Transcript
John Reade of the World Gold Council joins the Gold Exchange Podcast to talk all things gold. Are ETF’s a good way to own gold? Why are Central Banks buying gold, and not reporting it? How much gold is too much gold in an investment portfolio?
Follow John Reade on Twitter @JReade_WGC and visit the World Gold Council website.
Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals
Additional Resources
The Case for Gold Yield in Investment Portfolios
Podcast Chapters
[00:00:00]: Introduction
[00:00:14]: World Gold Council and its mission
[00:00:43]: John Reade’s background and role at World Gold Council
[00:01:59]: Uses and value of gold
[00:05:30]: Gold’s historical significance and Hoarding
[00:08:00]: Strategic and tactical allocation of gold in portfolios
[00:12:32]: Importance of Diversification
[00:14:16]: Risk-Adjusted Returns and Gold Allocation
[00:17:49]: Gold’s Correlation During Market Volatility
[00:18:32]: The Benefits of Gold in a Portfolio
[00:20:09]: Gold’s Unique Stock to Flows Ratio
[00:23:44]: The Role of Gold in Portfolios and the Global Economy
[00:26:01]: Germany’s historical sensitivity to inflation
[00:27:25]: Gold investment culture in the UK
[00:28:07]: Different types of gold investments
[00:30:10]: Storing Gold and risks of home storage
[00:31:38]: Risks and concerns with gold ETFs
[00:33:52]: Monetary Metals Gold Leasing
[00:37:59]: Gold availability and estimation challenges
[00:40:23]: Estimating Global Gold Production
[00:42:05]: Uncertainty in Gold Recycling Estimates
[00:42:36]: Selling Gold for Bonds and ETF Flows
[00:44:49]: Historical Interest Rates and Retirement Savings
[00:46:53]: Speculating on Government Bond Yields
[00:47:15]: Central Banks Buying Gold
[00:54:04]: Diversifying Away from Developed Market Currencies
[00:54:58]: The Role of Gold as an Asset
[00:55:15]: Where to Find World Gold Council’s Information
[00:56:30]: Importance of Gold in Investment Portfolios
[00:56:47]: Make Sure to Subscribe!
Transcript:
Benjamin Nadelstein:
Welcome back to the Gold Exchange podcast. My name is Benjamin Nadelstein. I am joined by the founder and CEO of Monetary Metals, Keith Weiner, and our guest for today, John Reade of the World Gold Council. John, thanks for joining us.
John Reade:
Thank you very much, Ben. It’s a pleasure.
Benjamin Nadelstein:
John, why don’t you quickly tell us a little bit about the World Gold Council, in case someone doesn’t know, and what you do there? Sure.
John Reade:
So the World Gold Council is a membership organization. We’re owned by gold mining companies from around the world, about 32 of them at the moment, although they keep merging and buying each other, so that number does change frequently. And we were set up in 1987 to develop the gold market, to grow demand for gold, to improve access to gold, to write research and strategy and collect data, etc. I’m the market strategist at the World Gold Council, responsible for Europe and Asia. So that’s only 13 time zones I get to cover. I joke to people, my bonus this year will probably be air miles. I’ve been in the gold industry now, actually, since 1986, just before the World Gold Council started. I’m a mining engineer, trained in London, worked in South Africa in the gold mines. I’ve been an equity analyst, I’ve been a commodity strategist, I’ve been a portfolio manager at a hedge fund, and for the last six and a bit years, I’ve been at the World Gold Council.
Benjamin Nadelstein:
John, I’d like to ask you, before we get into gold and investing and all these other things that gold is a part of, can you maybe elaborate on some of the uses of gold? I know a lot of people believe gold doesn’t really serve any practical purpose. It’s values completely arbitrary. What would you say to those people?
John Reade:
Well, I would say, first of all, I think they’re completely wrong. I don’t think gold is arbitrarily priced. I think its price is formed every day in millions of transactions that take place around the world, some financial in nature, some physical in nature, some for the jewelry industry, which still constitutes about 38 % of net demand for gold on average over the last 10 years. It’s valued by central banks. It’s valued by individuals, and it’s valued by institutions. So I think it has a genuine role. It’s also essential for 21st century life. We’re talking over electronic communications. Every chip microprocessor will have gold in it, and they don’t use it for fun. You don’t use things that cost $2,000 an ounce if you don’t have to. You’d rather use silver or copper. But gold has a set of unique physical and electrical properties, which means that it’s used in electronics all the time. So industrial demand only makes up about 7 % of gold’s demand. But society would be very much the weaker for it if we didn’t have gold.
Benjamin Nadelstein:
Keith, I want to send it your way. A lot of people say gold, just this shiny relic that we used to love as cavemen. And yeah, maybe in the past, we used gold as money, but it’s pretty much useless nowadays. What would you say to those people?
Keith Weiner:
It’s funny. I just saw a show on watching this podcast, very well done by Paul Cooper called the Fall of Civilizations. The Aztecs thought gold was the tears of the gods. I think that’s poetic and interesting. I think they were literal about it. What I say, I think economics has never really formally grappled with… They dismiss the idea of hoarding. There’s that airy hand away. But that’s what monetary reservation demand is. When you want to hold money is when you don’t want to be a creditor. You either don’t like the risks or you don’t like the returns and so you want to hold money. And so you want to hold money and gold is that thing that is the best thing to hold. People say, Well, why not a basket of commodities? Okay, imagine $100,000 worth of oil. So what is that? That’s what? 1300 barrels. Each barrel is what, 50 gallons? What is that? 60, 70,000. That would be several residential swimming pools worth of oil. Imagine the oil trucks backing up to your front yard, getting onto your driveway and busting up your curb, running over your mailbox and saying, Where would you like all this oil delivered, sir?
And meanwhile, if that was gold, you could hold $100,000 of gold in your hand. Gold is that thing that you want to hold if you don’t like the risks. And as we look at the banking system today, I think the risks are opaque. The risks are bigger than most people think. And that’s why there’s been several so far and I think more coming unless the monetary authorities take even more crazy action, which amps up the risk in other ways. But there’s a lot of risk in the banking system. Well, what do you want to do if you want to opt out of that? Gold is the opt out mechanism.
John Reade:
You don’t get something that’s established, I don’t know, 3,000 year history without having some pretty decent qualities. As you say, the value density, the fact that you can hold a substantial amount of value in one hand, and yet it’s something which is pretty easy to value. People often say to me, What about diamonds? I said, Well, to be frank, if you give me a set of scales and a bucket of water, I can pretty much be sure that that’s gold. If you give me a handful of diamonds, well, I’ve spent a lot of time in jewelry shops through my career, I might be able to get within, I don’t know, one or maybe two orders of magnitude of the value of those diamonds. And the other thing, if I buy a diamond from a diameter, never mind a jewelry shop, if I buy it today and sell it back tomorrow, I probably lose half of the value. So gold is unique and its ability to be hoarded, as you get as you describe it, Keith, to be held. It’s got extremely low storage costs as well. You can store gold at a big vault if you’ve got enough of it and pay, I don’t know, three, four basis points a year.
If you look at the cost of storing other commodities, they’re through the roof.
Keith Weiner:
It’s interesting you say 3,000 years. I know a lot of people in the gold space say 5,000 years. I always try to be on the lookout for things that can confirm dates on the stuff. I came across an article recently. It was about an archeological find in Bulgaria. And they found some warrior king, clearly a raid out with a scepter and all kinds of things made of gold. It was like 6 kilos worth of gold in his grave. And so clearly the value of gold very highly. The date of this grave in this find? 6,500 years ago.
John Reade:
Yeah, I’m sure. I think one of the problems about having a lot of experience is you think you’ve been around for ages, but even I haven’t been around that long. It’s certainly been many thousands of years. I think the first gold.
Keith Weiner:
Coin was like the first 600 BC.
John Reade:
Exactly.
Keith Weiner:
That was when they put it into coin form, which standardized it more. But they certainly valued it and traded it and priced it highly long before then. The cave shows at least 6,500 years ago, and there’s no reason to think that that was the first time that anybody valued gold, even then.
John Reade:
No, I think so.
Benjamin Nadelstein:
So I want to jump now to current day value of gold. So a lot of investors, a lot of financial institutions always say, Hey, you should have some gold in your portfolio. John, I want to ask you, should you have gold in your portfolio at all times, or is this a site specific or time specific asset to have in a portfolio?
John Reade:
I’d argue it’s both. I mean, we would make the case to investors that they should have a strategic allocation to gold at all times. That allocation depends what’s in the rest of the portfolio, depends which country you’re in, depends which benchmark you’re looking at. But typically somewhere between 4 % and 8 % waiting in gold. And we’ve got tools on our website which can help you determine based on what you’re investing in roughly what you should hold. So that’s the strategic allocation. You could, of course, have a tactical allocation on top of that as well. You can have a strong view that you think, for example, the US dollar is about to fall, or you’ve noticed that central banks have started expanding their balance sheet massively, or M2 is growing really fast, all things that might make me think I’d increase my tactical allocation to gold. So it’s not either or, it’s both. But I think the strategic case for gold is particularly important because what gold is very good at, in my opinion, is helping protect your portfolio from unexpected events. Covid 19, Russian invasion of Ukraine, the mini banking crisis that Keith referred to just before.
Nobody really expected those things to come. Maybe the Russia Ukraine thing was a bit predictable, I suppose, but certainly the timing of it wasn’t there. And in all three cases, gold went up. And that helped limit the losses in your overall portfolio and it reduced the volatility in the drawdown. So I think that good demonstrations of at least one reason why you want to have gold as a strategic component of your portfolio.
Benjamin Nadelstein:
Keith, I want to send it to you. A lot of people say you should have gold in your portfolio. Is there any argument as to why not have gold in your portfolio? Or do you agree with John that a strategic allocation is important for all investors?
Keith Weiner:
Well, I think if you’re 100 % confident in the Fed and its banking system and you believe that macro prudential regulation can take something that’s inherently unstable and make it stable in perpetuity, then I guess you should go all in on the dollar and not have any gold. But if you have some difficulty swallowing that, I think, and I don’t know what the percentage should be, and I’m not licensed as a financial adviser, but I totally agree with John that there should be a component of the portfolio that’s a strategic allocation to gold. I do know that every day, every boardroom in Zurich and Geneva, there are families that are planning intergenerational wealth. Gold is always part of those trusts and arrangements that are being set up. And that’s obviously not a tactical… No one’s trying to trade in and out of that. They’re just saying, Okay, well, you want to make sure that whether it’s 1 % or 10 % of the patriarch’s wealth that he worked his whole career to produce, you want to make sure that that survives intact to two generations, three generations out. What is it that you can buy that you know that in 75 years, 100 years from now, will still have its value?
Nothing. I mean, look at the city of San Francisco right now. You would have thought San Francisco real estate is always going to be high. Well, it’s collapsing right now. So things come and go. But gold is the economic constant.
Benjamin Nadelstein:
So I know a lot of people throw around these numbers. We’ve discussed them actually a little bit briefly just now. 1 % of your portfolio, 10 % of your portfolio. And obviously, no one’s a financial adviser. No one can say specifically for you, Ben, you should have X amount of gold in your portfolio. But maybe we can have a quick conversation. Do you think there’s too much gold that someone can have in a portfolio? I know I want to start with Keith. Is there an actual percentage or point where someone has too much gold?
Keith Weiner:
Well, we all have dollar or maybe pound sterling liquidity needs. And if you put everything into gold, the gold price drops, you’re going to be an unhappy camper and then you have to pay the mortgage, you have to pay the rent, you have to buy food. So in that sense, at least whatever you need for three to six months of liquidity probably shouldn’t be in gold. Beyond that, if someone said, look, basically, it’s almost like Atlas drugged in a way. I’m going on strike. I don’t believe in public equities at this moment. I think real estate is crazy. I certainly don’t want to buy government bonds. Corporate bonds represent opaque risks to me right now. What is it I’m going to hold? It’s going to be something tangible. And if you really don’t want to hold antique cars and old Masters paintings, or you’re not in that league, and you talk about if you want to buy it and immediately sell it, the only thing worse than Diamond and Shirley would have to be artwork for that 80 % loss or whatever it would be if you bought it and immediately sold it. What’s left?
So I think there are people… In fact, I know people, I’m talking to people that would have 80 % let’s say in gold. Most don’t. I think our average client of Monetary Metals is single digits. As most people are plugged into the mainstream world, that’s the world we have to live in whether you like it or not, most of us do like it actually. And so you have a bit of an allocation. But there’s so many factors that go into it. I’d be reluctant to say that’s too much to any particular number. Certainly not what I would advise, but I’d be reluctant to judge somebody for it.
Benjamin Nadelstein:
John, I want to send it your way. Do you think there’s an allocation that may be too high?
John Reade:
There is an allocation that’s too high. I don’t know what that number is because it depends on circumstances. But one of the things that I would say is, one of the things I think almost the mission of the World Gold Council should be is to get investors that can think about diversification. I hate the idea of putting all of your eggs in one basket. I think that people, particularly retail investors, do tend to be very committed to one stock or one sector, and they have all of their assets in that. I remember speaking to very successful tech entrepreneurs back in the original dot com bubble trying to say to them they should think about taking some of the extraordinary paper games that they’ve made and diversifying it into gold. Some of it into gold. And again, talking about small single digits, maybe 10 % type allocations. If nothing else, it’ll reduce the volatility of the things that they own. And none of them did. And I think seven out of the 10 of them were bused a couple of years later. Okay, when they came back. Okay, hey, this is tech. That’s Silicon Valley. But no, I think that you can have too much gold.
And think of it this way. Think of it this way, think of it in volatility terms. Gold does a really good job of increasing risk adjusted returns of a portfolio because of its correlation characteristics. But it has a higher volatility historically than, say, government bonds. Everything does. If you only own gold, your portfolio is going to be more volatile than one that would have been more balanced between equities, bonds, and gold.
Benjamin Nadelstein:
John, I want to touch on a point you mentioned there, which is the risk adjusted return and how gold has this uncorrelation to other assets. First, can you explain the audience what is a risk adjusted return for someone who wouldn’t know? Then why does gold have this correlation or lack of correlation to other assets?
John Reade:
Sure. The risk adjusted return effectively is saying that you can’t just look at returns of a portfolio alone. You’ve got to look at the returns compared to the volatility of the portfolio. Increasing the risk adjusted return of the portfolio means you’re getting more returns while at the same time taking less risk, and that’s got to be a win. Particularly if you’re using leverage in a portfolio, it allows you to own more assets for a set amount of risk within that portfolio. That to me is one of the holy grails of investing is, increasing the risk of just return of your portfolio. Now, you made a point about gold being uncorrelated, and that’s generally true. It’s uncorrelated to particularly equities in general. But if you look at how that correlation stands up during different circumstances, you get a very interesting effect. When stocks are rising rapidly, say more than two standard deviations in a week, just looking at the S&P 500, then gold’s got a small, modest positive correlation to equities, which is what you want. Stock’s going up, positive correlation, it probably means you’re going up too. But when those S&P 500 equities fall by more than two standard deviations in a week, that correlation flips over negative.
In other words, you’re now negatively correlated to an asset class which is falling fast, which is exactly what you want. The correlation characteristics of gold within a portfolio are extremely valuable and I’d say they’re basically unique. The only thing that we found that exhibits the same characteristics is silver. But silver carries a much higher underlying volatility anyway. It is a different proposition, I think, than investing in gold. But other than silver, nothing else has this flip over in correlation characteristics. It’s that flipover that’s helping you during these crash events or financial crises or health crises over the past.
Benjamin Nadelstein:
Keith, I want to send it. Keith, can I send it your way really quickly? Why does gold have these correlations or lack of correlations? And John did a good job of explaining why these are so beneficial. But why gold? I mean, why not Apple stock or oil or some other commodity?
Keith Weiner:
So I call gold the economic constant. We’ve been accumulating gold so far as we know for 3,000 years or 5,000 years or 6,500 years, which means it has an extraordinarily high stock to flows ratio. What that means is that there’s no such thing as a glut in gold and any other commodity. Let’s say if the weed harvest comes in 1 % higher than what the US Department of Agriculture estimated it would be, then there’s a glut and the wheat price could crash completely dis proportionate. It wouldn’t be a 1 % drop in wheat, it could be a 20 % drop, which is a strong disincentive to farmers to grow wheat, a strong incentive for users of starch to switch to wheat from whatever it is they normally prefer until the clot is worked off. But there’s no such thing as a clot in gold, which I argue means that the marginal utility, the value of the next unit of gold is not diminished relative to the last unit. That is the Nth plus one unit of gold is valued the same as the N, which gives it uniquely a constant marginal utility. That’s what it’s one of the properties you’d expect the money would have.
And so revisiting the is there too much gold in a portfolio looking at through this lens, gold is the constant. It’s the currencies that are going down and up, not gold that’s going up and down, really. And so if you just want to hold your own, it’s okay. I was just thinking about tech entrepreneurs, and I was one. I sold the tech company in 2008, right before the bus, it was August 19, 2008. You had 40… A bunch of things happened and suddenly it’s not just time preference, it’s your whole life priorities. It’s more important that I preserve what I have rather than try to maximize the upside so that I could get 10 X more. You want to make sure that I don’t lose what I have. I know plenty of tech entrepreneurs that made a fortune, lost a fortune, made another fortune. There’s a tendency outside of that world for everybody to say, Oh, that’s normal. Well, for the people that are going through it at the time that they’re suffering the loss, it’s anything but normal. It’s calam. Some people have a gambling mindset, and they’re okay with it, I guess. But gold is that thing when you want to de risk.
How much de risk do you want to do? It depends on how old you are and your goals in life and how much you have. And if you’re 21 years old and you have $10,000, maybe putting 100 % in that gold is appropriate. If it’s absolutely important that you preserve that over the next five years because you have a goal in mind, or maybe you want to bet that on something that has an extremely high beta. And at 21, you can always make more. You’re not at the end of your career. You’re at the start. You have greater earnings potential ahead of you than you have behind you, obviously. So maybe you don’t buy any gold at 21 because you’re just trying to maximize growth at that stage. And I don’t know if I answered the question, but those are the thoughts that popped into my head.
John Reade:
If I could come in there. I mean, agreeing with Keith, but the other thing I think about it is gold is a counterweight to the rest of assets in your portfolio as well. P retty much everything else in your portfolio on the equity or equity like risk characteristics side is about growth. It’s about positivity, it’s about trust, it’s about expectations of good things happen. When something happens to make those assumptions change, people retreat to the other side of their portfolio, which is gold. Now, look, one of the big things that’s happened in the last 40 years is people have been using equities for growth, bonds for income and diversification. I think one of the most interesting things about the market set off last year was the breakdown and this negative correlation between bonds and equities, because that certainly means what you have in your portfolio to protect yourself against losses didn’t work and may not work as well going forward. Because if you look at long run correlations between bonds and equities, they’re not always negatively correlated. They just happened to have been so in the last 40 years when we were just adjusting from a high inflation regime to a no inflation regime after poor Falker choked inflation out of the US economy.
Now, I’d argue things have changed a lot now. I think that the global economy is going to struggle not to get inflation high enough, which most economies have done in the last decade or so. They’re going to struggle to get inflation low enough. It doesn’t mean they won’t do it, but that’s going to be the difficult. That’s the challenge that central banks is going to be having is nailing down inflation, not pumping it up. And I think that could be a very different role for gold in portfolios over the next few decades. I just think it’s our job to get out there and tell people of the merits of gold, because I don’t think they think about gold enough and also not necessarily in the right way as well.
Keith Weiner:
John, I’m sure you must have some data on this, but it seems to me, and I can say this as both an American, I’m putting down my own in a way, and somebody who spends a lot of time in other countries, I think Americans understand gold the least of any culture in the world. In part because we live in a dollar bubble and Americans, we live in a bubble of our own making and we like it that way. And so gold, what’s that? Who cares? And partly we’ve never had a currency crisis in the United States. The worst we ever had it was the late 1970s. And if you talk about what was the official inflation rate, I think was 15 % or something like that. And I’m sure the fans of shadow stats or whatever would say it was higher. But you go to most any other country in the world and you tell them 15 % or 20 % inflation, they’d be like, in a year? Oh, that’s cute. You think that’s bad? So Americans have never really had a reason to question the soundness of the currency.
John Reade:
Think of it this way. During most Americans’ entire life, the dollar has been the reserve currency of the world. When you’re in that position, I think you tend to think about alternatives to your currency in different ways. And as you say, the Americans haven’t blown their currency up like many other countries did. I mean, in contrast, I think Germans and Northern Continental Europeans in general, really get gold.
Because of the hyperinflation that we saw in the ’20s in Germany, because of the replacement of the Reichsmark with the Deutschemark after the Second World War. Citizens there are both extremely sensitive to inflation and extremely cautious about anything that will devalue the currency, which is one of the reasons why the Euro has been such a political bunfight over the last decade through the global financial crisis. So Germany has been one of the most important physical buyers, bar and coin investors, small investment bar and coin investors in the world. I’ve described it to people, it’s almost the perfect market. You’ve got lots of different ways that you can buy gold there. You’ve got exchange traded funds that are there. You’ve got this established network of bar and coin outlets where you can get exposure to gold. When we think of market development and trying to get the world more access to and more understanding to gold, we look at Germany as saying, Wow, that’s a great country. What I would say, though, with my experience of traveling around many countries, there are countries that understand gold less than the United States. I’d say that’s the UK because ownership here was banned for a lot longer than it was in the US.
And there is very little culture of investing in physical gold assets in the UK. You don’t see the chains of gold investment shops to anywhere near the extent you’d see them in continental Europe.
Benjamin Nadelstein:
John, I want to ask about some specifics here, specifically two questions. First, when you guys say gold, does that apply to all types of gold? Do people buy certain styles like coins or bars as investment gold? Do people get exposure through ETFs or through paper gold? And does it matter if this gold is bought in a certain country of origin or is all gold the same? John, I want to bring it to you.
John Reade:
Yeah, it’s a good question, really. I mean, in general, I would argue that all gold, whether it’s in physical form or whether it’s an investment product of certain types, and I’ll come back to that, the study we do is on the gold price. It’s not about the price of gold and the price of coins. It’s not about the price of ETFs, etc. It’s on the London reference price, the auction price. When I’m thinking about a gold product that I’m comfortable recommending to people, and we’re going to talk specific products, but they do ask me their opinions, as you’ve just done now. I want something where I can trust the purity. I can trust that what I’m getting is what I think it’s getting. So I want to buy a branded small bar or coin from a retailer that I trust. I want to buy an exchange traded fund which vaults its gold and doesn’t lend it out again. So it’s a physically backed exchange traded fund. I don’t want to have an unallocated metal account. In other words, I’ve got claims on my bank already for my modest cash savings that I use for my three to six months of cash requirements as Keith required before.
I’ve got exposure to bank failures through that savings account. I don’t want to magnify that by having an unallocated gold account. So if I want an investment product in gold, I want it either physically. And look, I’m not sure I want to store too much value in my house. So maybe I’d have that as an allocated account or a safety deposit box either as a physical gold coin, which is mine, or as part of perhaps a collective custody scheme, or maybe even if I was rich enough, I’d have a pile of gold bar sitting at one of the vaults in the good delivery system. I don’t have that, by the way, much as I’d like to.
Benjamin Nadelstein:
Keith, I want to send it your way. Maybe you can talk about Monetary Metals for a sec and some other types of Gold 2.0 companies and ways to invest or think about gold that either most people don’t know or that they should know.
Keith Weiner:
Yeah, I was going to say the point that John alludes to is that you really don’t want to have that much valuable stuff at home. You become not only a risk of fire, flood, and those sorts of things, but home invasion. I know somebody who was woken up at three in the morning by a guy with a black ski mask shoving a gun in his face and says, I know you have gold. Now unlock your safe or I’m going to blow your brains out. So I think everybody should have a little bit of gold at hand in the sock drawer as it were, but not that much. So you look at safety deposit boxes. I know that our own Jeff Dice just put out something on the risks and safety deposit boxes, especially the ones at the banks, at least in the US. I don’t know what the political situation might look like in the UK or Europe or in Asia. And as John alludes, the problem with an unallocated account of bank is you’re an unsecured creditor. I think with golds, you don’t really want to be an unsecured… The whole point of owning the gold is not to be not in the position of an unsecured creditor.
And the big ETFs do have this challenge that those custodians and Sub custodians. I read through all that language years ago, and it’s not clear to me what would happen if there was a massive failure of somewhere in that chain. What exactly would happen to the end holders of these… I think they’re actually technically exchange traded notes, if I’m correct on that. They’re ETMs, aren’t they?
John Reade:
No, it depends country to country how they’re actually referred to. Exchange traded products is probably the best generic term for them. You can’t use the word fund in Europe unless it’s of a specific structure. But I’ve heard and read on the blogosphere these various things about custodians and Sub custodians, and that being used as a way for people to say that they’re concerned about ETFs. But I’ve been associated with ETFs actually since they first started when I was at UBS when we were advising actually the World Gold Council about gold ETFs. I’m comfortable that they are what they say they are and that the risks in the event… They’re bankruptcy remote in the event of failure. So I’m not concerned by that person.
Keith Weiner:
You think they are bankruptcy remote? Yeah. Well, that’s good. I’m definitely with you that there’s a lot of rumors that flood around about they don’t actually have the goal, that they’re cheating.
John Reade:
We inspect the ones that we’re responsible for every three months. I think it also third party inspected and audited. Again, I’m uncomfortable with that they are what they.
Keith Weiner:
Say they are. I’m not a big fan of theories that say that the way the world operates is simple and obvious fraud. I think there’s a lot of bad things going on, but it isn’t that sort. I mean, if somebody is saying that, if you send us money, we buy the gold and stick it here, and they’re a major reputable party, then they’re doing that. And the risks are more like counterparty risk. Are you a general insecure creditor? Those are the sorts of problems, not that they’re cheating in a fraudulent sense. Obviously, what Monetary Metals, we do, and there is risk, it isn’t zero, but the owner of the gold retains the title and we lease it out. Now in the financial markets, leasing is a term that certainly in the gold community developed a lot of bad reputation around that. And I think a lot of gold people think that leasing means that you’re selling it and hoping to buy it back at a lower price, like a short selling scheme. What we’re doing is providing physical inventory to jewelers and refiners and companies in the trade. And that allows our clients who are the lessors to own physical gold, retain the title to it as long as they’re comfortable with the change in form, let’s say in a refiner as it goes through a cycle and then getting a return on that.
But I think that if people were to say, okay, if gold is supposed to be your hedge against the end of the world, why would you give up your stash? To use an American slang expression stash, why would you give that up in exchange for a little bit of return? I think the answer that I would give is, well, you wouldn’t. If you have a certain amount of gold, that’s your hedge against that scenario. No, that’s what you’d keep. It’s the entire rest of the portfolio that we’d be competing to displace. What do you have in stocks and bonds? And are you entirely comfortable with the risks that those represent? To John’s point earlier, if stocks are falling, then bonds are supposed to be rising. The universe is supposed to guarantee that practically, at least since 1981. And certainly in the last 18 months, that has not been the case at all. They’ve both been going down. So if you want to opt out of that, but you want to get some return, then leasing the gold is… So we’re making that accessible, John. I don’t know if you know our model, but we’re making.
John Reade:
That accessible. I know a little bit of it. You must be taking on some credit risk though to get that return because gold in itself doesn’t offer a return unless you’re taking on.
Keith Weiner:
Additional risk. It’s not a credit risk, but there is definitely a physical risk. We’re putting the gold in the hands of a third party. It could be a refiner or jeweler. There’s always the possibility that somebody misplaces it or makes a mistake and ships it to the wrong address or steals it. There’s a lot of diligence that we do and a lot of insurance and a lot of other things, but there is no such thing as a return without a risk. Anybody who promises that is a fraudster and you should run fast and far. But we obviously think that the risk is controlled and understood and mitigated and compensated for in the form of interest. But without titting our own horn, the question was, okay, what are the various means of owning it? And I think for that strategic allocation, you want to make sure that’s physical. And it’s either in a vault that’s reputable, it’s yours and it’s not unallocated, or that you have it in some safe. Some people may live in a rural location where they have a safe buried in the backyard or something like that, and they feel that’s extremely low risk.
Others may have to be in a brinks account somewhere. But n ow, anyways, obviously, I believe in the monetized product as well.
Benjamin Nadelstein:
So, John, I want to go through a quick rapid fire section so you can answer these questions if you want with one word, with a short sentence or two, or if you’d like to really expound and tell people what you think, obviously, let the machine guns blaze. So I’ll start with you, Keith, though. How much gold do you think is out there and are we running out of gold?
Keith Weiner:
Well, the idea of running out is, as I said earlier, there’s no such things that are shortage either. Gold can become relatively scarce to the market. We measure that in the basis, or you’d see it in the forward rate. And it’s not the conventional world would look at it. How much gold is out there? Well, I do, John, as I’m sure you know, take a bit of a quibble to any estimates of how much gold is there because I just don’t think you can inventory it. I think it’s been mined for at least 6,500 years, according to this archeological dig, probably going back longer than that. It’s always been the thing that people hide from their governments and from their nosy neighbors. And whenever I tell the story, I always talk about, let’s say, when I meet people in their office, there’s always that safe that’s sitting in the corner, and I don’t feel it’s my place to ask what’s in the safe, show me, open it. I i notice it, but I don’t say anything. I’m talking about that people are very secretive about their gold, and sometimes they don’t tell their family, they don’t tell their kid until they’re on their deathbed.
And so I’m in this guy’s office and he’s in the gold. I want to say he was a big cash for gold aggregator, had a small little induction furnace just to melt it down, make uniform Dory bars. And there was everything from fillings to scrap jewelry or whatever. There was Palladian in there and gold and silver and whatever. And he’d be selling these off to the refiners every couple of months. Anyways, he points to the safe over there and he says, you see that safe over there? And I said, Yeah. He said, My son don’t know what’s in there. He doesn’t know about it. He said, Right now he’s partying and chasing tail and he’ll find out in due course. But he said there’s a lot of gold there. And he looks at me over his bifocals, I mean, a lot of gold there. And I said, Okay. And that was his confirmation to that this defies any stock take or inventory. I know you guys estimated about 200,000 tons. There’s no way to know. My gut feeling is it’s probably a multiple effect just because of how long it’s been accumulated and how much people hide it.
No way to know.
John Reade:
Let me explain that number. I mean, it’s about 210,000 tons now, but it is an estimate and we recognize that it is wrong because by definition you can’t know what… We don’t even know when it was started to be valued as we were talking before, 6,500 years or 7,500 years ago.
One of the things that we can be reasonably confident on is that so much of the gold that has been mined has been mined within the last 50 years. Actually, 50… Now, let’s go back to say, for example, the discovery of gold in South Africa in 1886 or 1887. I mean, if you look at estimates of global gold production by year, it just exploded at that point. So much gold came out of South Africa and it was pretty carefully measured, even right from the beginning as well, because it was, of course, taxed. I think that 210,000 tons, could it be 250,000 tons? P ossibly. Could it be much less than 210,000 tons? It might be 200,000 tons. That would be my error range on it. I just don’t think the ancients were pulling that much gold out of the ground that it really wasn’t being found. When I visited gold mines that were active during Roman times or during ancient Egyptian times, they were small by comparison to the production that we’re getting now. There are numbers that I’m less confident about, if I had to be honest, that we produce. Things like recycling of gold, how much gold gets recycled each year, because that is a really hard number to try and estimate.
Because as you were describing with your cash for gold aggregator, there’s lots and lots of those out there. And in some countries, they operate below the radar. So that’s always a number I’m a little bit uncertain with. But total gold production, yeah, I’m more comfortable with that one than I am with some others.
Benjamin Nadelstein:
Okay, John, I want to jump now to the next rapid fire question, which is, what do people tend to buy if they sell their gold? So they sell their gold, they have all these profits in dollars. What do you think people tend to buy with that?
John Reade:
Well, recently, bonds, believe it or not, one of the big things that we’ve seen is some decent sized physical profit taking in investment bars out of the German market I referred to earlier. And best we can understand, it was people who bought gold because they weren’t prepared to buy German government bonds at a negative nominal yield, not real, but negative nominal yield because they just refused and put some decent sized allocations into gold. And I think with the way that interest rates have changed now and the fact that the gold price in euro has gone up so much, we’re seeing a fair amount of profit taking in that market. And I think it’s going into fixed income products. I think the other thing I’d say as well, we monitor flows around exchange traded funds very closely because from our perspective, they’re great products. They disclose how much gold they’ve got every day, pretty much all of them do. The ones that don’t at least disclose it every month. We can see what’s going on, whether it’s North American funds buying, whether it’s European funds buying, whether it’s high cost funds which are large and liquid, or whether it’s low cost funds which tend to be bought by buy and hold investors.
Anyway, one of the things that has surprised me quite a bit in the market in the last six months, we saw gold bottoming at about $1,600 an ounce at the beginning of November 2022, and it traded up by the end of January 23, just shy of $2,000 an ounce. Okay, it went higher later, but that was a decent run. Almost $400 an ounce increase in price in the space of a few months. Global ETF holders were still selling throughout November, December, January, and February. That really surprised me. I think it’s nominal interest rates that are doing it. You can get, as you know, sitting in a matter of it, you can get what? 5 %, 5.5 % % on T builds. There are people in the market that have never seen those sorts of interest rates on T builds before. I mean, some of us are older, aren’t we, Keith? But yeah, 20 years or so, well, maybe not 20, certainly 15 years of virtually zero interest rates. Yeah, it’s a competition for gold.
Keith Weiner:
I gave a talk once that was mostly… We were working with another company and they were mostly doing the logistics in the organization. And it was their office manager who was all the phone calls and making sure the catered lunch came in and their name badges were printed and all that stuff. And I was talking about at that time saying there’s no interest to be had and therefore young people have no real means of attaining retirement. Because when I started my career, they said, set aside 10 % of your salary, put that into three-month bank CDs. And when you turn 65, you’ll have whatever the nest egg was supposed to be. But 80 to 85 % of that was om counting as the compounding of the interest. Only 10 or 15 was the actual raw set aside of your wage. And I was talking about this, and she came up to me afterwards. She said, I never thought about… Basically my entire adult life, I’ve never seen interest or an interest rate in a bank. I never thought about it before I told your talk. And I was like, Wow, she is a millennial. And she was probably 18 or 16 when the financial crisis hit.
And her whole adult world has been one of no interest. And I actually agree with you. I think actually long data government bonds is probably a screaming deal right now because I think we’re going to revert with a bang, not a slow slide, but I think finitely revert to a falling interest rate environment again, which means rising bond prices. Not that I would say to anybody, sell your gold to do this, mind you, but I do think that the government bond, I think the German bonds are going to go negative yield again, and the Swiss government bonds and in the US government bonds are going to continue their slide at a higher level as they have long been, but continue their slide and yields, which means rise in prices. But that’s a whole other macro conversation.
Benjamin Nadelstein:
A lot of people are saying central banks are buying gold like crazy. And something that I saw you noted was that in some ways they’re not exactly reporting it as much as people would like, or they would report some other buys. Can you maybe explain to people without a conspiracy theory, why are central banks buying gold and why are they trying not to report it?
John Reade:
Okay. We record central bank purchases in two ways. Every month we produce a report, which is what central banks say that they have bought and sold in the disclosures they make to the IMF. Our monthly report actually came out yesterday talking about the April changes because there’s always a bit of a lag. But the other thing we do is once a quarter, we produce a document called Gold Demand Trends, and that has an estimate of overall net central bank activity. It includes obviously the stuff that’s disclosed to the IMF, but it also includes transactions that we believe to have taken place. In other words, estimates of what’s going on in the market that’s under reported. Now, normally, I was looking back through the data series the other day, normally, I would say 75 %, 80 % of the change in central bank holdings is reported to the IMF and there’s only a small component of unreported selling or buying. But since the middle of last year, so basically the last three quarters, we’ve seen both unprecedented levels of our estimates of central bank purchases, but unprecedented amounts of undisclosed central bank purchases as well. Now, excuse me, why is that?
Well, I know why. Well, we think we know why. Central banks are buying gold because we conduct a survey every year of the central banking community. We published it last week for this year and we asked them anonymously. We don’t know who said what. We just know whether they’re an emerging market central bank or a developed market central bank. Anyway, we got some decent ideas about why they’re buying gold and collectively what their intentions are and what their expectations are for the entire central bank community. We know that. I don’t know why there are purchases that are going on that are unreported to such a degree. One part of it, when we talk central banks, we’re talking central banks plus sovereign wealth funds as well. And sovereign wealth funds don’t generally tell you what they’re doing. So there is always an element of estimation that takes there. And my suspicion is that many of these sovereign wealth funds are powered by hydrocarbon sales and volumes and value of hydrocarbon sales last year was high. So they had more money to invest and that could be part of the reason for it. The other thing is, though, is that if you’re a central bank sitting on hundreds of billions of dollars of foreign exchange reserve, maybe trillions of dollars of foreign exchange reserves.
John Reade:
There’s some very big ones out there. If you want to buy a lot of gold, maybe you don’t want to tell the market you’re doing so or you’re going to do so. I do remember when the European central banks were selling gold through the 90s and the 2000s, they would announce in advance that they were going to sell it.
Keith Weiner:
Gordon Brown.
John Reade:
And then looked with consternation as the gold price slipped ever lower, you don’t have to transact like that if you don’t want to. Look, central banks report their monetary gold. In other words, the gold that they’re holding in the reserves as part of their international reserves. They often have other accounts as well. Some central banks provide liquidity in gold to the domestic market when there’s a mismatch between buying and selling and you’ve perhaps got a closed capital account and imports are difficult to come in and out. So they have other accounts too. And then the other thing they could do, of course, is transfer gold from one of their non monetary accounts to their monetary accounts. And then bizarre, that would be our holdings of gold have gone up. And we’ve seen that from central banks in the past. But the short answer is I don’t know. My suspicion is that it’s because they’re probably wanting to buy a lot.
Benjamin Nadelstein:
Keith, I want to send it your way. Central banks have been buying gold. There’s a lot of different ideas being thrown out there. I’d like to hear Keith Weiner’s idea as to why central banks are buying gold.
Keith Weiner:
There’s so much I could say about that. But in short format, if you’re a central bank, let’s say an emerging market country, your challenge is that the asset side of your balance sheet may largely be dollars and dollar derivatives like euros. And the liability side is your local currency. If the asset side is going down, if you think that the dollar and or the euro are going to go down, that’s going to be a real struggle for you threatening your solvency, ultimately, if that happens to a great enough degree. And so you may turn to something like gold, either because it’s non correlated and therefore safer, or because it’s negatively correlated and you think that the dollar is going to go down, then gold is going to go up and it’s a nice counterbalance. So it’s somewhere between greed for gains and fear of losses and risk mitigation and hedging. And we’re in an environment where the markets are going to be particularly unkind to particularly emerging market central banks. If they get it wrong, they’re toast. And that can lead to social unrest and revolution and heads rolling in the street. I mean, it can lead to really, really bad things.
Keith Weiner:
So what do you do? You talk with El Presidente and El Presidente says, don’t let our currency go down. And you’re like, right, sir, I won’t do that. Now you go back on your desk and what do you do? Well, B y Gold might be on the shopping list.
Benjamin Nadelstein:
Right, absolutely.
John Reade:
I think there’s nothing I completely agree with Keith. I think that’s very well put. There are other issues as well, particularly when it comes to central banks. There is always a political dimension to what a central bank holds in its foreign exchange reserves. And we have been hearing from many central bank governors, from many El Presidente, as you describe them, talking about wanting to reduce the role of the dollar in the global economy or our dependence upon the dollar for funding, financing, r ailing debt, etc. I think that is all contributing at the margin. Because to be frank, if you want to diversify away from developed market currencies, you don’t have a huge amount of great choices, whether it be for liquidity, whether it be for capital controls, whether it be for potentially trust of the rule of law. I’m not saying that people are going to sell all their dollars and all their euros and put it into gold. But at the margin, that does seem to be taking place.
Keith Weiner:
That’s right. There was a funny article about so called bilateral trade between Russia and India. And it was like Russia got caught now with some rubies and with the capital controls, they can’t get it out, they can’t trade it for anything. And Modi’s like, sorry. And it’s exactly that. What are you going to hold as an asset if it’s not dollars, then what? And I argue, at length in many articles, there’s no other paper currency that can replace the dollar. Nothing comes remotely close, but there’s one thing that can, and it’s a shiny, heavy yellow metal. And we’re seeing that at the margin. Well, in a way, that’s a good thing because we’re starting the baby steps to rediscover monetary, let’s just say rectitude and leave it at that.
Benjamin Nadelstein:
So, John, before we go, I do have one more question, but I want to ask you first, where can people read more of the World Gold Council’s stuff that you’ve put out, all of these papers that you’ve written, a lot of these stats that you guys have? Where can people read more John Reade and more World Gold Council?
John Reade:
Sure. I mean, the short answer is we have a website, which all of this information is on for free called gold. Org, or you can just Google Gold Hub, and all of that information is there. If you’re a user of social media, many of us at the World Gold Council maintain LinkedIn accounts. I probably do most of my communication via Twitter. Weird place that it can be sometimes. It is a good way of getting instant thoughts and communication out there. Look me up by my handle and I now apologize for the sarcasm and occasion swearing.
Benjamin Nadelstein:
Okay, apology noted. So final question for you, Jon, which is, what’s a question that I should be asking all the future guests of the Gold Exchange podcast?
John Reade:
It’s a good question. I would ask them what proportion of their assets are in gold. And if the answer comes back, and I don’t know whether you’re just going to be talking to gold enthusiasts or not, but if the answer comes back as less than five %, ask them why they don’t own more.
Benjamin Nadelstein:
John, I want to thank you so much for coming on the Gold Exchange podcast. I’ll be asking everyone about their gold holdings from here on in. Maybe you can comment if you’d like to, what you think people should own as a % of their portfolio. John, thanks so much and we’ll see you on the next episode of the Gold Exchange podcast.
John Reade:
Thank you very much, Ben. Great to talk to you, Keith.
Additional Resources for Earning Interest in Gold
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The Case for Gold Yield in Investment Portfolios
Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.
