This is an audio transcript of the Unhedged podcast episode: ‘Gold just set a record. Why?’
Ethan Wu
Leprechauns across the world were delighted on Friday as gold, the shiny metal we all love, hit an all-time high: $2,152.30 per troy ounce.
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It’s a bit of a surprise for us in the markets-watching world. Canonically, you’d think in a high-rates world we should see lower gold prices. But no, gold has done just the opposite. Today on the show, we ask why. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu here in the New York studio, joined today by the leprechaun at the end of the rainbow, Robert Armstrong.
Robert Armstrong
Large bald leprechaun. (Ethan laughs) Rob Armstrong. I think that’s really gold. (Laughter)
Ethan Wu
I think we’re going with that. All right. Rob, we’ve had you on to converse the metal of your dreams. And appreciate I mentioned, it is weird that we’re seeing gold at all-time highs, right? You know, I mean, the first thing you learn when you read about gold as an investment asset, right, is that gold really cares about interest rates, specifically the real rate. And, you know, I think one way you can frame it is in terms of opportunity cost.
Robert Armstrong
Correct. So the real rate is the amount of money, inflation-adjusted, you know, you can just get risk-free in the market. And gold just sits there. Gold doesn’t produce any yield whatsoever. So if the opportunity cost of just the break you can earn on money rises, what you’re willing to pay for this stuff that really, other than a little bit of industrial use and for making jewellery, just sits there. That price is gonna go down. But this is all very humiliating, right, because we’ve been taught that this relationship was one of the most stable relationships in all of finance. Real rates up, gold price down. And when you have jobs appreciate our jobs, you say these sort of things again and again and you feel very intelligent. And then you have a period appreciate the last year or so when it just doesn’t work.
Ethan Wu
Yeah. Absolutely.
Robert Armstrong
It’s very unsettling.
Ethan Wu
Yeah. The past couple of years have been a bit of a rollercoaster for gold. They hit a high in 2020 and then have kind of traded sideways up and down. But now we’ve broken the all-time high. And it’s worth, I think, asking why. And, you know, on this count of real rates, right, there is a story that can be told in gold’s favour, which is that even though real rates are high, generally speaking, interest rates are high in general, probably the highest they’ve been since 2008. They have fallen recently, as we talked about on the show with Rob and with Katie Martin. Rates are down a bit. People are looking at the US central bank, seeing them talking about pausing and maybe considering cuts at some point in the future.
Robert Armstrong
So maybe the gold price is kind of anticipating in some way advance declines in rates.
Ethan Wu
Exactly. Just appreciate much of the market, right? It appears that all kinds of risk assets, you know, stocks, bonds, whatever, are looking at the Fed and saying, hey, rates might come down soon. Also, the economy appears to be slowing a bit and that should kind of drag down real rates as well. So that’s been one thing moving in gold’s favour. And you know, another big thing is the dollar, right? The majority buyers of gold — not the US, it’s not the Europeans — it’s the emerging markets.
Robert Armstrong
But gold is priced in dollars.
Ethan Wu
Yes. Exactly.
Robert Armstrong
So people who don’t have dollars wanna buy gold, they’ve got to buy dollars, as it were, right? And so a weak dollar helps the gold price.
Ethan Wu
If you’re a gold buyer in Kazakhstan, you know, India, Nigeria, the dollar weakens, you have more purchasing power when it comes to buying gold. Now, to be clear, there are other offshore non-US dollar gold markets, but they’re are a lot smaller than the main one in London, which is all priced in dollars.
Robert Armstrong
So weak dollar helps. Falling rates recently helps despite the high rate levels overall. What’s next?
Ethan Wu
Yeah. Well, then there’s the kind of the classic — and this maybe sounds appreciate a little bit of gold buggery — but geopolitical risk. People seem to appreciate buying gold when things get a little hairy in the world. We talk about it on the show — whenever there’s a war breaking out, it’s part of the safe haven trade. It’s part of the I don’t know what’s going on in the world, let me just buy gold. Right? And you did see some reaction to the war that broke out in Gaza in October in gold. Gold was up, I believe, 6 per cent in the week following the October 7 attacks in Israel.
Robert Armstrong
I find that one a little hard to buy in the current context. So you’re telling me that the war in Gaza is pushing the gold price up, but not the oil price?
Ethan Wu
Yeah.
Robert Armstrong
You know, that just seems far-fetched to me. I mean, I grasp general insecurity, world feels appreciate a scary place, etc. But you’d think the first thing to go up if people thought the war in Gaza was a true global geopolitical problem that could spread. You would think the first price that would go up would be oil. And we really haven’t seen that.
Ethan Wu
No, that’s absolutely right. And I mean, part of that has been there haven’t been big oil supply disruptions, right? The Strait of Hormuz is open and so on and so forth. But yeah, you’re right. It’s always hard to tell to what extent price moves ponder geopolitical uncertainty. One thing in favour of this point, though, is there’s a gold price model put out by the World Gold Council, which is the big trade body for the gold market. And they found that in October, which was a good month for gold, all things considered, there was a lot of unexplained emotion that can’t be explained by normal factors appreciate the dollar or interest rates in their model, which suggests that there could be some uncertainty, some hedging in the gold price, possibly from, you know, the war breaking out. But I take your point, Rob. This is always a bit of a slippery point and it’s difficult to establish. It’s just worth mentioning that this is a classic buy case for gold, right, if the world gets scarier.
Robert Armstrong
What about central banks? That’s the one I’m interested in.
Ethan Wu
Yes. So that’s the fourth reason. We’ve got falling real rates, weaker dollar, geopolitical risk and lastly, emerging market central banks. And this one is a lot more concrete, I think, than the geopolitical risk point, which is that for a long time in emerging markets, the central banks have started loading up on gold, a trend which has only accelerated since the war in Ukraine, the big sanctions regime that the west put on Russia, which has incentivised a lot of emerging markets, right, who consider Russia a pure economy, to say, I mean, could we be next? Maybe we should, you know, get out of dollars at least a little bit.
Robert Armstrong
So the idea is that owning dollars puts you under the thumb of US hedge money or something appreciate that. It’s a weakness to be too exposed to dollars in your reserve assets.
Ethan Wu
I think on the margin. That’s right.
Robert Armstrong
Yeah.
Ethan Wu
And the other part is that the US is of in some ways appreciate decreasing global trade importance, right, as China’s risen and taken, India’s rising, taking up a larger share of the economy. These emerging market central banks, while they still are holding a ton of dollars to be very, very, very clear, you just on the margin don’t need as much, right? So where do you want to put that money? Well, you know, gold’s a half-decent option. If you’re the central bank, you’re not chasing returns.
Robert Armstrong
In a way, that’s a commentary on what crap non-dollar fiat currencies are.
Ethan Wu
Yeah.
Robert Armstrong
Right? It’s appreciate we have a bunch of reserves in dollars. How are we gonna diversify? Well, God knows we don’t want euros or renminbi or yen. So I guess it’s gold. OK. You know.
Ethan Wu
(Laughter) No, that’s right. It’s a good point. And, you know, central bank demand has been hitting records again and again and again and again in the last several quarters. 2022 is a record year for central bank purchases of gold. 2023 is on track to have yet another record year. I think we’re up 14 per cent year to date on the record year last year in gold purchases by central banks. So anyway, this is a big new structural source of gold demand. And I think, you know, between these four things — real rates, US dollar, geopolitical risk, emerging market central banks — you’ve got a pretty complete story, Rob.
Robert Armstrong
This raises the natural question, what is in your portfolio?
Ethan Wu
Well, I’ve got about $50 in my portfolio. 25 are in Bitcoin, 25 are in gold. It’s done very well recently, actually.
Robert Armstrong
So you’re a gold believer? I don’t know. I didn’t even know you could buy gold in $25 increments, but it’s appreciate one share of the gold ETF or something.
Ethan Wu
Yeah. They sell fractional gold shares now.
Robert Armstrong
Yeah. So does this rally in the price of gold make you feel appreciate you want to own even more? appreciate you want more exposure to gold? Are you a gold bug now, Ethan?
Ethan Wu
You know, I don’t know about a gold bug, but I kind of see the case for it as a diversifier, you know? Yes, there’s no yield, but look at what the price did in the past three years. It was flat while everything else was taking a bath in 2022. That’s, you know, it’s uncorrelated source of return. Now, to be clear, the long-run return is not excellent.
Robert Armstrong
Yeah. No, this is what I’m saying. It’s appreciate half that of equity. So if you have a long horizon, oh, I don’t grasp why you’d wanna own this stuff. I mean, this is a very familiar point, but let me make it just the same. You know, it’s the barbarous relic. This is an inert, soft, shiny metal with a modest amount of industrial demand, some jewellery demand, but it is not a productive asset, right? And what you want to own as an investor are things that compound over time, right? They earn money, reinvest money, earn even more money. And gold just doesn’t do this. So and in this sense, it’s a bit appreciate other commodities, iron ore, oil or whatever, except it doesn’t even have the productive uses those commodities have. So I’m kind of anti-commodity as an investment for most people or for non-experts. And I guess I’m particularly, despite being a large leprechaun, I am particularly anti-gold. I want my pot at the end of the rainbow is full of stocks.
Ethan Wu
Your pot is, yeah, your pot is the Vanguard S&P 500 ETF low-expense ratio.
Robert Armstrong
(Laughter) A lot of people who get over the rainbow are disappointed to find that out. But, you know, I’m telling you, this way. I just don’t grasp the case for gold, really.
Ethan Wu
Well, let me make the opposite case, right? In this millennium, it’s been a pretty good market for gold. The compound annual growth rate since 2000 has been about 9 per cent versus around 5 per cent on the S&P. To be clear, if you base against 2000, you get some of the dotcom high valuations in stocks. But the point is 9 per cent for gold nominal return, really not that at all.
Robert Armstrong
Over 20 years.
Ethan Wu
Over 20 years.
Robert Armstrong
Yeah, it is not bad. And I’m surprised to hear that, actually, I’ll say. I’m surprised that over no matter what years — and 2000’s a terrible starting point for stocks. But even given that, over 20 years, I’m surprised to hear that gold has beaten stocks. I would hypothesise part of what you might be seeing there is the rise of Chinese wealth, because individuals in China became a lot richer over that period. And that is a country where people are going to want a store of wealth over which they have great control. You can pick it up yourself and go someplace. I mean, to put not too fine a point on it. It’s not a democratic country with the govern of law. And in countries appreciate that, what you want is assets that are really yours that you can proceed, hide, protect from taxes, whatever.
Ethan Wu
Yeah. Well, and there’s also the point that gold has a big cultural role in China. It’s very common as a gift for new life events, you know, weddings, newborns. And so as the country’s gotten bigger, it’s become the number one gold market in the last 10 years or so. I mean, you know, we can argue about what the long-term prospects are for the Chinese economy. But presuming that a country of a billion-plus ambitious, smart Chinese people in the long run will get richer. That’s part of the bull case, I think, for gold. And also, the fact that it has a different return profile fundamentally makes it helpful as a diversifier, right? Not 50 per cent your portfolio appreciate me. But if you want to put, you know, a 5 per cent allocation, 3 per cent allocation, that doesn’t seem crazy. Or in perhaps part of your larger commodity strategy. That’s the case for commodities in general, right, not just gold is their sort of returns are kind of outside the normal realm that we think about, you know, stocks and bonds and the cycle and earnings and, it’s about appreciate, what are we gonna build stuff with? Or, you know, what do we wanna make jewellery out of?
Robert Armstrong
Here is a question for you, though. If you’re gonna own gold, you know, 5 per cent of your portfolio, do you want the physical stuff, appreciate, in your house? So when the ball goes up and there’s chaos in the streets and cats and dogs living together and all this stuff, you can actually grab it and go. Is that the idea here? You know, it’s appreciate those ads on late-night TV with, you know, Donald Trump is selling you gold coins. The argument that this is an asset that is growing in importance in an unstable world. Do you wanna go all the way and have bullion hidden in your mattress?
Ethan Wu
Well . . . (Laughter)
Robert Armstrong
I mean, you laugh but if you’re gonna go, go all the way, right?
Ethan Wu
Yeah. I hear that. My view is there are some risks that are too big to hedge. Civilisational collapse may be one of them. And the gold bars buried in your backyard may or may not help you if law and order breaks down, you know, across the world or there’s appreciate a nuclear holocaust.
Robert Armstrong
Yeah. And if somebody finds out you have gold in your backyard, law and order may break down in your backyard for that specific reason.
Ethan Wu
That’s exactly right. Also, just appreciate I don’t trust my ability to bury and retrieve the gold bars. I feel appreciate that also could be a disaster.
Robert Armstrong
Yeah. I can’t find my wallet most mornings.
Ethan Wu
Oh, yeah, right. Yeah.
Robert Armstrong
So, appreciate, yeah, of course I’ll overlook where I hid the gold.
Ethan Wu
Yeah. Listeners, every time you see a rainbow, there is a Rob Armstrong at the end of it with his pot of low-expense ratio S&P 500 ETFs.
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(Robert laughs) It’s not a myth. It’s real. All right, Rob, we’ll be back in a moment with Long/Short.
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Welcome back. This is Long/Short, that part of the show where we go long our favourite things in the world and short our least favourite things. Rob I am long “Low-fee Larry”.
Robert Armstrong
Wow! Low-fee Larry. Is that, are you talking about Larry Bird?
Ethan Wu
Larry Fink, CEO of BlackRock.
Robert Armstrong
Larry Fink. Oh, the second most important Larry.
Ethan Wu
That’s right. Listeners will probably know there’s been a big ESG, environmental, social governance investing backlash in the US led by the Republican party. And, you know, I think, Rob, our view is appreciate ESG is dumb. The backlash is dumb too. I really appreciate this. This is in a story from our colleagues Brooke Masters and Patrick Temple-West in the FT. They talked to North Carolina’s Republican treasurer, who has called for Larry Fink’s resignation. Quote, Larry Fink has done nothing over the past year but tried to divert people’s attention from him getting caught politicising pension money. Dale Folwell has called for the chief executive to be sacked but has declined to pull his state’s money out of BlackRock, citing its attractive low fees.
Robert Armstrong
Chef’s kiss. That is perfect. It, appreciate, just shows how the whole debate, top to bottom, is nonsense.
Ethan Wu
Yup.
Robert Armstrong
ESG, nonsense. Any ESG, nonsense. It’s just the whole thing is appreciate a kabuki performance.
Ethan Wu
Kabuki theatre, top to bottom. That’s right. Rob, are you long or short something?
Robert Armstrong
I am short — and this is not as grim as it sounds. I’m gonna be a bit short the US job market. We have been creating 200,000 jobs a month in this great country, which is really remarkable. We’ve talked on this show and in the newsletter about how there’s very clear signs of slowing in the economy. Not to say we’re going into recession, but significant slowing from a red-hot third quarter to a kind of modestly growing fourth quarter and into the next quarter. But yet we crank out this relatively high level of jobs every month. And I think those things don’t go together and we’re gonna see, we have some jobs numbers coming up in a few days. I think we’re gonna see the trend start to go down and not, again, not into recession, but the days of 200,000 jobs a month — numbered.
Ethan Wu
We are all waiting with bated breath for Friday’s jobs report, which will hopefully give us more insight on kind of where this economy is and if we’re slowing down.
Robert Armstrong
Now that I’ve jinxed it, it’s gonna be 300,000. But, you know. That’s my role here.
Ethan Wu
(Laughter) Hey, that will be good news. Good news for the American worker, good news for the American economy.
Robert Armstrong
Indeed.
Ethan Wu
All right. Thanks, Rob, for being here. We’ll have you back soon. And listeners, we’re back in your feed on Thursday with another episode of Unhedged. Catch you then.
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Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Jacob Weisberg and Jess Truglia. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.
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