Speaker 1>like what you hear, you could subscribe to Here's Why

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<v Speaker 1>wherever you usually get your podcasts. Enjoy Bloomberg Audio Studios, podcasts,

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<v Speaker 1>radio news. I haven't seen yet a sense of Okay,

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<v Speaker 1>where's my safe haven? Where do I go and park myself?

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<v Speaker 1>The US is benefiting right now from kind of the

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<v Speaker 1>safe haven trade at the moment. If you can find

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<v Speaker 1>me a safe haven in this market, I'd be the

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<v Speaker 1>first one to sign up for that. We do see

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<v Speaker 1>some of the safe havens seems doesn't perform as good

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<v Speaker 1>as we expect it. For example, go and silver, Japanese

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<v Speaker 1>here and the bones. In times of trouble, investors often

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<v Speaker 1>look for safer ground. During previous crises, that's meant to

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<v Speaker 1>rush into assets like US treasuries, the dollar, the Swiss

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<v Speaker 1>franc or gold. But the turmoil caused by President Trump's

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<v Speaker 1>trade taras last year the traditional safe haven trades as

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<v Speaker 1>investor has turned away from US assets and the latest

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<v Speaker 1>conflict in the Middle East has seen another shift. Here's

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<v Speaker 1>why the Iran war is prompting a safe haven rethink.

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<v Speaker 1>Joe Eisenthal House to Bloomberg's Odd Lots podcast joins us

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<v Speaker 1>now for more. Joe, great to talk to you. Can

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<v Speaker 1>you help us understand first of all the background here?

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<v Speaker 1>What makes a good safe haven asset? Why are treasuries

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<v Speaker 1>or the Swiss frank or gold considered a place to

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<v Speaker 1>shelter from market turmoil.

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<v Speaker 2>The thing that investors are always looking for is some

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<v Speaker 2>sort of asset that is not strictly correlated to growth

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<v Speaker 2>or to risk asset. So what is a risk asset

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<v Speaker 2>or risk asset is an asset that goes up when

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<v Speaker 2>things are going well. So stock market classic risk asset.

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<v Speaker 2>You're feeling optimistic, you think the world is going to

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<v Speaker 2>be good all things equal, you want to buy more stocks,

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<v Speaker 2>gas st is. Then you have other assets that are

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<v Speaker 2>characterized as safe havens, and so there's something about their

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<v Speaker 2>properties in which you expect to be paid back, you

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<v Speaker 2>expect to hold their value even if things aren't going great.

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<v Speaker 2>So gold obviously a classic one. People have been using

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<v Speaker 2>it for money for thousands of years and so by

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<v Speaker 2>and large you expect them. It'll still have monetary possibilities

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<v Speaker 2>in a thousand years. The performance of gold is not

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<v Speaker 2>contingent on things going particularly well in the economy. Treasuries

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<v Speaker 2>are another example. The US is you know, maybe it's

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<v Speaker 2>changed a little bit, but by a large stable and

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<v Speaker 2>the coupon payments are simply contingent on legally required payments

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<v Speaker 2>from the US government, and so again those payments will

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<v Speaker 2>happen regardless of whether the economy is strong or bad

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<v Speaker 2>or whatever it is. So that has safe haven properties

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<v Speaker 2>all around the world. Generally speaking, the US has had

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<v Speaker 2>very little inflation over the years, certainly relative to many countries,

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<v Speaker 2>and so therefore the dollar holds its value relatively well.

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<v Speaker 2>It's accepted almost everywhere, and so it is safe haven property.

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<v Speaker 2>So basically, what people gravitate to in times of stress,

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<v Speaker 2>and it's a little different are assets that are not

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<v Speaker 2>correlated to the business cycle, that can perform and hold

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<v Speaker 2>their value even if things aren't going well.

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<v Speaker 1>So what was different than during the tariff turmoil of

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<v Speaker 1>last year because some of these traditional safe havens seemed

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<v Speaker 1>a bit less attractive.

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<v Speaker 2>Yeah, So I think the way to think about it

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<v Speaker 2>is that you know, safe havenness is something that kicks

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<v Speaker 2>in at specific times. And so let's go back to

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<v Speaker 2>the tariffs. Did it create a true crisis? Crisis is

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<v Speaker 2>in like a run on the banks, et cetera. No,

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<v Speaker 2>not really. There was a lot of anxiety and so forth.

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<v Speaker 2>But the net effect of tariffs where for many people

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<v Speaker 2>around the world, the US looked like a less attractive

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<v Speaker 2>place to invest. It would be more costly to do

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<v Speaker 2>business here, and so forth, and so well, in this

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<v Speaker 2>environment you saw the dollar weakening.

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<v Speaker 1>Right.

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<v Speaker 2>This really did not have much to do with its

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<v Speaker 2>safe haven properties per se. It was just the dollar

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<v Speaker 2>being another currency, and investors around the world look and say, okay,

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<v Speaker 2>this is not great for economic management. I don't really

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<v Speaker 2>want to put more assets on the ground in the

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<v Speaker 2>US because importing goods in the factories and so for

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<v Speaker 2>it'll be more expensive, and so then they sell dollars.

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<v Speaker 2>Now you fast forward to the war in Iran, and

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<v Speaker 2>this is very different. The dimensions of the currency are

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<v Speaker 2>not about broader conditions. This is there is a war

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<v Speaker 2>going on. We do not know how long this war

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<v Speaker 2>is going to go on. War spiral out of control,

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<v Speaker 2>even if they're meant to be contained. This is a

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<v Speaker 2>historical fact. In that environment, people are not thinking about

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<v Speaker 2>is the US a good place to invest right now?

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<v Speaker 2>They're thinking, I am scared. I want to have my

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<v Speaker 2>money and something that is likely to roughly retain its

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<v Speaker 2>value for a year and now five years from now,

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<v Speaker 2>et cetera. And by that measure, the dollar is a

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<v Speaker 2>relatively attractive option. So at times, these what we call

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<v Speaker 2>save haven assets performed differently. In twenty twenty five, the

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<v Speaker 2>dollar performed like an investment asset. Oh, I don't really

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<v Speaker 2>want to hold it so much, because the US is

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<v Speaker 2>a less attractive environment. Today the dollar looks good. It's

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<v Speaker 2>a safe haven asset, not because the US is a

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<v Speaker 2>great place to invest per se, but because those properties,

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<v Speaker 2>those safe haven properties have kicked in.

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<v Speaker 1>So how does that work then in this moment for treasuries.

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<v Speaker 2>Yeah, another great question. What makes treasuries a safe haven? Obviously,

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<v Speaker 2>it's the fact that the US is very credit worthy,

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<v Speaker 2>that the US borrows in its own currency, so therefore

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<v Speaker 2>there is no prospect of the treasury like running out

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<v Speaker 2>of money. It can always print it and so forth.

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<v Speaker 2>And so what gives treasuries a safe haven property is

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<v Speaker 2>the fact that that payment is guaranteed by the US government. Now,

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<v Speaker 2>another factor in the pricing of treasuries is inflation. And

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<v Speaker 2>so if you have, like I say, you know treasury

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<v Speaker 2>that it pays a four percent coupon, you get a

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<v Speaker 2>four percent yield every year. But inflation, let's say it

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<v Speaker 2>goes to six percent, that is a money losing investment, right,

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<v Speaker 2>The real value of that treasury, that coupon payment is

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<v Speaker 2>not keeping up with inflation, so you don't on to

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<v Speaker 2>hold it. With the war, people are worried about inflation.

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<v Speaker 2>I mean, obviously we've seen oil prices spike. Wars are

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<v Speaker 2>costly just from a sort of budgetary standpoint, They require

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<v Speaker 2>more fiscal expenditure, They put strains on resources of all sorts.

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<v Speaker 2>We may have to massively ramp up missile production, that

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<v Speaker 2>puts strains on the real economy. All of these things

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<v Speaker 2>taken to be per se inflationary. So then you look

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<v Speaker 2>and you're like, if you're an investor, someone's selling you

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<v Speaker 2>a treasury, You're thinking, you know what, I want to

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<v Speaker 2>hire yield to compensate for this inflation. So it's the

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<v Speaker 2>type of thing once again where the same ass but

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<v Speaker 2>in a different environment. The safe haven properties aren't kicking

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<v Speaker 2>in for that moment. Now, I do think it's worth

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<v Speaker 2>noting that, like you can watch, say like the VIX

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<v Speaker 2>for example, a measure of financial conditions and sort of

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<v Speaker 2>a pure measure of how anxious people are feeling. If

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<v Speaker 2>you get a major VIX spike, there is a good

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<v Speaker 2>chance that people will buy treasuries. And so what I'm

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<v Speaker 2>saying is I mentioned all the concerns with treasuries. However,

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<v Speaker 2>maybe that's a price people are willing to pay just

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<v Speaker 2>for that security, and so there's a push pull here.

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<v Speaker 2>I like the fact that the payment is guaranteed. I

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<v Speaker 2>don't like the fact that the payment is going to

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<v Speaker 2>keep up with inflation. If things are really breaking down,

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<v Speaker 2>you might say, you know what, I'm willing to take

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<v Speaker 2>a price loss. I'm willing to accept a coupon payment

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<v Speaker 2>that is less than inflation because the fact that I

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<v Speaker 2>get paid anything at all, and the fact that I

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<v Speaker 2>will get my principle back at the end of the term,

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<v Speaker 2>whether it's a ten year treasury, is worth so much

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<v Speaker 2>to me in this period of extreme anxiety that I

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<v Speaker 2>will use a treasury as a safe haven, even if

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<v Speaker 2>it's a money losing investment. An analogy that I like

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<v Speaker 2>to make is a safe deposit box. You pay the

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<v Speaker 2>bank for the right to hold something in a safe

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<v Speaker 2>deposit box. De facto, that means that a safe deposit

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<v Speaker 2>box has a negative yield, and yet it is often

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<v Speaker 2>part of someone's safe haven portfolio. I'm going to put

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<v Speaker 2>my values balls in there, despite the fact that it

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<v Speaker 2>costs me a little bit of money every year, because

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<v Speaker 2>the fact that I will be able to take them

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<v Speaker 2>out one day is worth quite a bit of peace

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<v Speaker 2>of mind.

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<v Speaker 1>Can you then explain to us what happened with gold,

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<v Speaker 1>because if we look at a gold chart for the

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<v Speaker 1>past few years, and we've talked about at length, you

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<v Speaker 1>know number go up to absolutely quote our hike sekbox

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<v Speaker 1>and it's book of our crypto. But this time around,

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<v Speaker 1>we haven't seen the same rally in gold during the

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<v Speaker 1>Iran war.

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<v Speaker 2>Why so, first of all, as you said, gold has

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<v Speaker 2>rallied a lot over the last several years, and it's

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<v Speaker 2>rally during a period of I would say, sustained high inflation.

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<v Speaker 2>The rate of inflation has come down, but inflation all

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<v Speaker 2>around the world is still fairly high. People are worried

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<v Speaker 2>about the you know, paper currencies holding their valume. It's

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<v Speaker 2>gone up during a period of geopolitical attention, obviously multiple

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<v Speaker 2>wars around the world since twenty twenty two, and so

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<v Speaker 2>once again, you know, there's this anxiety about like sovereignty

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<v Speaker 2>and some pretty fundamental questions, and so this is the

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<v Speaker 2>type of environment in which people want to reach for

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<v Speaker 2>an asset that once again, it transcends time, it transcends space,

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<v Speaker 2>it transcends nation states, and so forth. It's a form

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<v Speaker 2>of money that's kind of understood everywhere in the world

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<v Speaker 2>and throughout history. So the last several years have been

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<v Speaker 2>a really good environment for people wanting to have some

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<v Speaker 2>allocations that people want to hold a dollar alternative. If

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<v Speaker 2>you think back to twenty twenty two, Russia got sanctioned

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<v Speaker 2>and lost access to a lot of the dollars that

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<v Speaker 2>it had, and I think people around the world world,

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<v Speaker 2>we're looking at that and you're like, you know what,

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<v Speaker 2>maybe I want to hold fewer dollars because this could

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<v Speaker 2>happen to me too one day, and so I want

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<v Speaker 2>to hold gold in a vault. Now we get the

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<v Speaker 2>war and gold hasn't done as well. I think there's

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<v Speaker 2>probably a couple of factors you know. Something that happens

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<v Speaker 2>in an extreme spike, and this is a little bit counterintuitive,

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<v Speaker 2>is when you have real fear, dollars suddenly become more

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<v Speaker 2>interesting to you because you start thinking, I have a

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<v Speaker 2>rent bill to pay, I have a Bloomberg bill to pay,

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<v Speaker 2>I have to pay for my terminal, I have to

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<v Speaker 2>pay for the lights, I have to like pay for everything.

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<v Speaker 2>You want to just survive to the next month, and

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<v Speaker 2>the way you survive to the next month is making

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<v Speaker 2>sure that your bills are paid. Can't pay your bills

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<v Speaker 2>in gold, and so you think to yourself, Okay, there's

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<v Speaker 2>big liquidations happening. I do want to hold gold long term,

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<v Speaker 2>but in the short term I need to come up

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<v Speaker 2>with some dollars. And so gold, having done extremely well

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<v Speaker 2>over the last few years, it may be something that

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<v Speaker 2>you sell in this environment. There's another drawback to gold,

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<v Speaker 2>which is that it's costly to move right having it's

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<v Speaker 2>heavy on like say bitcoin, or on like say the dollar,

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<v Speaker 2>you can't just withdraw it anywhere in the world. If

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<v Speaker 2>you have your gold in a vault in Switzerland and

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<v Speaker 2>you move to Singapore, that gold is not available to

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<v Speaker 2>you at a moment's notice. And so you have to

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<v Speaker 2>think about how are you going to get it there?

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<v Speaker 2>Or if things really go bad, how do you get

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<v Speaker 2>your gold out of that vault. These are questions that

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<v Speaker 2>gold investors actually have to think about sometimes. And I

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<v Speaker 2>do wonder, given the closure of the strait of hor

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<v Speaker 2>Moves and give it the fact that we don't know

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<v Speaker 2>how wide the war is going to spend, maybe there

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<v Speaker 2>is a little bit of cost to holding something in

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<v Speaker 2>which the ability to physically move it to where you

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<v Speaker 2>are is part of its appeal. And so perhaps at

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<v Speaker 2>the margins this is a negative factor in gold, which

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<v Speaker 2>is here is a type of money that has to

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<v Speaker 2>be physically moved at a time when physical movement is

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<v Speaker 2>under stress.

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<v Speaker 1>Joe, fascinating stuff. Thanks so much for joining us, Joe

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<v Speaker 1>Wisenthal Houst of Bloomberg's Odd Lots podcast. For more explanations

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<v Speaker 1>like this from our team of three thousand journalists and

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<v Speaker 1>analysts around the world, go to bloomberg dot com slash Explainers.

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<v Speaker 1>I'm Stephen Carol. This is Here's why. I'll be back

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<v Speaker 1>next week with more. Thanks for listening.