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Counsel Views – Episode 11: Chris Beer and John Reade

Is all that glitters gold? Industry thought leaders share their insights, views and outlooks on the precious metal.

Counsel Views, hosted by Stu Morrow, Chief Investment Strategist, RBC PH&N Investment Counsel, is an audio series aimed at bringing insights to clients from thought leaders and experts across Canada’s leading wealth management firm.

Episode guests: Chris Beer: Vice President and Senior Portfolio Manager, North American & Global Equities, RBC Global Asset Management (RBC GAM)
John Reade: Chief Market Strategist, World Gold Council

In this episode of Counsel Views, industry thought leaders Chris Beer, Vice President and Senior Portfolio Manager, North American & Global Equities, RBC Global Asset Management (RBC GAM), and John Reade, Chief Market Strategist for the World Gold Council, share their insights, views and outlooks on the ever-coveted and much debated shiny metal gold.

Chris leads the coverage of the Energy and Materials sectors, and co-manages the RBC Global Precious Metals, RBC Global Resource and RBC Global Energy Funds. Chris, who joined RBC GAM firm in 2000, has been researching and analyzing natural-resources companies since 1993, with a focus on precious metals and base-metal mining companies. His combination of investment-industry experience and four years as a field geologist bring diverse perspectives to his analysis of resource-based companies.

John joined the World Gold Council (WGC) in February 2017 as Chief Market Strategist. He is responsible for producing strategy and developing insights on the gold market; leading the WGC’s global dialogue by engaging with leading economists, academics, policy makers, fund managers and investors on gold; and leading WGC’s research team. John has over 30 years’ experience in the gold industry and related fields, most recently as a partner and gold strategist with Paulson & Co for the past seven years.

View transcript

Stu Morrow:

Hello out there, and welcome back to another episode of Counsel Views.

During the depths of the COVID crisis, we received a number of questions related to gold. This was no surprise given gold has traditionally been viewed a safe haven investment. Amidst the volatility we saw in 2020, some investors were indeed afraid of what may lie ahead and took up new positions in gold. Yet, ever since financial markets have recovered and reached new heights, we've seen gold prices act somewhat aloof. And not surprisingly, interest in gold and gold investing has since waned. Today we're facing the prospects of higher inflation ahead, though we would argue it's likely to be transitory inflation rather than persistent inflation. In the past gold has acted as an inflation hedge, meaning that the price of gold has historically performed well during an inflationary period. So is now the right time to think about gold again? We believe that for some clients, a strategic allocation to gold may be appropriate.

And so with me today, to discuss everything gold investment related, are two special guests. Our first guest is John Reade. John is the Chief Market Strategist at the World Gold Council, and is based in London, U.K. In his role, John is responsible for producing strategy in developing insights on the gold market, and leading the global dialogue by engaging with leading economists, academics, policy makers, fund managers, and investors on gold, and leading the research team. John has over 30 years of experience in the gold industry and related fields. Most recently he was a partner and gold strategist with Paulson & Co. for the past seven years.

I'm also happy to welcome Chris Beer. Chris Beer is Vice President and Senior Portfolio Manager in North American and Global equities with RBC Global Asset Management. Chris leads the coverage of the Energy and Materials sectors, and co-manages the RBC Global Precious Metals, Global Resource, and Global Energy Funds. Chris joined the firm in 2000, but has been researching and analyzing natural resource companies since 1993, with a focus on precious metals and base metal mining companies. His combination of investment industry experience and four years as a field geologist brings diverse perspectives to his analysis of resource base companies.

Gentlemen, welcome to Counsel Views, and thank you for being here.

John Reade:

No one told me I'll be sharing a platform with a geologist though, I'm sorry about that, I'm a mining engineer. Sorry Chris, I'm going to have to terminate this now.

Chris Beer:

Hi, John, thanks, nice to speak with you again. And thanks Stu for setting this up.

Stu Morrow:

Yeah. Great to be here. It's going to be exciting. John maybe we could just start with you, give us a bit of an overview of the World Gold Council for our clients who may not be familiar in its function and purpose. And anything specific to your role there, that I didn't mention.

John Reade:

Yeah. Sure. Thanks Stu. The World Gold Council was set up about 33 years ago, by the leading gold mining companies in the world. And our mandate's very simple, we're the market development organization for the gold industry. And our purpose is to stimulate and sustain demand for gold, also provide industry leadership and to be the global authority on the gold market. And I've been with the organization now for about four years. Although, ironically, the first time I came into contact with the World Gold Council was a couple of years after they were founded. So I've had a long association of ... particularly as a consumer of this sort of information, and research that they put out.

And now I'm responsible for its production, the research team report sent to me. But interestingly, I think this was also sent into the Central Bank and public policy teams. So we have a collection of people that speak to central bankers trying to encourage them, the merits of owning gold, and why they should have and part of their central bank reserves. So I guess some useful insights from there as well.

I spend my time, normally, flying around the world, speaking at conferences, doing research on the gold markets, speaking to central banks etc. Last 12 months has been different for me, stuck in my study at home where I'm doing this podcast from today.

Stu Morrow:

That's great. Thanks John. Maybe we can open it up like just sort like leading into it. John you were talking about the purpose of gold investing and maybe I'll just start with Chris, and say, “Why should investors invest in gold? What traditionally has it served? What purposes has it been in an investment portfolio for clients?”

Chris Beer:

Thanks Stu, and just to mention, I've been involved with gold for over 20 years now in an investment capacity. But also 20 years, I think in dealing with John in various roles, the last few years in the World Gold Council. And prior to that as a research director at various firms. So pleased to talk to you both on this, this morning. And also on the World Gold Council, we've been recommending the World Gold Council for investors because we think the website is interactive and their advice is ... very easy to go into their website and get a lot of information.

And in fact, people in the Canadian broadcast would know particularly, say, Pierre Lassonde the co-founder of Franco-Nevada and one of the former chairpersons of the World Gold Council. Pierre wrote a book on gold investing mostly gold stocks but he's also quite known for his quote of looking at gold, "What is gold, it's 80% a currency and 20% a commodity" so I always start off that way. I mean it maybe more of a rule of thumb or folklore but it kind of works out that way, you can't really look at gold as supply and demand.

John will get into, but gold had served many different roles over the years but, his studies ... again the World Gold Council helped us with the report we published last year, and their findings were kind of backed by ours with regards to gold as diversification tool, over the longer term. And it is basically diversified because, honestly, it's inversely correlated with many other major asset classes. Store of value, inflation hedge, maybe that's something we can flush out, but it's really the diversification that it brings, that it's so hard to get in other asset classes.

Stu Morrow:

Would you add anything to that, John? And maybe you want to touch on some of those things that Chris has talked about. In terms of correlation and maybe how gold has acted in a portfolio, in different market environments as well, and even the current environment we're in.

John Reade:

Sure. Chris has made the point that I would make. I perhaps just emphasize a couple. The investment correlation, particularly to equities, and particularly during equity sell-offs, is very useful as a portfolio diversifier. I mean you can stick a load of different things in a portfolio but it doesn't make it diversified if they will all react the same way during crisis, for example. Adding gold to a portfolio has had material benefits, for that diversification against equity or equity-like risk. But it has also been the source of returns over the long term, as well.

People think you buy gold when there is inflation or when there is crisis. Yeah, it tends to do pretty well during those periods, but it’s delivered over the long term. Returns more or less in line with other major asset classes sort of been, 7, 8, 9% per annum depending which currency you're measuring it in. And look at how it has periods when it doesn't perform, sometimes for quite a long period of time. But most of those happen quite some time in the past. So we think of gold as an asset class that stands out as this diversification returns characteristics, and really should be a strategic component in most peoples’ portfolios.

I think the other thing as well is because there is always, probably more uncertainty out there than most people think of, we're in a bull market for equities at the moment. The most logical thing that people will think is that, that will continue. This is the sort of time that you really need to have the insurance component of your portfolio, against the known unknowns, and maybe the unknown unknowns.

I didn't think I would be spending so much time looking at virology two years ago, for example. And looking at cases and death, and the hospitalizations. And to try and plot a trajectory for the global economy out of the coronavirus pandemic. And gold did particularly well last year, delivering about 25% returns in U.S. dollars. Amongst the best performing asset classes out there, it just shows you. Nobody forecasted this. Having gold in your portfolio benefited you from an unknown unknown, I'd say.

Chris Beer:

Yeah. I would corroborate that. I mean, certainly the returns analysis that we looked at ... I don't want to get stuck on numbers per se, but I think the World Gold Council suggested somewhere 5-6% of gold in your portfolio, which we can place you further out on the efficient frontier. And our work suggested the same thing and we invested the gold, monthly rebalance those. And we also did the same thing for various precious metals strategies, or the Precious Metal Fund from Canada.

And because that has stock specific attributes to it, over the longer term that's added. Also it was inversely correlated to most asset classes and also helps investors get a higher rate of return. If you added up with 5 or 6% in your portfolio.

Stu Morrow:

How do investors think about the return aspect then ... I guess the question is, what sort of those key demand drivers for gold over any sort of period of time? Is it fundamentally based like we can understand a supply curve? What else are the underlying demand for gold today?

John Reade:

Yeah. Let me kick that one off.

It's an interesting way think about gold, I think. Work we've done suggested in the short term, you don't really need to understand much about supply and demand fundamentals for gold. In the short term the biggest drivers are financial market factors like the U.S. dollar, like real interest rates, like inflation expectations, all of these things together. And then you are trading gold on an intra-day, or in one month, or maybe up to a year. You don't really need to think very much about supply and demand.

But if you're thinking about gold from the longer term perspective, so as a long-term strategic allocation in the portfolio, you absolutely need to think about the supply and demand fundamentals. Work we've done shows that over the long term, the single most important driver of gold demand is actually global economic growth. And that's because there's a decent component of gold demand probably about 40% goes into consumer goods, whether its jewelry, or into technology, in electronics in mobile phones, and all other electronics really. And yes, there's investments, the investment component is very much driven by risk and uncertainty, but even some components of investments are actually driven by savings. So, as you become wealthier you got more money to save, people tend to put more money into gold, particularly in some countries. So even then, the economic prosperity is a big driver of gold in the long term.

As I said, the investment side very much driven by risk and uncertainty. And of course then there's the central banks which are trading this in a similar but different way, but more for diversification. And particularly a diversification from major reserve councils.

So in short term, yeah, if I was trading gold, I could probably just look at the dollar real rates, what's the equity markets, F/X, you know all the stuff that we talked about all the time. But if you think about it for the long term, you have to take the supply and demand fundamentals into consideration.

Chris Beer:

And maybe Stu, I’ll put on my geologist hat here and it's even probably more apropos for the engineer, but the supply side of gold has been problematic, it’s basically grown recently, some years kind of negative, very hard to get gold. Basically 80% of gold demand each year is met by mining and the rest has to come from above-ground supply. And we're basically going forward maybe 1% gold growth, but with the added ESG element, and some of resource nationalism. It's particularly hard for gold mining has basically stagnated around the world. John, help me out, 3800 tons a year?

John Reade:

Yeah. 3650 somewhere around that. And as you say, it's going to be hard for the mining companies, the large scale mining companies, to replace their reserves. I think to be able to maintain production growth going forward. So now I'm completely with you there Chris. There's a lot of debate about, "When do we get to peak gold?" I've seen a lot of things written that suggests it could be 2022, 2023 and then, we might be in for a period of declines ... not catastrophic I think, but maybe potentially flat 1%, 2% declines per annum.

And it's purely a consequence of a lack of discoveries ... This is your camp, Chris. And the difficulties in developing mines because of either the financing, or environmental issues, or of just general permitting issues. So I'm with you here. This is a finite commodity. And yes there's more to be mined, more to be discovered, but they're going to struggle, I think, the industry to keep supply at current level, and maybe into long term.

Chris Beer:

And then the demand side are, the aspect of that maybe, we'll talk about Bitcoin later but ... the set 18 million coins now going to 21. The amount of gold on the earth, is quite finite, especially with ... as John mentioned, these attributes or difficulties. And basically it's eight or nine years of bringing on a new mine. And we haven't found really some of that tier one, tier two that you hear ... The Barricks and Newmonts of the world talking about.

I would add that on the financial side if you look at, typically emerging market, monetary growth has been growing at 10% prior to COVID, and mining supplies maybe 1% CAGR and probably closer to zero in the foreseeable future. Certainly the global financial crisis and now COVID, as of July ... numbers stick in my head, U.S. money supply was growing at 18, 19%. So money supply has grown quite a bit.

Now the velocity of money has not kicked in and that's a different argument, but historically when we looked at the data outstanding, there's all kind of things, as John mentioned, interest rates, real rates, inflation and the U.S. dollar, but if you just put a simple chart of world debt outstanding, or U.S. debt outstanding versus the gold price, it's really highly correlated, particularly over the last 20 years. The stimulus may have been maximized in the last five or six months. But even Biden's initial stimulus bill and the likely the further ones, and the same globally that will result in further money supply. Gold versus that increased money supply, historically, has been a good environment for gold price.

Stu Morrow:


John Reade:

And I think that's really important, I know I'm skipping ahead here to talk about inflation. We've done a study we are producing and launching next week, which looks into this phenomena of gold and inflation. A lot of people think gold's a great hedge against inflation but you do the numbers it's actually isn't really. There's been periods of high inflation in the late '70s and early '80s, when gold performed very well when inflation was really high. But when inflation isn't really high, gold's driven by other factors much more so.

And a much better way of thinking about gold holding its value has not been against a CPI index but it's actually been against money supply. And the increases that we are seeing in global money supply, that was just what Chris was talking about, just checking my numbers on Bloomberg, it’s the beauty of having a lot screens in my home study. We have seen a tremendous increase in USM too, through this crisis. Much more than we are seeing following the global financial crisis, in sort of post 2009-10 onwards. Then M2 struggled to get up to 10% growth, now it's above 20. And that maybe the reason that we saw gold doing so well last year, it was an anticipation and recognition of this money supply growth. I'll be honest with you, money supply doesn't look like it's coming down anytime soon. Growth rate may slow obviously, but the fiscal and monetary stimulus has been carried out by pretty much every economy in the world.

I remember the people that were buying gold last time around the anticipation of the consequences of the reaction to global financial crisis, I'm sure that we are looking at these numbers now with their eyes popping out of their heads. So I think there's a genuine case to be made for owning gold at the moment. Irrespective of your views on short term supply and demand that coronavirus cases and the economic recovery, simply on the basis of this big increase in global monetary supply that we see.

Stu Morrow:

So I would ask you both, sort of in my opening comments just alluded to, the performance or the price of gold since the 3rd quarter of last year or late in to last year, has somewhat been flat to down, whereas public markets have been on an astounding run for many reasons. But let me just touch on that, because we're sitting on the period now, where there's a lot of talk about inflation is coming back, a lot of concerns. Maybe we'll start with you Chris, if you want to touch on that. This interim period of gold price performance.

Chris Beer:

You know, I guess, there's no one thing that you can put down ... I mean we can rhyme off relationships such as, say, a 30% - if you look at say 10% increase in the U.S. dollar - you probably can get a 30% decline in the gold price. So went from like 104 to basically 90 on the trade with the dollar, and it has bounced kind of hard here up to 92. And so probably a hundred dollars after the gold moved, over the last ... from the peak in August, and certainly from the peak in January of 2021 can be attributed to that. And then, another one is real yields - a hundred basis point uptake in the real yield, could give you another hundred dollars off the gold price. So they're the kind of things that you can probably short term, if you want live in your office bedroom office forever, and just focus on the next three to five months and get those factors right, then you can probably have a pretty good track record with gold.

And I'm keen to see the inflation, before John was talking about, because that's obviously a key what's the driving nominal and the real rates, and we haven't seen that. I mean, I think some of the things we are looking at, is that we look at what the Fed is saying and doing. The Fed, their policy on the inflation has really changed since COVID. I mean, before it was policy driven, like the policy was, "we're targeting an inflation of ... forecast inflation mainly the personal consumer expenditure index. And that's basically, average one and half percent over the last 10 years. We're looking at that, that's why we have these taper tantrums say in 2015, 2016 and 2013, because people were starting to look at forecast inflation.

But now, Chairman Powell is saying that basically they're not waiting on a forecast of two percent. They're going to let inflation run hot so the policy changed has been not forecast but actual inflation and so we don't know how that's going to work out. The market thinks that Fed has the tools, if we let it run and two and half percent, and as you mentioned, initially that maybe inflation even though global inventories are at record lows, maybe inflation will be temporary. But the Fed if you take them at face value, and the new policy is to let inflation run hot for significant period of time, and if you look at the Fed dot plot for the next two years, it seems like, 18 of the 18 members are on side for at least 21 and 22. I don't know, John if you wanted to add anything?

John Reade:

Yeah, absolutely, I mean, perhaps more explanatory than forward looking, as Chris was talking. Again, we've been doing quite a lot of work looking at this, we've been looking at how gold performs, as the global economy, particularly the U.S. economy, comes out of recessions. And what we found is fixed with the experience that we've seen really since the 3rd quarter, and that is, as the economy comes out of recession the gold is not the best performing asset within the first six months or so. I think that makes sense.

I think about it intellectually, just in terms of gold having been bought up, as protection for when bad things are happening. When you start coming out of the other side is we've been really, since about the 3rd quarter last year. Other things takes place, things that have been crushed even more, like oil prices, like energy commodities, like other raw materials, as people are playing a reflation trade. So I'm not surprised perhaps, that the gold lagged and flat to sideways downwards over the last six months, the mantle has already been picked up by things like, crude oil, et cetera.

What we do find though is if you look beyond the first maybe six to 12 months, gold's performance actually is pretty decent. So it might not be the first assets to perform in a reflation environment, but it's been, if you look at the 24 months performance or 36 months performance, it does pretty well under those circumstances. So if that's the sort of thing that's going to be repeated again, then this temporary weakness or this weakness that we have seen since November I guess it was, when we started to get a fantastic vaccine news coming out, and the world looked forward again. I don't think it's particularly surprising, maybe with hindsight, but I wouldn't say that it's certainly the end of the world. And it's actually may be an opportunity here to accumulate for potentially more gains to become as the reflation trade carries on.

Stu Morrow:

Downsides to, let's just call it investing in gold through public market securities or let's even say the physical gold. Distinguish those two risks for clients and taking a position. We talked about the return potential, we talked about the environments, we talked about the benefits to portfolio construction. The risks. We'll maybe just start with you Chris.

Chris Beer:

Okay, so yeah. If we look at the just the nominal real rates, that's been key over many years. And from Y2K in 2000, and the global financial crisis ... I think our numbers ... Did we saw a negative real rates in 2000? And prior to that it was sort of a ... when real rates weren't negative but they were going lower and gold was more competitive, but not withstanding ... The summer we had a minus or 1.1, 1.2 negative real rates, and now it’s back all the way up to 60, and now back to 80 kind of thing, at least in the U.S. basis. But if you look on the G7 or G20, it's still negative across the board, I don't know the numbers, it's probably at 17 trillion negative.

But as John mentioned, we came out of this probably quicker than ... this reopening trade has kind of, maybe it's failing again this week, I'm not sure, but we've seen several attempts for the reopening trade to work. And coming out of a recession like we had, gold should be expected to be ... it was insurance initially, and as John mentioned, now not too much. But as that relates to ... And John hit on it earlier, I'm not going to quote numbers off the top of my head, but if you go back to the '70s, and look at gold, and even gold stocks the returns as an asset class, gold has been better. Now again, certain gold equity instruments also have been better and competitive with the bonds and stocks over the longer term. Our fund was doing quite well, up until ... gold peaked in August, and now it's pulled back.

But it has provided competitive return over a longer term horizon, but clearly there are a lot more unique risks and specific risks to the equities, what I would say is, ‘08 the global financial crisis, going in to that and coming out of it, gold performed well and the gold stocks was over a 150%, gold stocks were up 300%. And it incited a lot of the gold equity or the gold industry, the gold producers, they went on this buying binge of ... and we were also in the heat of a Chinese super cycle and commodities.

So we had a lot of commodity inflation, and labor inflation, in mining. And so basically the industry did itself quite a disservice and I won't mention some of the company names in particular, but some of the premier companies did all the deals of the top of the cycle, 20 and 30% of their market cap. And it really destroyed lot of value as gold came off in the trade when the gold price came off post 2011. 2011 to basically 2020 we were in a US dollar bull market, and the gold bear market. So over that time frame the industry has really looked at itself and has been a true renaissance. I wouldn't have thought of following, and John followed the gold industry for years. I wouldn't have predicted the renaissance and capital discipline, and operating discipline that was seen over the last five years in the industry.

So we're seeing strong free cash flows. And right now with the gold price pulled from say, 2000 to 1750, you're seeing many of the middle to large cap companies posting 3-5% dividend yields, so twice the S&P. I can't rule out further downside if we're wrong and you know the Fed has just becomes too lofty, you can raise and raise that wouldn't be good for gold or the gold miners. But I do think there's enough discipline in the gold equity space that, they're generating strong free cash flow, and this down cycle at least they won't have the balance sheet issues if it went deeper than I thought.

Stu Morrow:

John is an asset class, any sort of things to keep in mind for clients and the risks.

John Reade:

Sure. I mean, gold is a risky asset. Its volatility is not that high compared to many things. We may talk about crypto if we get the chance. More in line potentially with the volatility with equity market and equity indices. But there's always a risk of downside.

I guess the thing that would keep me awake at night is that we were to return to what, I think we used to call the Goldilocks economy. And the Goldilocks economy of the mid 2000s was when global economic growth was strong, unemployment was low, interest rates were pretty high, productivity growth was high, budgets were balanced or nearly balanced, and things looked really good for a few years. Now that was an environment where gold was not prospering, where real U.S. treasury yields were, I don't know, 2, 3% positive. If we were to go back to that Goldilocks economy, when everything is fixed and fine and normal and none of the balance sheet expansion or government debt expansion that we've seen, over the last 15 year. All that were to disappear magically, then I would perhaps argue that there's less reason to be thinking about gold or another way of looking at it, looking at gold at nearly 1800 dollars an ounce would look a bit high.

Now sure, look, anything can happen, certainly the last 18 months has proved to us that anything can happen, but I don't think we going to back to Goldilocks in my lifetime. And I think one of the things that the last 10 years, maybe 12 years, has taught us, is that there are probably more risks out there than we used to think there were. And the unpredictability of how these risks may materialize means that, I think you need to consider protective elements and genuine diversification element in portfolios more than you did. But I can't rule out something ... something negative might happen that could see the gold price go down. I mean, it has gone up a lot, there's no doubt about it. We were trading what? Some 1200 dollars an ounce in 2019 and now we're trading 1800 dollars now, that's up 50%. I'd argue the world has change quite a lot in that environment, but even so, you can’t rule out further volatility.

Stu Morrow:

We've been sort of dancing around the topic a little bit through our conversation but just on that last point about volatility, let's talk about Bitcoin, let's talk about digital gold, as some people like to refer to it. We are working through our views of cryptocurrencies, crypto assets, as a firm. But maybe start with the idea of digital gold is it, is it not? Is it a complement? Is it a friend, a foe? John, I'll start with you.

John Reade:

We've spent a lot of time looking at cryptocurrencies and Bitcoin in particular. This will pose a challenge of the whole thing, and largely because ... Well first of all, it's impossible to ignore both the returns and the amount of noise that comes out about the crypto assets, it's a very vocal community. And the fact that it gets referred to as digital gold, has certainly attracted our attention.

Is it a foe of gold? I don't think so. And can gold compliments crypto assets within a portfolio? Yes we think it can. The thing about this tag of digital gold is I think it's a bit of a misnomer. Yeah the certain aspects that of by design that Bitcoin was meant to be naturally or inherently scarce, a bit like gold is, and that supply was supposed to grow at a slow and sustained and actually declining rate, bit like gold. Yeah, there is some characteristics that are similar, but when you look at the demand side of the equation, it's completely different. I mean gold, as I've mentioned before, we've got investment demand, we've got jewelry demand, we got technology demand, we got central banks buying it as well. And yes, investors and speculators involved in there too, fine.

When you look at crypto assets, yeah there's a lot of talk about applications for it but it's mostly speculators and investors. And that lack of diversification of demand tends to mean that you got a much more volatile beast. And Bitcoins volatility is much higher than that of gold, so immediately places it into a higher risk category. It doesn't really diversify a portfolio either, because if you add Bitcoin to a portfolio, you do increase the risk adjusted return of that portfolio, which is great, and that's what we're trying to do. But if you look at how it does it, it does at from its returns alone.

Now, returns are good, but diversification is good too. If you add gold to a portfolio and you look at how's that behaved over the last 10 years, you get a sort of numbers, that Chris was talking about, the 4, 5, or 6% depending what else is in that portfolio. And the reason you get that waiting is because gold increases the risk adjusted returns to the portfolio by being: firstly, the source of returns; but secondly, being diversification, particularly when you really need it, when other aspects of your portfolio are falling. Now, look at crypto in a portfolio, tends to behave like a high risk NASDAQ stock or FANG stock.

So if you add in Bitcoin to your portfolio, fair enough. Understand what you are getting in for it, understand the volatility, and understand that you are not getting through diversification. And like every other asset that has equity like returns, gold is actually a decent diversifier of that. So I don't think they are foes. I'm not an expert on cryptocurrencies don't get me wrong. I have spent quite a lot time looking at this for maybe the last five or six years, but I would say is that “digital gold” is the one thing that probably makes my blood boil more than anything else at the moment. So thank you for that Stu, just proving that I have a pulse.

Stu Morrow:

No. I would add too, when we look at the correlations between Bitcoin and other asset classes in the portfolio as well, those correlations have been changing. I mean this is a relatively short trading history that we're talking about here. Gold has been part of portfolios and price discovery for quite a bit of time, whereas Bitcoin is in its 12th or 13th year depending on where you want to start from. So I don't know, Chris if you wanted to sort chime in on this digital gold topic.

Chris Beer:

Oh, I have my two cents because clearly there's a ... John and his team, I've listened a couple of his colleagues speak on podcast on gold and Bitcoin. And then there's no shortage of Ray Dalio and other hedge fund managers and people that have ... Paul Tudor Jones had been early on this, he quite likes gold as well, but looking at it from the liquidity in fact we don't have nothing, we don't really have a long history of ... we do have the returns clearly the last year some 100% have been phenomenal for Bitcoin and even year to date. But we don't have necessarily the inverse correlation. We don't know ... I like that the debasement theory on paper, it's like. "We're investing in Bitcoin because we don't want the government to be involved." But it wasn't really ... Hopefully it wasn't Turkey's initiative that they're banning Bitcoin, that caused the sell-off, I'm sure it's not. But the point is, that many countries ... Larry Summers...

There have been a lot of very prominent speakers that, if this gets to the point where it impedes a sovereign's ability to issue their own currency, as we mentioned, to combat the various unknown unknowns, then governments will step in. And just this year alone in Canada, many of the Canadian investors on the podcast will see that for the first time the Canadian revenue services asking you have you owned Bitcoin this year, and you’re having this start to disclose, and just from the last week, same thing with Robinhood when we look at it as medium of exchange whether it's gold, Bitcoin or any 220 other currencies in the world. I'm not so sure we're there yet, clearly Bitcoin and Blockchain will unfold as did the internet over the next 20 or 30 years. But at the moment there's a lot of speculation and ... as we've mentioned mostly in this call, from gold we know that historically there're three or four drivers.

I would add those three or four drivers, and I'm sure John has done some work on it, and again that's so short. But if I look at the $250 drop from the 2050 in August and try to keep short and medium term correlations of real rates inflation in the U.S. dollar constant, I've seen some estimates, but I'm not sure what John sits, of upwards to $50 or $60 maybe $70 an ounce attributable to basically the almost trillion dollar horizon. In Bitcoin, they've taken some wind out of the sales of gold.

John Reade:

I haven't actually done those calculations and I'd be interested to catch up with you afterwards Chris to see that. I mean we have an attribution model, which looks at more conventional factors, the dollar, interest rates, momentum, things like that. And we certainly ... interest rates moves has been the biggest factor I'd say behind the decline in the gold price, that we've seen since the all-time high last year, and a bit on the dollar as well. Yeah I'd be interested to actually see that.

Would I be surprised if some investors who have been in gold, have been in cryptocurrencies over the last 12 months? Absolutely not. Chris you mentioned the number of the names of investors who have spoken very highly of Bitcoin recently, all of the ones you mentioned actually, historically have owned and as far as we were aware continue to own gold. And some of these hedge funds managers and principals have made a lot of money by getting on the bandwagon on somethings early. And perhaps that's what they've done again here. I don't think it's something which means that the gold is dead or Bitcoin is going to replace gold, but 700% return when something seems to be trending really well, yeah that will be too attractive for some fast money to be ignoring. So I wouldn't be surprised, as I said I'd like to see that model be, sounds quite interesting.

Chris Beer:

Well and ... you heard this term Bitcoin Whales and basically 95% of flow is on … end of the orders. And that's not the case in the gold market, rightly or wrongly. In fact, my early gold investing experience it was all ... central banks were not sellers, but I think John, maybe for the last 12, 15 years, banks have not been tired?

John Reade:

Yeah, I think it's the 11th year of net buying now. And I think ... by the way that is ... I completely agree that's been a big change that taken place in the latter third of my career is this switch from central banks selling to central banks buying, and seems to be continuing. We published monthly stats on this and it just continue. We did have a quarter of net central banks starting last year in the 3rd quarter. But it seems to be, so far relatively limited and there was some reasonably coherent reasons why some centrals banks actually chose to lighten gold. But that's probably the subject for another podcast, because don't get me started on that topic.

Stu Morrow:

On the Bitcoin that lack of breadth and ownership is certainly something we're seeing too, we're looking at a ... as we build up our case for looking at crypto currencies. Gentlemen we always close off the podcast with a few book or podcast recommendations for our eager clients who are interested in learning more about what we've spoken about or even now you've seem to think about the investment world in general. Anything that you would recommend for our listeners, Chris?

Chris Beer:

Well, again I already put in a plug for John and his team in the World Gold Council. It's not a gold bug website, it's like you can put in different assumptions on the conventional measures and try to come out ... What we try to do is come up with a trend of the gold price rather than an absolute price target. I also like Peter Bernstein's got a book out, The Power of Gold. And it goes back historically, from the time of the Pharaohs and today. And his point is the same thing kind of like Mark Twain, with, the lore of gold is interest. Appealing but it can't be a hundred percent as some gold bugs suggest.

And, I also kind of like James Richard. I'm not saying he's a gold bug, but many of his books have the historical ... The Cases for Gold, The Death of Money, Currency Wars, A Road to Ruin all these books are interesting, but we've been waiting for this for a long time. And the interim, all I know is 5 to 6, 7% of gold has helped the portfolio returns over the long term. I guess I'll leave it at that.

John Reade:

Well I was going to say, it's not a podcast or a book but it's a very good website called Gold Hub, from World Gold Council. Which has lots research and data and commentary on gold, produced by the World Gold Council. I think it's very good, I think it's got some really good content on there.

Something else though is a company called Byte Tree, B-Y-T-E Tree. And that's run by a guy called Charlie Morris who's an ex fund manager with HSBC. And I've done Charlie for years because when he was at HSBC as fund manager he had an explicit allocation to gold in his portfolio, and we try to encourage that sort of thing. So I've spoken to him a lot over the years. He's also now got into crypto currencies, and he writes on both, and he writes about them, I think in a very sensible way. Talking about why they are different and complimentary rather than enemies from birth. So I'd have a look at Bytetree.com and see what is Charlie is saying about this space. He certainly understand crypto currency much more than I do and the little bit I've learned is largely been through interactions with him.

And then finally, a plug for Metals Focus, who are our data providers, so a lot of the supply and demands statistics that turn up in our publications come from people out in the fields, speaking to Indian refineries, speaking to Chines banks, speaking to the jewelry manufacturers, and even smugglers, and things like that, so that we can actually get the whole picture of the market. So Metal Focus is a very good as well, we used that data and insights from them but much of that stuff is available for free as well. There's a lot of good stuff out there on gold. And I'd encourage you to read widely on it, there's lot of different opinions.

But always remember I think when it comes to investing, and this is really echoing exactly what Chris just said, don't put all your money into gold. It a great portfolio diversifier, it can give you some decent returns but it's not without its risk and volatility like in everything else.

Stu Morrow:

All right gentlemen, thank you both for being here in Counsel Views. I know I speak for our listeners when I say, "You've given us a ton of insights in to gold investing." I'm going to end our conversation, I hope that we can have you on again in due course, to have a review of what's been happening in the industry. And no doubt that on the digital gold conversation we can continue on with that. But thanks again for joining with me and I appreciate your time.

Chris Beer:

Thanks Stu. Thanks John.

John Reade:

Yeah. Thank you very much. I really enjoyed that. Take care guys.


This episode was recorded on April 19, 2021.

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