The gold rally

0:09Gold is one of those things in markets that really sparks an argument. Some people consider it to be a pointless pet rock, others as the only true store of value. The bickering about this is honestly endless. Either way, the shiny stuff is having a moment, with prices leaping up to the highest on record, around$2 ,500 an ounce. Today on the show, let's settle this once and for all. Is gold just for weirdos?

0:40That's the question, though. Yes, that is fair. That's totally fair, Katie. And like certain other asset classes, gold does bring out the weirdos. However, just because - Wait a minute, wait a minute. I need to do the This is Unhedged bit. Okay, do it. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at the FT in London, and I'm pretty firmly in the camp that gold is like annoying. But by the magic of modern technology, I'm joined down the line from New York by my esteemed associate, Rob Armstrong, captain of the Unhedged newsletter.

1:18And somehow now kind of gold curious. Yes. I mean, Rob, are you? I agree with you, Katie, that gold brings out the conspiratorial tin hat wearing types in the world. However, just because you're paranoid doesn't mean the world is not out to get you. In other words, there is a case to be made that the sort of odd people who tell us we're foolish to own stocks or government bonds and have their money in ingots in a safety deposit box or hidden in their house may be on to something. This year, the value of the stuff has gone up more than stocks. So who's the weirdo now, Katie? That's what I'm asking you.

2:01I mean, yeah, the tinfoil hat crew are doing like really nicely out of this trade now. But why are people so attached to this as a thing to invest in? I think there is a constituency in markets that really distrusts government in general and central banks in particular. So the government is irresponsible in that it borrows all this money and props up the economy at the wrong times and so forth. And the central bank is irresponsible and that it prints all this money. And there are people, rightly so, who want to be in an asset that is safe from those real or perceived manipulations. And gold, being a very, very ancient store of value and one where the supply cannot be controlled by governments or at least not controlled very well, it's an asset that sort of fits the bill.

2:59There's a whole set of questions there, right, around, is it actually an asset? Is it a currency? Yes. I mean, good luck buying a six pack of beer with it down in the supermarket. So from that point of view, I'm going to say no. Here's one way to think about it. It's not a very reliable currency. So between about, like just for a recent example, between about late 2011 and late 2018, the value was just down to flat. It depreciated, you lost buying power. And that's a fairly long time. That's six or seven years when your so-called currency is doing nothing for you, right? Or less than nothing for you.

3:40But one characteristic of gold, which justifies the people who are real partisans, is that when the poop really hits the fan, when the market is in real crisis, 2001, 2008, the end of 2018, those first scary moments of COVID, gold really does tend to hold its value. And indeed, it generally appreciates. So when people are panicked and they've given up on rationality and the future looks very dim. Gold does shine. So that's a characteristic you might want in a portfolio. Okay. Is the current environment really that bleak? Like gold has had a great run this year. Like I say, it's up in nominal terms, at least to close to a record level.

4:29Yes. I don't see a pandemic. I mean, you can certainly point to parts of the world that I've got hideous geopolitical situations going on, but it's not like we're on the brink of World War III, I don't think, unless there's something that these people know that I don't. I just don't get that the current environment is bad enough to justify what's going on with the gold price. First of all, you're absolutely right. Gold is going bananas right now at a moment that doesn't look like the moments when it traditionally goes bananas. There is still growth. there is anything other than panic in risk asset markets.

5:08We have the kind of the opposite of panic. But there are some things that help explain why gold would do well right now. So one of them is slightly technical and boring, but I'm going to risk saying it anyway. That's what the listeners tune in for. This is what they love. Give them what they want. So now this involves the real rate of interest. That is the rate of interest you can get in the market on your bonds or whatever, your 10-year bond, minus the inflation rate. And when that is positive, when the bond rate minus inflation is a positive number, that means you can make some money, real money, inflation-adjusted money, just sitting around doing nothing.

5:53And when that number is high, gold does badly because gold, you're sitting around doing nothing and you don't even get that real interest. No. So it's when gold tends to do its best is when the real rate of interest is negative. In other words, sitting around in bonds, you're actually getting poorer in real terms. Why not own gold? At least it's stable. Anyway, right now, the real rate of interest in anticipation of Federal Reserve interest rate cuts is falling. And that is part of the story on gold. Yeah. So, you know, if you're getting effectively less and less money in terms of the regular interest payments on your bonds, then you may as well.

6:35Less and less real money. Exactly. Then you may as well own gold instead because it's really important to remember gold doesn't pay you a dividend, doesn't pay you any kind of interest. you just own the pet rock or some sort of financial instrument that reflects the price of the pet rock in the wholesale markets. The thing is, I think this is why I find gold irritating, is that every argument you can construct why it's doing well right now, whether it is something around the kind of geopolitical situation or around the real interest rate or anything like that, you can immediately unpick it. Right.

7:12So there's a kind of an equally valid counter argument to any of these points. But there do seem to be some big picture shifts going on that are supportive for the gold price at the moment. And I'm thinking here of central bank reserves and of China. Which one of them do you want to pick first? OK, central bank reserves. Russia starts a war. Right. And this is considered extremely bad manners by most people. And we're against it. And so quite rightly. the American authorities are interested in punishing Russia for their monstrous behavior, and they target Russia's dollar reserves, right? And they make it harder for Russia to transact in dollars on the global marketplace.

7:59This is a thing that I strongly approve of. However, central banks around the world say, hmm, we're keeping all of our extra money in US dollars. And as it turns out, if we do things the U.S. doesn't like, they're going to make our life difficult. Maybe we should put some of our reserves just a little bit. People still love dollars. This is not a wholesale change. This is at the margin. But central banks are starting to think maybe at the margin, it might be wise to have some non-dollar assets. What, just in case we accidentally invade another country in a war of aggression? Yes, just in case that should happen.

8:39You're showing your hands here a bit, guys. In any case, your options there aren't great. You want to own euros? Shall we have a little discussion of the history of the euro as a store of value? You want to own the Chinese currency? But also, same problem, right? Yeah. Yeah. So gold starts to be appealing. And in the recent year or two, central banks have increased their purchase of gold. And because gold is relatively scarce, a relatively small change in demand can actually move the price quite a lot. So in the longer gold run that started kind of 2018, 2019, central bank purchasing has played a role.

9:15It's a factor. Yeah. Yeah. China's a different case. Yeah. Traditionally, a very big source of demand for gold is people in China and, by the way, in India who do use this stuff as a store of value. And a lot of it is actually just owned as jewelry. Right now in China, as you may know, and as we have discussed on this show in previous episodes, I believe the real estate market, which is the traditional place for Chinese households to put their savings, is doing terribly. So if you are a Chinese household, you used to use your extra money to buy an extra apartment that you gave to your kids or rent it out.

9:55Now, what are you going to buy? So under those circumstances, gold demand in China up until recently, and we'll talk about that recently shortly, has really gone up. And we saw some of the same in India as well. Okay. So maybe what if it's not really a currency and it's not really a kind of asset as such, but it's like a commodity? Because you can kind of think about it in any of those ways, right? Yes. Again, one of the reasons it irritates me is that it's not a normal commodity. It's not really pushed around by supply and demand. No. It's not like someone's found a new industrial use case for gold and it's going to power the green energy revolution.

10:32We're not going to be putting it in any wind turbines anytime soon. There are industrial uses for it, but it's like 6 % of demand for gold or something like that. It's there, and maybe it puts a floor at the very bottom under the price, but it's not a big deal. Industrial use is not going to drive a huge rally in this stuff. So it is a unique asset. It is not a commodity. As you can see right now, other commodities are doing awful right now while gold is rallying. It is not a commodity. It is not a currency. It is its own thing. It's like this panic button that you press when you think governments and central banks are behaving irresponsibly or otherwise war, economic collapse, things have gone very badly pear-shaped.

11:23It is strange, as you point out, that it is rallied so strongly now when things seem broadly okay. Yeah, inflation's coming down. It speaks to kind of specific, very specific cracks in the world economy rather than big, horrible ones, I guess. But let me say this, Katie. The people who buy gold when they're scared are actually price sensitive. the rule of thumb used to be at around like 2 000 or 2 100 dollars and there has been strong evidence that at 2 500 bucks the asian retail demand has really weakened because they just figure yeah we'll we'll try you know where you know we'll try again in a couple of weeks maybe it'll be here a couple of months or a couple of years and maybe we'll buy the same stuff for two thousand dollars an ounce i enjoyed that little noise.

12:20That's the sound of rationality. That's the majesty of the capital allocation process in action. But you know what this all sort of sounds a lot like? Yes. Bitcoin. Oh, it's horrible. I knew you were going to say that. Someone referred to it recently in a note that I received as gold is physical Bitcoin. And you You know what I did with that note that I received? I deleted it immediately in a mood. You should have printed it out only to shred it. If I could figure out how to use the printers right here, I would. I mean, the analogies are frightening, right? So both gold and Bitcoin are basically valuable because people think they are valuable.

13:04Yes, it goes up when other people think it's going to go up. If everybody in the world just decided gold was boring and uninteresting and didn't work anymore, it would be boring and uninteresting and it wouldn't work anymore. Right. Ditto with Bitcoin. You know, it is what it is because people believe what it is. Did I get that right? It is what it is because people believe it is what it is. In any case, there's a huge element of faith in both. They're both wildly expensive and environmentally destructive to produce. You know, in the case of gold, you have to dig this huge hole in a perfectly innocent piece of ground and then leach the gold from it using wretched chemicals and so forth.

13:46And, you know, it's... On that note, actually, that's something I wanted to ask you is like the gold miners, if you look at gold mining stocks, they're not doing anything anywhere close to as exciting as what the gold price is doing. So again, that sort of says to me that like gold is going up because gold is going up and soon it will go down again because it's going down and it's probably not worth wasting too much intellectual effort on figuring out why. So this whole thing has been a total waste of time, Rob. Well, there's a very straightforward reason that the gold miners have done so badly in recent years, in like the last 10, 15 years.

14:28and that is because gold miners are operated by miners and miners are people what they really like to do is dig huge holes in the ground love it and find things they just love doing that what they don't like doing is making investors richer if you give a miner whether it's a copper miner or a coal miner or a gold miner, an extra dollar. That guy immediately says, and it usually is a guy, great, I can dig another dollar's worth of hole in the ground. And his investors are like, but we wanted that dollar. And he's like, tough, digging more holes. And usually there's nothing at the bottom of the hole and it's a disaster.

15:10So every once in a while, miners kind of get religion and sort of think, what if we made money instead of more holes? Like this happened in the shale industry in the United States where shale operators, instead of drilling holes in random places in the United States, decided to just pull oil from the holes they had and give the money to their investors. And lo and behold, the stocks went up a lot. So it's a classic kind of agent principle problem with gold miners. And it will not surprise you to hear that the gold miners say they are going to stop doing this now. And they're going to give investors a lot of free cash flow instead of a lot of holes.

15:51But we will see. Now, the thing is, Rob, as you will no doubt be aware, if you make the mistake of writing or talking about gold in a public forum, you receive emails from people who do not like you very much. Katie.Martin at FT.com, where all of your correspondence from this podcast should go. But so I would just like to put on record that any listeners out there that have called this gold move correctly and have made a lot of money out of it. Keep it to yourself. Hats off to you. Like it's been an incredible run. It was a trade that no one saw coming this year. I think there was a couple of asset managers that had it on.

16:35But like, you know, if you've ridden this, then you've done incredibly well. and just I would claim to be clever rather than lucky if I were you, but pick any reason why it's clever and stick with it and, you know, fantastic. But what I want to ask you, what I really want to do, Rob, is give you the opportunity to be wrong about this again. So tell me. That's my specialty. What you do best. By the end of this year, will gold be at$3 ,000 an ounce,$2 ,500? I'm going to say we're not going to get to 3 ,000 this year for the simple-minded reason that retail buyers and even central bank buyers are price sensitive.

17:16And they're going to look at the shape of the gold chart and say, this looks a little too hot to handle. I bet I can come back in 2025. Meh. Meh. And they'll give it the meh. And then so I think it's been a great run. I wouldn't want to say it's going to stop here, but if I had to guess, we're not going to get to 3 ,000 in 2024. Maybe. Okay, what about a year from now? And then I will stop moving. No, I've answered one question and I think that's... I've asked all your questions now. Leave me alone. You're just going to keep asking me questions until I give an answer that turns out to be wrong, which you can remind me about later.

17:56This is not fair. Good stuff. I think we've definitely... We've tortured this theme to death. Yeah. So we'll leave it there, but we're going to be back in a sec with Long Short.

18:14Okie doke. Now it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Rob, what you got? Well, you know, Katie, tomorrow on Wednesday, we have the most important earnings report in the world. So NVIDIA, a little chip company that also happens to be the most valuable company in the world, and the figurehead of the AI hype cycle in the entire stock market reports Wednesday afternoon. And of course, if it's good, the whole market is going to go up. And if it's bad, the whole market is going to go down. Which, by the way, is a ridiculous situation that we find ourselves in.

18:59It is none that's true. A preposterous way to run a stock market. Absolutely right. However, I feel it is incumbent upon us to predict for our audience whether these earnings are going to be a pleasant surprise or an unwelcome disappointment. And I am taking the pleasant surprise. It's just a coin flip. I have no inside information here, but I'm generally an optimist. So I'm going to say NVIDIA is going to be okay. Are you joining me on the long side of this one, Katie? Your long optimism and you are long gold. This is an interesting position to be holding. I'm going to say I'm going to be a little pessimistic on NVIDIA in terms of how its stock performs, only because it's had such a blowout run.

19:43I mean, I've never seen anything like it. It's added, what,$3 trillion in market value over the course of this year or something stupid like that. Don't quote me on the numbers. It's a lot of money. So I'm going to say the scale of disappointment that NVIDIA would have to put out to knock its stock a little bit would be really quite small. Yeah. So on that basis, I will go short and one way or another, one of us will be wrong by the next time we chat. That's it. That's what we're always looking for. Perfect. Okay, listeners, so that's it for now. But we're going to be back on Thursday, so listen up then.

20:18Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Seidler. 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 slash unhedged offer. I'm Katie Martin. Thanks for listening.

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