#96 - Aakash Doshi: The Strategic Case for Gold

28:38The other factor to consider is for the first time in recent memory, private investors are buying gold in size. What are your thoughts on their role in the recent rally we've seen? Very important, very critical. A lot of us in financial markets, Alex, we think about gold ETFs or gold futures. The bar and coin investment, physical investment in gold is actually very critical to understand the pricing mechanism of gold and to understand where the demand for gold is coming from. And what's unique about 2025 is that you're seeing very strong ETF inflows, record in dollar terms, the strongest tonnage that we've seen since 2020.

29:24But bar and coin demand has still been pretty decent despite these record high prices. And I would say certain regions like China, you've actually seen stronger physical gold demand from private investors and consumers than anyone would have expected three, six months ago. To interlink all the points, I think some of that is post-liberation day driven, but I think some of it is just idiosyncratic support for gold. China consumers buying because of CNY or local currency devaluation fears. I think some of it because the property market never recovered to pre-pandemic trend. Some of it due to the fact that China has capital controls.

30:05And gold is one of the few fungible global assets that Chinese investors have access to there. So I do think this notion of gold gaining popularity and accelerating in Asia over the last couple of years has been a key driver. And then Western private investors, as well as ETF investors coming back into the fold, I think that's been the big driver this year. If we have a chance to later on in this conversation, I can definitely talk about what I think are the cyclical drivers of gold post-pandemic and why I think 5 ,000 is more likely than 3 ,000 next year. Let's do that. Let's hear your thoughts on that.

30:43Yeah, sure. So if I take a bird's eye view, I think the gold market is rebased higher in that what I previously said earlier this year, that 3 ,000 was the new 2 ,000. I think 3 ,500, 3 ,600 is the new 3000. So I think that's a good support area for gold. And I can talk about where I get that number if you want in more detail, but I want to get that point across. Gold in particular is still under allocated. In October, some would argue it might have been overbought. That's different from being over allocated. So let me explain very quickly of how I think about this gold price cycle. Again, echoes of 1970s, but let's even take stagflation and all of that aside.

31:27What do I think has driven the gold market very broadly since the pandemic, when we first hit$2 ,000 an ounce and then have traded since? So I look at the 2021-2022 inflation scare and the Fed hiking cycle and the Russian incursion into Ukraine. I look at that as an inflection point that helps solidify 2000 as a price floor. And I think that was mostly driven by physical demand because that central bank demand for gold increased dramatically. As you pointed out, Alex, or you asked in your question earlier, when Russia invaded Ukraine, you saw central banks increase their purchases above 1 ,000 tons for the first time on record.

32:06And they maintained those levels for several years, 23, 24 as well. This year, like I said, will be strong. So it's the first part of the gold rally or the gold support rebasing higher was this physical demand from central banks and also from China consumers and China retail. One little tidbit, China consumers and retail demand, not the PBOC, not the central bank, although some of this could be shadow imports from the PBOC. But China consumer demand, if you back out that data and decompose it, has been higher than all central banks globally for gold every year for the last three years. Let me repeat that.

32:45China consumers are buying more gold than all central banks globally every year since 2022. It's remarkable. I think those two factors is the first leg of the price support, physical demand. 2025, starting in mid-24, but really 2025 solidifying it, it's the return of the ETF investor and the Western ETF investor. Number one driver of prices this year, ETF inflows, in my view and in my model. What I think can take us to 5 ,000 next year is the allocation to gold away from unmanaged duration, away from money market mutual funds that have over 7 trillion in US dollar assets as we speak right now, Alex.

33:31And I think that's the next leg for gold to get to 5 ,000. So very simply put, to give hard numbers as opposed to throwing a number in the air, how do you get to 5 ,000 in cost? What's required? Central bank demand staying within plus minus 3 % of this year's level. APAC demand being flat and ETF inflows in 2026 globally at 75 % of the pace of 2025. I think that's sufficient to get you to 5 ,000 announced next year. You talked about allocation. And I think that is important because if it becomes more broadly accepted that gold deserves a more strategic allocation within portfolios. If you scan across institutional and high net worth portfolios today, is your sense that they're heavily under allocated relative to what is a more reasonable allocation given the backdrop you described?

34:27Yes. And I think that's true across all verticals. So 2024, gold was the number one performing global macro dollar denominated asset. In 2024, gold outperformed the S &P 500 outright and in risk adjusted terms. Off the top of my head, 27.2 % was the simple return in 2024. And the real returns were also well above 20%. Now, we saw globally in 2024, ETF outflows, mostly driven by the first half of 24. In the second half, we saw inflows. But once you had the US elections, there was actually a lot of selling in November and December last year. It's really only been in the last six, eight months that you've seen allocations start to increase in size and with some duration and scope.

35:22So most clients that I've spoken to, but you could also normalize this and survey work that we've looked at, et cetera, most investors missed 2023 and 2024 and even a lot of 2025. It's only in the last few months that I think you've really started to see allocations being added. I would note even in January of this year, we saw ETF outflows in the spider suite. Then they've come roaring back really since March, April. So I do think March, April was a little bit of an inflection point. And that reallocation is going to increase over the next couple of years. Again, not necessarily from equities, but from unmanaged duration exposure, so long bonds in particular, and perhaps, like I think for money market, mutual funds.

36:11We know that investors oftentimes chase returns. So when you see something go up 40%, 50%, etc., it's going to draw eyes towards it. I like to focus on where is the long-term allocation for portfolios. If it's relatively low, that's a very different starting point than if it's relatively high. Yeah. At State Street Investment Management, we consider gold a strategic core asset in a portfolio. We have a white paper that's available on ssga.com. Any listener that wants a copy, just see the website, look up my name, and it should be available there, ssga.com. Our paper does go up to 10 % to 12%. And let me frame it, why that works as an allocation.

36:54You manage a lot of money. You're a very prominent advisor across the nation, if I do say so myself. And we're connected on LinkedIn. And I've looked at a lot of the talks that you've given recently. And I think what's interesting, and this won't be controversial, is that post-pandemic, but you could even argue over the last 10 years, 60-40, 70-30 is not a 2025 allocation mix, especially as the point I mentioned earlier, since 2022, US stock bond correlations are very high. So what should be that allocation? Should it be 55-25-20? Should it be 50-25-25? What is that last number I'm alluding to, 20-25%, maybe even higher, maybe slightly lower?

37:39That's your alternative sleeve. And in my view, and in the work we've done, a lot of the clients I've spoken with on the RIA side, on the broker-dealer wealth management side, is that gold deserves its own liquid alternative sleeve in that broader 2025 bucket, which then includes commodities, which can include private assets, which can include real estates and other exposure. But gold is unique from a portfolio standpoint because of all of those assets that I'm mentioning, it is the lowest volatility asset. And to the extent bonds have this issue of too much supply in the market, this inflation impulse, this fiscal impulse, we haven't even talked about that in the US, you might have an issue where 10s, 20s, 30s, they're unable to rally sufficiently.

38:34without a huge recessionary shock, where gold then serves as your portfolio counterweight. It serves as your safe haven left tail hedge in that environment. So again, 3 % to 12 % with the sweet spot around 5 % to 7 % on our average portfolios where we recommend a gold holding to improve your volatility adjusted returns over the long run. And is it fair to say that most portfolios, at least in your experience, have far less than that in gold? Yes, because many portfolios have 0%. You have many people that don't like gold because it doesn't provide a coupon or yield, or that it's difficult to value because you can't do a DCF or discounted cash flow model.

39:19You can't look at a forward PE ratio of gold. But my argument would be that it provides other portfolio attributes, capital appreciation over the long run, very low volatility, very low correlation. And in this environment post-pandemic, we've mentioned it so many times with the debt, alt fiat, et cetera, it's a global debasement asset. I often find it helpful to try to listen to the market, take a step back. And when you look at the top five calendar year returns for gold since 1971, they all occurred in the 1970s. And you alluded to this earlier, but 2025 would crack into the top five if it ended today.

40:02So what is the market telling us about the current environment? The market is telling you that A, gold was probably undervalued pre-pandemic and post-GFC. Two, that it is concerned about just the level of debt and the fiscal impulse and inflation impulse in many developed market economies. So keep in mind, gold is up to record terms and dollar terms this year, but it's also hit records in every other emerging market and G10 currency this year as well. So from that statement, I do think it speaks to a global phenomenon as well. Now, does that mean that it goes on a straight line up? Of course not.

40:47Nor should it. If anything, a consolidation would be healthier from a price cycle standpoint. It allows for broader participation because many people will have a FOMO about gold, fear of missing out, which you often see in tech stocks, less so in commodities and precious metals. But I think that's what you saw over the last month, month and a half. You saw record inflows into gold ETFs in the month of September, all-time record in dollar notional terms, very strong tonnage terms as well. And I think that last$300,$400 move higher, when we went from$3 ,700 to$4 ,000 and then very quickly above$4 ,300, I felt like that was a lot of new money, fast money leverage getting into the system.

41:35And that last in is the first out right now. And if we stabilize here in the mid-high 3000s, I think that's actually more promising for 2026 returns than if we had what's known in commodity markets, a blowout top, where you really spike higher, but then you crash afterwards. And I think from that standpoint, a lot of these structural factors driving gold, they're still in play for 2026. And they're just different factors driving it than equities. So you've had a sharp rally in both over the last six months. And I think there's arguments to be made that having gold as your safe haven hedge in that environment is even more attractive because what happens when there is a volatility shock or liquidity event or an S &P correction, which we haven't seen since April of 2025?

42:34Gold might benefit as your safe haven hedge there. It is interesting because many of the factors that you just described, excessive debt, sticky inflation, even the under allocation to gold, those have existed for a long time. It just seems like all of a sudden the market has realized, you know, this is actually an interesting asset class and it all hit at once and then you had the FOMO play as well. It is pretty fascinating how it all came together all at once. Absolutely. Again, it's going to be a debate in the market, especially now that we're come off from the all-time highs. It's still a very strong year.

43:09But I think there's a fair case where the market revalues higher. Remember, prior to the global financial crisis,$1 ,000 was a price ceiling for gold. Then it became a price floor. Then 10 years later, the pandemic hit COVID shock in 2020. $2 ,000 became a soft price floor. It wasn't a hard price floor, but really$1 ,800 to$2 ,000. That's where prices averaged over the next couple of years up until the end of 2022. And then in 2023, you started to make the move higher and$2 ,000 really solidified itself. You broke into the mid-2000s in 2024 and then$3 ,000 was hit in the first quarter of this year, so third month of this year.

43:51That became a reset higher for these various reasons that we talked about. I think the move to 4 ,000 came a little bit quicker than anticipated, but I think it speaks to the concerns in the market about inflation risk, about a weakening labor market. Are we going to get the returns from AI that are being priced into the market? One interesting point on equities, again, I'm not pulling out of equities into gold necessarily as much as I would be from fixed income or cash, but the CAPE ratio is among the highest in history right now. What do I mean by that. That's a forward outlook of the PE ratio on the S &P 500 versus its trailing 10-year average.

44:31And that right now is, I think, the second highest on record. The previous time it was this high was into the dot-com bubble crash. Again, I'm not saying that we're at the same analog, but it's difficult to argue that gold doesn't play a left-tail portfolio hedge in an environment where a lot of things have to go right for equities to continue the same momentum. Whereas I feel like gold is moving on some of these more structural issues of debasement, dollar, now the Fed cutting again, and so forth. You touched on this a little bit, but one of the pushbacks that I hear is you can't tell if gold is overvalued or undervalued.

45:12Are there any metrics that you look at to get some idea of maybe where it stands historically? One thing is you can look at ratios of different assets, so nominal to nominal or real to real. One example is the S &P 500 in gold terms. So that's looking at in the simple terms of the S &P 500, a gold ratio. That has been below its pre-pandemic, pre-2020 mean for the last six, seven months since March of this year. So even as equities have had a V-shape, Gold has held its own and also rallied over the last six months. Historically, when you've had an S &P 500 in gold terms at this level, it signals recession risks or at least slowdown risks.

45:59You saw that in some of the hard data. I think the other way you value it is looking at gold as a physical commodity, as a physical asset, so having a supply-demand model. And if gold demand growth is outpacing supply growth, which it is in 2025, which I expect it to do in 2026, then you need a higher equilibrium clearing price. That's kind of a commodities 101, econ 101 standpoint. And I can get into those dynamics. I think a third is understanding gold's pricing mechanism. it's not co-determined with other assets, but it's a one-way transmission mechanism. Okay, that sounds like a lot of jarbled Columbia University econ talk.

46:42Let me distill it. Oil and interest rates or oil and FX have a two-way flow. Oil is a big part of current accounts and commodities terms of trade and trade balances at a lot of economies. So oil can help determine emerging market FX and then vice versa. There's a transmission mechanism. Oil drives break-evens and inflation expectations. Gold is different in the sense that the transmission mechanism is one way. The bond market can affect gold, but typically the gold market doesn't affect bond valuations. And the same is true on inflation. Gold doesn't drive inflation, but inflation can drive gold prices.

47:28So I think understanding that transmission mechanism makes sense a lot as well. So you put it together in some sort of model where you consider real rates, inflation, physical S &D, and you come up with a fair value. But I think the most important thing is if demand growth is greater than supply growth, commodities one-on-ones is the price has to go up. And how should investors think about the differences between investing in physical bullion, gold ETFs, or mining stocks? I'll start with mining stocks first. That can be a tactical trade, just like silver, but that is not providing you the portfolio attributes and that strategic role that gold does.

48:10Mining stocks, more volatile than the S &P 500, high beta in your world. Gold, less volatile, low beta. Gold mining stocks, you have to deal with free cash flow and dividend yields and company management. Also, where in the gold mining sector do you invest? Royalty players, streamers, the big conglomerate miners. Gold mining is very fractured around the world as well. It's mined in six continents out of seven and$4 ,000 an ounce, I'm sure Antarctica will be in play soon enough. So it's very fragmented. It's difficult to think about what is the right play, although tactically it can be a great trade as it has been in 2025.

48:57Gold from that standpoint has a role in a portfolio that's providing capital appreciation, low volatility, diversification, and so forth. It's providing you that unique left tail low volatility hedge. So that's how I think of it differently. What was the other asset to compare it to, you said? Just the physical bullion. So this is getting into a product discussion. So I consider gold mining stocks just different from the underlying gold. Yes, they're correlated, just like ExxonMobil can be with oil prices or Archer Daniel Midland can be with corn prices, but they're different. No one would say oil is ExxonMobil and vice versa.

49:35I don't consider the gold mining stocks the same as gold and portfolio. Now, how you access that gold is an interesting question. You can access it through derivatives and futures, ETFs, or physical. Some argue that having physical gold is the right way to do it. And if it's some physical gold, sure. Listeners can't see my watch has gold in it. My ring does. And you could even have some gold in your house safe or your safety deposit box, sure. But when you're thinking about real allocation, you can't keep gold under your mattress. And the cost of transacting in a physical bullion market is very expensive.

50:14Look at the largest gold vault private banks. Your premier customer, you still might be paying two and a half, 3 % just to buy the gold premium, a markup to transact. In some cases, 5%, 10%, even 15 % markups that have that physical gold. Then of course, if it's any sizable amount that has a real value, you can't keep it under the mattress or at grandma's house. You have to pay for vault storage and insurance. That's all a cost. And then if you need that liquidity, on the other side of the market, you're going to have to pay a discount. The ETFs, and this is true for all gold ETFs, if I'm honest, that are physically backed or 33-act products, but the spider tickers, GLD and GLDM, are the market leaders, by far the largest gold ETFs in the world, largest commodity ETFs and funds in the world.

51:10They have the advantage of transparency, they have the advantage of very low transaction costs. Physical gold, you could pay two and a half, three, four, 10 % markup as a retail investor or even a high net worth investor. Trading GLD can cost less than a basis point to move$10 million, to move$100 million. And from that standpoint, it's still physically backed, but you have this liquidity, you have this transparency. And you have this very high correlation to the spot gold price, meaning very low tracking error. There's very little slippage with the gold ETFs. It's a very efficient way, I like to say, of transacting in the market.

51:53Futures is another way you can access gold. That's a good way to get leverage in gold. I would say the issue with that, and this is getting a little technical, and especially since it's not a video podcast, but an audio, you have something called a roll yield in commodities. To have that exposure, you have to constantly roll contracts. And if the commodity curve is upward sloping, you have to buy high and sell low to constantly maintain that short front end exposure. Also, gold futures have become less liquid since the pandemic, while gold ETF liquidity has increased since the pandemic. So to me, at State Street Investment Management, maybe I'm a little biased, but I do think from an honest perspective, The ETFs are a transparent, easy way to access gold.

52:41You can get physical spot price exposure that way to the commodity. That is not possible with any other commodity. You cannot get oil spot exposure. You cannot get copper spot exposure as an investor. I think many people don't realize that. Precious metals and particularly gold is one of the few ways you can get spot exposure to a commodity. And the only way you can get that spot exposure is actually through the ETF or owning the physical. But that physical has a lot of frictions if you're doing it on your own. Many argue that gold has a new viable competitor in Bitcoin. How do you compare gold and Bitcoin as investment assets?

53:21I look at gold as a left tail hedge and Bitcoin as your right tail hedge. Prior to joining State Street Investment Management, it's only been 11 months here, But I spent, as we said at the beginning of our conversation, about 14 years at a bulge bracket Wall Street bank at Citigroup. I was a founding member of a cryptocurrency research working group there in 2018. And we looked at Bitcoin as a foreign exchange, as a commodity, as a tech stock. What do you think it was most like? It probably acted mostly like a tech stock. Yeah. It acted mostly like a tech stock because it had that similar volatility profile.

54:00It had inflow-outflow that very much correlated with tech stocks. It had an adoption growth curve, which is very much based on future growth prospects and not a long history or track record. So very similar to that. And I would say as recently as even four years ago, five years ago, Bitcoin bulls and gold bugs, they would have friction. They would butt heads. I think now, especially with gold's performance over the last couple of years and this global fiat debasement trade, it almost coexists. I think gold is your left tail, Bitcoin's your right tail. Gold is there as your safe haven, low volatility asset.

54:38It lowers portfolio volatility. During liquidity or volatility shocks, it is your liquidity or volatility hedge. It also has that pro-cyclical and counter-cyclical sources of demand. And in the case of central banks, non-cyclical source of demand. Bitcoin, for all its press and the advent of the ETFs particularly, have certainly helped mainstream adoption of Bitcoin. It is still driven by investment demand. That is the source of Bitcoin demand. It's not used for anything else. So it's a store of value. So I think there's overlap in the investor base, but Bitcoin is a high volatility asset. What I like to do is not to try to convert people who are Bitcoin bull or crypto native into gold is understanding how both can coexist.

55:26And in fact, that is a title of a paper that's on State Street's website, how gold and Bitcoin can coexist in a portfolio. And what we found is that Bitcoin can help juice returns. Its price performance can be very volatile, but can be trending upwards. while adding gold to the portfolio with Bitcoin actually improves returns overall, lowers volatility, lowers drawdown risk. I think having both actually makes sense if you're someone who believes in having crypto exposure. We backtested this by looking at 60-40 portfolios, 70-30 portfolios, and then adding a Bitcoin sleeve alone, and then adding a Bitcoin and gold sleeve.

56:07And what we found is that having that gold sleeve makes a lot of sense. So I think the way to consider it is, especially if you talk to young advisors or people who just really believe in new technology or just love crypto, there's no need to convert them away from that. it's explaining to them, hey, gold has a role here in this portfolio too. If you want a thin sleeve of crypto or even a large sleeve of crypto as part of your alts bucket, gold can be there too to help mollify a lot of risks from a high volatility asset. And Bitcoin is still a high volatility asset despite it becoming more adopted across institutions.

56:47You shared some thoughts about a strategic allocation to gold in portfolios. Do you feel like today's environment, which is relatively unique, warrants perhaps a higher strategic allocation to gold? Ray Dalio at Bridgewater has said, again, a 15 % allocation to gold and State Street Investment Management works with them. They sub-advise our all-weather risk parity fund. I personally think that, yes, there is a need to have some sort of hedge to this global fiscal debt story, because that's the one thing that's not being resolved in the current convoluted geopolitical fiscal global policy landscape.

57:37If there's one thing that hasn't changed this year, is that the fiscal trajectory for governments and global debt loads, they're not expected to get paid down. And in fact, there's probably no escape velocity over the long run. So from that standpoint, I look at what impact in my portfolio, what plays out if you have this ongoing bull steepening bias in the treasury curve, that 10-year paper, but really 30-year paper only has so much that it can rally. You have this fiscal and inflation impulse. What are some alternatives that could work in that environment? And I think gold is one of them. I think you take it in and you dip your toes in, especially when prices are this high.

58:22If I had said, yeah, sure, let's invest 40 % in gold, 50%. Maybe you don't want to listen to this podcast. You run out the door. If you're a more conservative investor and you're concerned about inflation risk and having this duration exposure, particularly from bonds, where you think money market yields are going to yield negative real returns next year, which is possible if the Fed keeps cutting and you're in a high-tax state like California or New York, where I live, then you might have 0 % or negative returns in real terms for money markets. So maybe I allocate a little bit of my cash to gold because I'm getting these other portfolio diversification benefits and potential capital appreciation in the long run.

59:02So for me, yeah, I think the time to allocate something to gold is still there strategically right now. Do I love it as much as I did in January of this year? No. The second paper I wrote this year for State Street was, is it too late to invest in gold? No! Of course, back then, gold prices were$2 ,600 an ounce. At$4 ,000 an ounce, is it too late? Maybe there's no exclamation point, and maybe you just dip your toes in. So that's kind of where I stand on it. Well, Akash, I appreciate you taking the time, sharing your insights, your experience, and also all of the perspectives. It's been insightful to me and I hope our listeners as well.

59:38Thank you. Thank you for having me. It's been my pleasure. Thanks for listening. We hope you enjoyed this episode. Please visit our website at insightfulinvestor.org to access past shows and learn more about our podcast. If you have questions, feel free to email us at info at insightfulinvestor.org. And if you enjoyed the discussion, please subscribe to this podcast to ensure you don't miss future episodes. And don't forget to forward today's conversation to others you think would enjoy listening. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice.

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