April 18, 2025 • 27 mins
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Gold serves as a portfolio stabilizer during volatile markets while offering upside potential when traditional assets falter. We explore how this precious metal fits into a diversified investment strategy during uncertain times.
• Gold ETFs provide liquid exposure without needing physical storage
• Target allocation of 5-15% depending on market conditions and risk tolerance
• Gold demonstrates negative correlation to stocks during market downturns
• Multiple demand sources create price support: central banks, industrial use, cultural significance
• China's pursuit of gold backing for currency contributes to consistent buying pressure
• Writing covered calls against gold positions can offset ETF expenses
• Historical context includes Roosevelt's 1930s gold seizure, though unlikely in modern context
• Gold currently represents 7-10% of potential backing for US dollar
• During extreme volatility, allocation could increase to 15-20% for protection
Share this episode with fellow investors seeking to understand how gold might strengthen their portfolios during uncertain times.
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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Steve Davenport (00:00):
and gold.
Clem Miller (00:03):
Welcome.
This is Steve Davenport, andI'm here with Clem Miller from
Skeptic's Guide to Investing,and today we want to talk about
all the glitters gold.
What is gold?
How does it affect yourportfolio?
Is it something that you wantto have in your rings and around
your neck, or is it somethingyou want to have in your
portfolio?
(00:23):
I think that the talk aboutgold is an interesting
discussion because investmentpeople will argue forever about
whether it's an alternative,whether it's a personal asset or
whether it's a key to yourportfolio.
So today, clem, I'd like you totry to if you could explain to
(00:46):
me why you think gold belongs inyour portfolio versus cash or
other assets, and how do youfigure out how it should be
sized.
Steve Davenport (00:59):
Okay, thanks, steve, and welcome everybody to
our show today.
So let me just say first, steve, that I'm trying to stay away
from all these conceptual issuesthat you know angels on the
head of a pin, issues aboutwhether gold is a currency or a
(01:20):
commodity or you know whatever.
It is right.
I'm trying to stay away fromthat.
The question is does it work aspart of a portfolio?
That's the only question.
Does it work as part of aportfolio?
And indeed, this year so far2025, I've had gold as a
(01:41):
significant part of my portfolioand it's helped in this current
environment of a decliningmarket and also a volatile
market, and gold has generally,over the last year to date, has
(02:03):
generally been rising and risingpretty significantly, and so
the reason for that, I think,quite obviously, is that gold is
considered by people in themarket as a relatively safe
asset.
Safe in the sense that it isless volatile than other things
(02:30):
that you could purchase,especially stocks.
And the way I invest in gold isI invest in a gold ETF, and
there are several out there.
I'm not going to recommend aparticular one on this podcast,
but there are several gold ETFsout there and that's how I
(02:51):
invest in them.
That's a liquid way of doing it, so you don't have to have gold
bullion in your dresser draweror under your bed, although
certainly you could have goldcoins I know people have gold
coins but I want to remain kindof liquid so that if you want to
(03:12):
sell if I ever wanted to sellsome of the gold gold ETF I can
certainly do so pretty quickly.
But right now, steve, I have inmy portfolio I just looked 17%
gold in my portfolio.
Clem Miller (03:28):
You think that's the upper limit.
Steve Davenport (03:33):
I can see myself.
If the market continues to have, or if it has another round of
volatility like what we sawaround the time of the tariff
announcements, I certainly wouldbe inclined to increase gold,
but I think, as it stands rightnow, I don't intend on
(03:57):
increasing it over the nextcouple of weeks, if things seem
to be relatively stable, but atthe same time I don't intend on
decreasing it either.
If I'm going to edge back up instocks, I'm going to do so by
taking money out of cash.
Clem Miller (04:19):
Yeah, I mean, I think the whole concept of gold
I like a lot better than otherETFs that are based on futures.
So USO is a US oil and it'sbased on future contracts and
that has caused problems, asthere is extreme volatility
because sometimes yourpositioning can be just a little
bit off and it gets amplified.
(04:40):
So I think that the gold ETFsthat are physical, meaning
there's a vault in London or inChicago or in New York where the
gold is being held, and so youare literally owning a piece or
a share of that reserve in thephysical asset.
(05:02):
I like that.
I like knowing that when I ownsilver or I own gold, I'm owning
the underlying metal, and theunderlying metal has demand from
three or four sources.
When I look at what's happeningwith gold, I'd say one of the
things that is a little bit hardto fathom, but it is the way it
(05:27):
is is China is trying very,very hard to get more and more
gold.
They want their currency to besomewhat backed by some amount
of gold, but because theireconomy has been growing so fast
and because they don't havetheir own natural resources, in
a large extent they areconsistent buyers of gold in the
(05:50):
marketplace.
And when I think about it goingup a lot, I think about all of
these countries and sovereignwealth funds who are sitting
there saying what do we do?
Should we own this, should wehave more of a certain currency?
And I think that there is goingto be gold as a place of safety
(06:13):
for both governments andindividuals.
So I like that safety nature.
But then gold also has the usein all kinds of plating and
other chips and othermanufacture.
That is going to be a constantdemand.
And so when you look at it andthen you look culturally, in
(06:35):
India and other countries, goldis considered, you know, a piece
of their culture and that whenyou have weddings or you have
big events, you celebrate itwith gold.
And so to me, as a person in theUnited States, I never realized
until I started to research ithow widespread gold as an asset
(07:00):
is, not necessarily as aninvestment asset, but a demand
that is regular from generationafter generation of cultures
around the world.
And to me what that does isthat puts a floor under it.
For me, that puts you know.
I know that there's, you know,different countries are going to
do different things, but I lookat the financial system and I
(07:24):
think about people getting moreand more nervous about paper
assets and crypto assets, and Isee that people aren't running
to crypto.
People are running to thingsthat they feel more confident
about, and gold is it.
And the question is you know notif it is going to be in demand,
but how much demand?
And does the price?
(07:44):
Is the price inelastic?
Can it go up a lot?
I don't know, but I think, aslong as we realize that when
people are scared, they tend todo one or two things they look
for alternatives outside themarket, they look for bonds and
cash and they look for gold.
Look for bonds and cash andthey look for gold, and
(08:09):
therefore, if you're looking tostabilize your account, then I
think it does have a place inyour portfolio.
The question I have is how muchplace?
Because I think this wholequestion about alternatives,
bonds and gold is they're allpieces.
They all work for you.
How do you decide between thesechoices?
And then you know what are theadvantages of physical gold and
(08:34):
the idea of having an ETF, Ithink is a great creation, but
you know the different providersand I'm happy to discuss it.
I think that I'll get into alittle strategy I've used for
some clients who were verynervous about gold and they
wanted to buy gold because theywere afraid of the markets.
(08:54):
But what is it about gold inyour mind that separates it from
some of these otheralternatives?
Steve Davenport (09:05):
So you know, I think you know we're talking
about a time when we've got warin Europe, we've got war in the
Middle East, we've got agigantic trade war which has
been launched, we've gotpolitical uncertainty in the
United States, we have issueswith the bond markets, which
(09:30):
we'll get into separately inanother episode there's a lot of
volatility and uncertainty inthe financial markets and I
think gold offers some stabilitywith some upside general upside
(09:52):
at least we've seen it so farin 2025, that you know, really
cash doesn't, you know, doesn'tgive you.
I see gold as being astabilizer during a very
difficult time worldwide,geopolitically and policy-wise.
Clem Miller (10:20):
Yeah, I mean it comes down to correlations,
right, because when there is arush from equity assets, that is
risk and there is a desire formore safety, they seem to
perform.
I don't know what correlationyou'd use in your analysis, but
(10:42):
I think it's probably negative.
I think it's probably anegative.
0.4 is how I model it, but Ithink that it's probably a
negative.
0.4 is how I model it, but Ithink that it's not a negative
one.
You're not going to get forevery 1% drop in the technology
and stocks.
You're not going to get 1%increase in gold.
But if you got a 4% increasefor a 10% decline, that's a
(11:06):
pretty good alternative.
So I like the fact that thecorrelation seems to hold up
better than other assets.
Yeah, I think that.
I think that that at the heartof it, is why we're both
quantitative.
You know we're both cfas and weboth look at things and say if
it doesn't perform, then whywould I add it?
And I think that that what itperforms at is offering that
(11:30):
relief.
And I think you know how do youlike the idea of just having
one ETF that has gold versushaving gold miners and other
people who produce gold peoplewho produce gold.
Steve Davenport (11:47):
Well, you know, the problem with gold miners is
that first of all, it's capweighted if you're doing an ETF,
and so you don't really know ifthe stocks with the highest
caps are those which have sortof the lowest cost production,
(12:08):
Because that's you know, whenyou're investing in mining
companies, you really want tolook for the companies that have
the lowest cost miningproduction and those are big
reserves, you know Well, but notjust reserves.
You know you could have all thereserves in the world, but it
could cost too much to get themout of the ground.
You want a company that isgoing to make a lot of money
(12:32):
regardless of what the goldprice is, and so a market cap
weighted ETF doesn't necessarilygive you that.
I mean, if I wanted to look ata gold miners, what I would look
at is all the major gold minersand do a lot of work to figure
(12:52):
out what their profitability iswhen gold prices are low.
And you know, honestly, youknow I've got, you know I've got
more.
I've got better stock picks Ican do than looking around for
the cheapest gold miner OK,that's how I look at that picks
I can do than looking around forthe cheapest gold miner Okay.
That's how I look at that.
Clem Miller (13:12):
Yeah, I think that there's more security risk and
if you really just want the purecommodity, I think that's what
you know there's people who sayuse futures.
There's people who say you knowthere's different way to
structure this.
I think that the ETF is a greatway because it is in physical
item, being managed and storedfor you, and it's got some
(13:34):
expense the storage and so theway that I've tried to offset
some of that expense of the ETFcost is to write calls against
the ETFs.
So in doing so, I'm not tryingto generate 4% or 5%.
What I'm trying to do is tomake it costless in terms of
covering the ETF cost and alsoadd a little bit more income.
(13:58):
So if I can turn gold from anasset that costs me 40 basis
points and add you know, add oneand a half to 2% from writing
call options, now all of asudden you know I've got a yield
of one, I've got no expense,I've covered the expense of the
(14:18):
gold and you know if it goesdown, I might make more than one
or one and a half.
So the volatility is somethingthat you should always be
thinking about and that, in mymind, is another way to
supplement this idea of it as anasset class.
I think that we, as investors,need to always be looking for is
(14:42):
there another way to take thisasset and do something different
with it?
I think the idea of usingoptions isn't always for
everyone, but it is for somepeople that might say you know,
I got a pretty large portfolioand I don't like this expense
for this asset.
(15:02):
I'd rather buy the companies.
There's trade-offs and I thinkthat our trade-off is what's
going to help the most amount ofpeople, and I think from a
skeptic's point of view.
I want to be clear gold is anasset and it should be included
in the mix of things you thinkabout when you're trying to
(15:24):
decide on how to find safety ina volatile environment.
Steve Davenport (15:29):
Now, steve, let me just raise one more thing.
We always try here on Skeptic'sGuide, to present sort of both
sides to an issue right, and soI'm going to present the
potential downside of gold.
(15:50):
I don't see it as havinganything more than a minimal
probability at this point, but,just to be clear to everybody,
there is a potential downside ifyou look at the history of gold
, and that is back in the 1930s.
Granted, it was a long time agonow, but back in the 1930s
(16:13):
Roosevelt issued an order toseize all the gold, and he did
so in order to try to strengthenthe US dollar, so that the
dollar would have more goldbacking for it.
And you know it was only muchlater on, with Nixon, that we
went off that particular goldstandard.
(16:33):
But you know there was a riskat that time, big risk, that
those who held gold wouldessentially have all their gold
expropriated, and so you knowthat's a risk that's out there.
I attribute a very, veryminimal probability to that
happening, but you know it couldhappen and it's, you know, in
(17:00):
an absolute currency collapsescenario, you know one option
the government could turn to isseizing people's gold, and so I
think we need to be mindful ofthat possibility, even though
the possibility, I think, isextremely minimal at this point.
Clem Miller (17:23):
ED HARRISON.
Oh, I agree, I think the US asa currency backed by gold has
obviously been off the standardfor a while.
So I think I'm trying to findwhat is the ratio.
Steve Davenport (17:39):
But I think it's been some MIKE GREEN the
ratio of gold to dollars.
Ed HARRISON Correct MIKE GREENWell-.
Clem Miller (17:45):
ED HARRISON.
Us Treasury owns this much goldand this is the amount of
dollars in currency, the moneysupply.
Steve Davenport (17:51):
Yeah, yeah, so I mean, that would be an
argument.
So, whatever the number is,steve, there is vastly more
dollars relative to gold ouncesof gold than there was back in
the Roosevelt days, and so-.
Clem Miller (18:07):
I agree.
Steve Davenport (18:07):
I'm just saying it's yeah well, no, the logic,
the logic that that that forcedRoosevelt, or encouraged
Roosevelt to uh, to seize thegold uh was because gold back in
the thirties was a higherproportion of a higher
proportion could be a higherproportion of backing for the
dollar.
But today the amount of moneysupply that's out there probably
(18:33):
would not be gold, wouldprobably back so little of it
that it wouldn't be worthexpropriating.
Clem Miller (18:41):
Well, I think the number is somewhere between 7%
and 10%, if I look at my pastresearch on this, yeah.
So I think that, if you thinkabout China, is somewhere around
1%.
Yeah, and it would take all ofthe gold from all around the
world for China to get to 5% or6% and they couldn't maintain it
(19:05):
because their economy is goingto grow faster than the
underlying asset can be takenout of the ground.
So when you look at the size ofthe Chinese economy, their
ability to get to a backingequal to the dollar is one of
the main reasons why people sayit will be very hard for people
to ever adopt the Chinesecurrency as a replacement to the
(19:26):
government.
So I look at that relationshipand say China's going to try,
but as long as the US and theseother countries are the main
holders, everybody would have toacquiesce to give China their
gold in order for them to beagain have a currency that is
backed as much as the US is.
(19:47):
Is it symbolic?
Largely?
But there is some underlyingtheory here that says when you
want stability, you need to beable to say our currency has
some backing.
And, yes, inflation is one ofthe reasons why people own gold.
Inflation because inflation.
(20:07):
Is it a perfect hedge toinflation?
No, is it a good hedge?
Yes, and so that's why I thinkthere's uncertainty, there's war
, and the last one is inflationas to a reason to own gold, and
I think I guess I'd like to wrapup by saying to, let's say, we
have the average listener outthere, and that listener is 65,
(20:32):
35 traditionally, and he looksat his portfolio and he says I'm
not sure I feel I want allthose bonds, I'm not sure I want
all that equity.
What do you think is a mix thatyou would put into gold?
That is just enough, though ithas an impact, but not too much
that it takes over the portfolio.
Steve Davenport (21:05):
So I would say, in normal times, which maybe
10% max, but 5% more like it.
But, as I said, today is adifferent environment and that's
why I'm up to around, as I said, 17% and could potentially go
higher if things become morevolatile.
Clem Miller (21:27):
Yeah, and I look at how inflation hurts our fixed
income and I'd say first I'dprobably have 30 percent in
bonds and 5 percent in gold.
And then I'd say you're goingto start to remove some of the
equity risks, so you take fiveoff of the equity risk and now
you get 10.
And then I'd say you probablytake your next five from equity
(21:55):
and then you've got bonds andcash and alternatives.
So I think somewhere in thatfive to 15 range is a good range
for people to think about, butfor everyone it comes down to do
you want to impact yourlong-term growth by having too
much in an asset that doesn'treally produce anything?
As you remember, I think therewas a CIO who we worked with who
(22:16):
had certain opinions about goldand it wasn't a productive
asset.
And my point is it's aproductive asset if it fills a
role in your portfolio with lowcorrelation.
So I like assets to produce,but I also don't want to
necessarily get into theselection of each individual
(22:38):
gold miner.
So I think giving people aguideline of something like 5 to
15 is probably a good space, doyou think?
Steve Davenport (22:50):
I agree.
You mentioned unproductive.
I think that probably hadsomething to do with the lack of
a dividend yield associatedwith gold, and you'd want to
have less gold in anincome-oriented portfolio than
you would in a totalreturn-oriented portfolio.
(23:11):
So that's what I said.
Clem Miller (23:14):
You can add income to it if you're right calls
against it.
So I mean, when I look at bondsthat were basically negative
yielding negative yielding Ididn't hear anybody telling me
about the lack of income thatwas being produced by your fixed
income when everybody ran tobuy bonds when the treasuries
(23:34):
were at 2%.
So I think there's a little bitof hypocrisy in some of the
people who criticize gold,because I didn't hear those same
people talk about bonds being ahorrible asset.
But I think this is a good spotfor us to call it here.
Gold is an asset.
(23:55):
Yes, it glitters.
Yes, you should own some.
And the extreme example I'll useis based on World War II.
A lot of people used gold.
You.
They escaped from Germany.
There were many people who soldall their assets, bought gold
(24:20):
and then carried it across theborder and over to whatever
country they escaped to.
So, yes, it can be a store ofvalue.
And I think we know why cryptowas created.
It was used by a lot ofdifferent underworld and other
unsavory actors, and crypto hasreplaced one of the functions,
which is to transport wealthacross borders without people
(24:42):
knowing that you have thatwealth.
So I hope we don't have thosesituations again.
But there are people out therewho are looking at this as a
place where they want to own thephysical and not just the ETFs,
and I think it's really adifferent discussion about your
personal situation and how safeyou feel owning a physical asset
(25:07):
like that.
So, as an investment, we likeit.
As a physical asset, I thinkyou could have some of it, but
I'm not sure I would be diggingbig holes in the backyard right
now.
Steve Davenport (25:18):
What do you think?
Clint, I agree with that.
Hold it in ETF form and ratchetit up or down depending on your
perceptions of marketvolatility, all right.
Clem Miller (25:30):
I'll call it there.
Thank you for listening and wehope you'll share and like our
podcast and let others know, andalso everyone.
Have a great Easter weekend,thank you.
and gold.
Clem Miller (00:03):
Welcome.
This is Steve Davenport, andI'm here with Clem Miller from
Skeptic's Guide to Investing,and today we want to talk about
all the glitters gold.
What is gold?
How does it affect yourportfolio?
Is it something that you wantto have in your rings and around
your neck, or is it somethingyou want to have in your
portfolio?
(00:23):
I think that the talk aboutgold is an interesting
discussion because investmentpeople will argue forever about
whether it's an alternative,whether it's a personal asset or
whether it's a key to yourportfolio.
So today, clem, I'd like you totry to if you could explain to
(00:46):
me why you think gold belongs inyour portfolio versus cash or
other assets, and how do youfigure out how it should be
sized.
Steve Davenport (00:59):
Okay, thanks, steve, and welcome everybody to
our show today.
So let me just say first, steve, that I'm trying to stay away
from all these conceptual issuesthat you know angels on the
head of a pin, issues aboutwhether gold is a currency or a
(01:20):
commodity or you know whatever.
It is right.
I'm trying to stay away fromthat.
The question is does it work aspart of a portfolio?
That's the only question.
Does it work as part of aportfolio?
And indeed, this year so far2025, I've had gold as a
(01:41):
significant part of my portfolioand it's helped in this current
environment of a decliningmarket and also a volatile
market, and gold has generally,over the last year to date, has
(02:03):
generally been rising and risingpretty significantly, and so
the reason for that, I think,quite obviously, is that gold is
considered by people in themarket as a relatively safe
asset.
Safe in the sense that it isless volatile than other things
(02:30):
that you could purchase,especially stocks.
And the way I invest in gold isI invest in a gold ETF, and
there are several out there.
I'm not going to recommend aparticular one on this podcast,
but there are several gold ETFsout there and that's how I
(02:51):
invest in them.
That's a liquid way of doing it, so you don't have to have gold
bullion in your dresser draweror under your bed, although
certainly you could have goldcoins I know people have gold
coins but I want to remain kindof liquid so that if you want to
(03:12):
sell if I ever wanted to sellsome of the gold gold ETF I can
certainly do so pretty quickly.
But right now, steve, I have inmy portfolio I just looked 17%
gold in my portfolio.
Clem Miller (03:28):
You think that's the upper limit.
Steve Davenport (03:33):
I can see myself.
If the market continues to have, or if it has another round of
volatility like what we sawaround the time of the tariff
announcements, I certainly wouldbe inclined to increase gold,
but I think, as it stands rightnow, I don't intend on
(03:57):
increasing it over the nextcouple of weeks, if things seem
to be relatively stable, but atthe same time I don't intend on
decreasing it either.
If I'm going to edge back up instocks, I'm going to do so by
taking money out of cash.
Clem Miller (04:19):
Yeah, I mean, I think the whole concept of gold
I like a lot better than otherETFs that are based on futures.
So USO is a US oil and it'sbased on future contracts and
that has caused problems, asthere is extreme volatility
because sometimes yourpositioning can be just a little
bit off and it gets amplified.
(04:40):
So I think that the gold ETFsthat are physical, meaning
there's a vault in London or inChicago or in New York where the
gold is being held, and so youare literally owning a piece or
a share of that reserve in thephysical asset.
(05:02):
I like that.
I like knowing that when I ownsilver or I own gold, I'm owning
the underlying metal, and theunderlying metal has demand from
three or four sources.
When I look at what's happeningwith gold, I'd say one of the
things that is a little bit hardto fathom, but it is the way it
(05:27):
is is China is trying very,very hard to get more and more
gold.
They want their currency to besomewhat backed by some amount
of gold, but because theireconomy has been growing so fast
and because they don't havetheir own natural resources, in
a large extent they areconsistent buyers of gold in the
(05:50):
marketplace.
And when I think about it goingup a lot, I think about all of
these countries and sovereignwealth funds who are sitting
there saying what do we do?
Should we own this, should wehave more of a certain currency?
And I think that there is goingto be gold as a place of safety
(06:13):
for both governments andindividuals.
So I like that safety nature.
But then gold also has the usein all kinds of plating and
other chips and othermanufacture.
That is going to be a constantdemand.
And so when you look at it andthen you look culturally, in
(06:35):
India and other countries, goldis considered, you know, a piece
of their culture and that whenyou have weddings or you have
big events, you celebrate itwith gold.
And so to me, as a person in theUnited States, I never realized
until I started to research ithow widespread gold as an asset
(07:00):
is, not necessarily as aninvestment asset, but a demand
that is regular from generationafter generation of cultures
around the world.
And to me what that does isthat puts a floor under it.
For me, that puts you know.
I know that there's, you know,different countries are going to
do different things, but I lookat the financial system and I
(07:24):
think about people getting moreand more nervous about paper
assets and crypto assets, and Isee that people aren't running
to crypto.
People are running to thingsthat they feel more confident
about, and gold is it.
And the question is you know notif it is going to be in demand,
but how much demand?
And does the price?
(07:44):
Is the price inelastic?
Can it go up a lot?
I don't know, but I think, aslong as we realize that when
people are scared, they tend todo one or two things they look
for alternatives outside themarket, they look for bonds and
cash and they look for gold.
Look for bonds and cash andthey look for gold, and
(08:09):
therefore, if you're looking tostabilize your account, then I
think it does have a place inyour portfolio.
The question I have is how muchplace?
Because I think this wholequestion about alternatives,
bonds and gold is they're allpieces.
They all work for you.
How do you decide between thesechoices?
And then you know what are theadvantages of physical gold and
(08:34):
the idea of having an ETF, Ithink is a great creation, but
you know the different providersand I'm happy to discuss it.
I think that I'll get into alittle strategy I've used for
some clients who were verynervous about gold and they
wanted to buy gold because theywere afraid of the markets.
(08:54):
But what is it about gold inyour mind that separates it from
some of these otheralternatives?
Steve Davenport (09:05):
So you know, I think you know we're talking
about a time when we've got warin Europe, we've got war in the
Middle East, we've got agigantic trade war which has
been launched, we've gotpolitical uncertainty in the
United States, we have issueswith the bond markets, which
(09:30):
we'll get into separately inanother episode there's a lot of
volatility and uncertainty inthe financial markets and I
think gold offers some stabilitywith some upside general upside
(09:52):
at least we've seen it so farin 2025, that you know, really
cash doesn't, you know, doesn'tgive you.
I see gold as being astabilizer during a very
difficult time worldwide,geopolitically and policy-wise.
Clem Miller (10:20):
Yeah, I mean it comes down to correlations,
right, because when there is arush from equity assets, that is
risk and there is a desire formore safety, they seem to
perform.
I don't know what correlationyou'd use in your analysis, but
(10:42):
I think it's probably negative.
I think it's probably anegative.
0.4 is how I model it, but Ithink that it's probably a
negative.
0.4 is how I model it, but Ithink that it's not a negative
one.
You're not going to get forevery 1% drop in the technology
and stocks.
You're not going to get 1%increase in gold.
But if you got a 4% increasefor a 10% decline, that's a
(11:06):
pretty good alternative.
So I like the fact that thecorrelation seems to hold up
better than other assets.
Yeah, I think that.
I think that that at the heartof it, is why we're both
quantitative.
You know we're both cfas and weboth look at things and say if
it doesn't perform, then whywould I add it?
And I think that that what itperforms at is offering that
(11:30):
relief.
And I think you know how do youlike the idea of just having
one ETF that has gold versushaving gold miners and other
people who produce gold peoplewho produce gold.
Steve Davenport (11:47):
Well, you know, the problem with gold miners is
that first of all, it's capweighted if you're doing an ETF,
and so you don't really know ifthe stocks with the highest
caps are those which have sortof the lowest cost production,
(12:08):
Because that's you know, whenyou're investing in mining
companies, you really want tolook for the companies that have
the lowest cost miningproduction and those are big
reserves, you know Well, but notjust reserves.
You know you could have all thereserves in the world, but it
could cost too much to get themout of the ground.
You want a company that isgoing to make a lot of money
(12:32):
regardless of what the goldprice is, and so a market cap
weighted ETF doesn't necessarilygive you that.
I mean, if I wanted to look ata gold miners, what I would look
at is all the major gold minersand do a lot of work to figure
(12:52):
out what their profitability iswhen gold prices are low.
And you know, honestly, youknow I've got, you know I've got
more.
I've got better stock picks Ican do than looking around for
the cheapest gold miner OK,that's how I look at that picks
I can do than looking around forthe cheapest gold miner Okay.
That's how I look at that.
Clem Miller (13:12):
Yeah, I think that there's more security risk and
if you really just want the purecommodity, I think that's what
you know there's people who sayuse futures.
There's people who say you knowthere's different way to
structure this.
I think that the ETF is a greatway because it is in physical
item, being managed and storedfor you, and it's got some
(13:34):
expense the storage and so theway that I've tried to offset
some of that expense of the ETFcost is to write calls against
the ETFs.
So in doing so, I'm not tryingto generate 4% or 5%.
What I'm trying to do is tomake it costless in terms of
covering the ETF cost and alsoadd a little bit more income.
(13:58):
So if I can turn gold from anasset that costs me 40 basis
points and add you know, add oneand a half to 2% from writing
call options, now all of asudden you know I've got a yield
of one, I've got no expense,I've covered the expense of the
(14:18):
gold and you know if it goesdown, I might make more than one
or one and a half.
So the volatility is somethingthat you should always be
thinking about and that, in mymind, is another way to
supplement this idea of it as anasset class.
I think that we, as investors,need to always be looking for is
(14:42):
there another way to take thisasset and do something different
with it?
I think the idea of usingoptions isn't always for
everyone, but it is for somepeople that might say you know,
I got a pretty large portfolioand I don't like this expense
for this asset.
(15:02):
I'd rather buy the companies.
There's trade-offs and I thinkthat our trade-off is what's
going to help the most amount ofpeople, and I think from a
skeptic's point of view.
I want to be clear gold is anasset and it should be included
in the mix of things you thinkabout when you're trying to
(15:24):
decide on how to find safety ina volatile environment.
Steve Davenport (15:29):
Now, steve, let me just raise one more thing.
We always try here on Skeptic'sGuide, to present sort of both
sides to an issue right, and soI'm going to present the
potential downside of gold.
(15:50):
I don't see it as havinganything more than a minimal
probability at this point, but,just to be clear to everybody,
there is a potential downside ifyou look at the history of gold
, and that is back in the 1930s.
Granted, it was a long time agonow, but back in the 1930s
(16:13):
Roosevelt issued an order toseize all the gold, and he did
so in order to try to strengthenthe US dollar, so that the
dollar would have more goldbacking for it.
And you know it was only muchlater on, with Nixon, that we
went off that particular goldstandard.
(16:33):
But you know there was a riskat that time, big risk, that
those who held gold wouldessentially have all their gold
expropriated, and so you knowthat's a risk that's out there.
I attribute a very, veryminimal probability to that
happening, but you know it couldhappen and it's, you know, in
(17:00):
an absolute currency collapsescenario, you know one option
the government could turn to isseizing people's gold, and so I
think we need to be mindful ofthat possibility, even though
the possibility, I think, isextremely minimal at this point.
Clem Miller (17:23):
ED HARRISON.
Oh, I agree, I think the US asa currency backed by gold has
obviously been off the standardfor a while.
So I think I'm trying to findwhat is the ratio.
Steve Davenport (17:39):
But I think it's been some MIKE GREEN the
ratio of gold to dollars.
Ed HARRISON Correct MIKE GREENWell-.
Clem Miller (17:45):
ED HARRISON.
Us Treasury owns this much goldand this is the amount of
dollars in currency, the moneysupply.
Steve Davenport (17:51):
Yeah, yeah, so I mean, that would be an
argument.
So, whatever the number is,steve, there is vastly more
dollars relative to gold ouncesof gold than there was back in
the Roosevelt days, and so-.
Clem Miller (18:07):
I agree.
Steve Davenport (18:07):
I'm just saying it's yeah well, no, the logic,
the logic that that that forcedRoosevelt, or encouraged
Roosevelt to uh, to seize thegold uh was because gold back in
the thirties was a higherproportion of a higher
proportion could be a higherproportion of backing for the
dollar.
But today the amount of moneysupply that's out there probably
(18:33):
would not be gold, wouldprobably back so little of it
that it wouldn't be worthexpropriating.
Clem Miller (18:41):
Well, I think the number is somewhere between 7%
and 10%, if I look at my pastresearch on this, yeah.
So I think that, if you thinkabout China, is somewhere around
1%.
Yeah, and it would take all ofthe gold from all around the
world for China to get to 5% or6% and they couldn't maintain it
(19:05):
because their economy is goingto grow faster than the
underlying asset can be takenout of the ground.
So when you look at the size ofthe Chinese economy, their
ability to get to a backingequal to the dollar is one of
the main reasons why people sayit will be very hard for people
to ever adopt the Chinesecurrency as a replacement to the
(19:26):
government.
So I look at that relationshipand say China's going to try,
but as long as the US and theseother countries are the main
holders, everybody would have toacquiesce to give China their
gold in order for them to beagain have a currency that is
backed as much as the US is.
(19:47):
Is it symbolic?
Largely?
But there is some underlyingtheory here that says when you
want stability, you need to beable to say our currency has
some backing.
And, yes, inflation is one ofthe reasons why people own gold.
Inflation because inflation.
(20:07):
Is it a perfect hedge toinflation?
No, is it a good hedge?
Yes, and so that's why I thinkthere's uncertainty, there's war
, and the last one is inflationas to a reason to own gold, and
I think I guess I'd like to wrapup by saying to, let's say, we
have the average listener outthere, and that listener is 65,
(20:32):
35 traditionally, and he looksat his portfolio and he says I'm
not sure I feel I want allthose bonds, I'm not sure I want
all that equity.
What do you think is a mix thatyou would put into gold?
That is just enough, though ithas an impact, but not too much
that it takes over the portfolio.
Steve Davenport (21:05):
So I would say, in normal times, which maybe
10% max, but 5% more like it.
But, as I said, today is adifferent environment and that's
why I'm up to around, as I said, 17% and could potentially go
higher if things become morevolatile.
Clem Miller (21:27):
Yeah, and I look at how inflation hurts our fixed
income and I'd say first I'dprobably have 30 percent in
bonds and 5 percent in gold.
And then I'd say you're goingto start to remove some of the
equity risks, so you take fiveoff of the equity risk and now
you get 10.
And then I'd say you probablytake your next five from equity
(21:55):
and then you've got bonds andcash and alternatives.
So I think somewhere in thatfive to 15 range is a good range
for people to think about, butfor everyone it comes down to do
you want to impact yourlong-term growth by having too
much in an asset that doesn'treally produce anything?
As you remember, I think therewas a CIO who we worked with who
(22:16):
had certain opinions about goldand it wasn't a productive
asset.
And my point is it's aproductive asset if it fills a
role in your portfolio with lowcorrelation.
So I like assets to produce,but I also don't want to
necessarily get into theselection of each individual
(22:38):
gold miner.
So I think giving people aguideline of something like 5 to
15 is probably a good space, doyou think?
Steve Davenport (22:50):
I agree.
You mentioned unproductive.
I think that probably hadsomething to do with the lack of
a dividend yield associatedwith gold, and you'd want to
have less gold in anincome-oriented portfolio than
you would in a totalreturn-oriented portfolio.
(23:11):
So that's what I said.
Clem Miller (23:14):
You can add income to it if you're right calls
against it.
So I mean, when I look at bondsthat were basically negative
yielding negative yielding Ididn't hear anybody telling me
about the lack of income thatwas being produced by your fixed
income when everybody ran tobuy bonds when the treasuries
(23:34):
were at 2%.
So I think there's a little bitof hypocrisy in some of the
people who criticize gold,because I didn't hear those same
people talk about bonds being ahorrible asset.
But I think this is a good spotfor us to call it here.
Gold is an asset.
(23:55):
Yes, it glitters.
Yes, you should own some.
And the extreme example I'll useis based on World War II.
A lot of people used gold.
You.
They escaped from Germany.
There were many people who soldall their assets, bought gold
(24:20):
and then carried it across theborder and over to whatever
country they escaped to.
So, yes, it can be a store ofvalue.
And I think we know why cryptowas created.
It was used by a lot ofdifferent underworld and other
unsavory actors, and crypto hasreplaced one of the functions,
which is to transport wealthacross borders without people
(24:42):
knowing that you have thatwealth.
So I hope we don't have thosesituations again.
But there are people out therewho are looking at this as a
place where they want to own thephysical and not just the ETFs,
and I think it's really adifferent discussion about your
personal situation and how safeyou feel owning a physical asset
(25:07):
like that.
So, as an investment, we likeit.
As a physical asset, I thinkyou could have some of it, but
I'm not sure I would be diggingbig holes in the backyard right
now.
Steve Davenport (25:18):
What do you think?
Clint, I agree with that.
Hold it in ETF form and ratchetit up or down depending on your
perceptions of marketvolatility, all right.
Clem Miller (25:30):
I'll call it there.
Thank you for listening and wehope you'll share and like our
podcast and let others know, andalso everyone.
Have a great Easter weekend,thank you.
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