My Answers to Your Questions about Gold

Thank you for all the great questions about gold. I'm trying to answer as many as I can, and I'll be sharing my replies as I have them in this article.

You seem to look at gold and the gold price differently from most people. How do you think about gold?

You're right. I think most people make the mistake of thinking of gold as a metal rather than as the most established form of money, and they think of fiat money as money rather than debt and they think that fiat money will be created to prevent debt defaults. That's because most people have never lived with gold being the most fundamental money, and they haven't studied the debt-gold-money cycles that have occurred in almost all countries over almost all time. However, anyone who has seen gold-money and debt-money evolve over time has a different view. In other words, to me gold is money like cash—over time, it has had about the same real return (1.2%)—because it doesn't produce anything. But like cash, it has buying power that can be used to create money that is borrowed and enable people to do things like build money-making businesses that are owned via stocks. If those stocks are solid and produce the cash needed to pay back the loans, then of course the stocks are better. When they can’t pay back the loans and fiat money is printed to prevent the default problems, then non-fiat money (gold) is most valued. So, to me, gold is money like cash, except unlike cash it can’t be printed and devalued. It’s a good diversifier to stocks and bonds when bubbles pop and/or when people and countries don’t accept each other's credit, like in wars.

In other words, to me gold is the most sound fundamental investment rather than a metal. Gold is money like cash and short-term credit, but unlike cash and short-term credit which creates debt, it settles transactions—i.e., it pays for things without creating debt and it pays off debt.

Anyway, it has been obvious to me for some time that the relative supplies and demands of debt-money and gold-money were shifting against debt money’s value relative to gold money’s value. As for the right price for debt money to be relative to gold money, given the ratios of supplies and demands for each of them, and given the sizes of bubbles that could go pop, I know that I want to keep my piece of gold that’s part of my portfolio, and I think that those who are wrestling between having no gold at all or a small amount of gold are making a mistake.

Why gold? Why not silver, platinum or other commodities, or inflation-indexed bonds as you have suggested.

While other metals can be good inflation hedges, gold occupies a unique place in the portfolios of investors and central bankers because it is the most universally-accepted non-fiat currency-based medium of exchange and store-hold of wealth, and it is a good diversifier to other assets and currencies in these portfolios. Unlike fiat currency debt, it doesn't have the same inherent credit and devaluation risks—in fact, it diversifies against them because when they are doing worst, gold does best —acting almost like an “insurance policy” within a diversified portfolio.

While silver and platinum share some similarities with gold—particularly in terms of industrial applications—they do not possess the same level of historical and cultural significance as a store of value. Silver, for instance, is more heavily influenced by industrial demand, which can lead to greater price volatility, though it has been used as the basis of currency systems before. Platinum, though valuable, is even more constrained by its limited supply and specific industrial uses. Consequently, neither metal enjoys the same universal acceptance or stability as gold when it comes to wealth preservation.

Regarding inflation-indexed bonds, while they are a good and under-appreciated inflation hedge asset in normal times (depending on the real interest rate they offer at the time) and I believe more investors should consider them in their portfolios, they are still fundamentally debt obligations. So if there is a big debt crisis, their performance is tied to the creditworthiness of the issuing government. They are also subject to government rigging, like rigging the official inflation numbers or other terms governing them, which history has shown to be the common problem with inflation-indexed bonds when there was high inflation in countries led by leaders who wanted to get around high debt-service costs. Moreover, while effective in combating inflation, they do not provide the same degree of diversification or safety net as gold during systemic financial crises or periods of severe economic distress.

As for stocks, especially those in high-growth sectors like AI, they undeniably carry the potential for substantial returns, though they have proven to be bad performers in inflation-adjusted terms both because their inflation hedging characteristics are limited and because, during really bad times, the economy and the businesses do badly.

To summarize, gold is a uniquely good diversifier to these other assets and diversification matters, so it has a place in most portfolios.

Hi Ray, at least AI has enormous upside and debt instruments pay interest, while gold may only look pretty solid until any of the big holders like the banks want to sell.

I can see that you don't like gold for the reasons you said, and I don't want to advocate for it (or any other investment) because I don't want to drift into becoming a tipster. That won't do anyone any good. I just want to share what I know about the mechanics. As for investing, I'm more in favor of great diversification than in favor of any single market, though I tilt my portfolio significantly based on my indicators and what I think, which for quite some time has led (and still leads) me to a big tilt toward gold. If you're interested in why, my book How Countries Go Broke: The Big Cycle explains my thinking much more comprehensively than I can do here.

As far as the alternative markets you mention, it seems to me that in the case of AI stocks, in the long run their upside depends on their pricing relative to their future cash flows, which are extremely uncertain, and, in the short run, it depends on bubble dynamics. I believe that we should be mindful of the lessons that analogous cases in history provide, in which the breakthrough technology companies became very popular as they are now. I'm not saying definitively that these companies are in bubbles—though they are showing lots of signs of being in bubbles based on my bubble indicator. In any case, an awful lot about the markets and the economy hinges on the AI boom companies doing better than is discounted in their pricing, because, if they don't, their stocks will go down. These stocks have accounted for 80pct of the gains in U.S. stocks, the top 10pct of income earners own 85pct the stocks and account for half of consumer spending, and these AI companies' capital expenditures have accounted for 40pct of this year's economic growth, so a downturn would be really bad for people's wealth and the economy. It seems obvious that some diversification of one's holdings would be prudent.

As far as your observation that "debt instruments pay interest," for these debt instruments to be good storeholds of wealth, they have to pay a decent real after-tax interest rate. There is a lot of pressure to lower the real interest rate, and there is an oversupply of debt that is being added to more quickly than the demand for it. So, we are seeing a diversification out of debt and into gold, while there isn't enough gold to diversify into.

Putting aside tactical considerations, gold is a very effective diversifier to these other investments and if individual and institutional investors and central banks put an appropriate share their portfolios in gold for diversification purposes, the price would have to be much higher (I will soon send you my analysis of it) because the quantity is so limited. In any case for me, I want to have some piece of the portfolio in it, and figuring out what that piece should be is important. Without giving specific investment advice, I do recommend that people ask themselves the fundamental question of how much to allocate to gold. For most investors, I think this is likely 10-15pct.

Now that the price of gold has gone up, should I still own it at this price?

To me, the most simple and fundamental question that everyone should ask themselves and answer is what percentage of my portfolio should I have in gold if I don’t have a clue about the direction of gold and other markets? In other words, how much gold should I have for strategic asset allocation reasons, rather than because I want to make a tactical bet on it. Because of its historical negative correlations with other assets (mostly stocks and bonds), most importantly when the real returns of stocks and bonds are bad, the answer is that about 15pct is best because that would give the best portfolio return-to-risk ratio.

However, because gold's expected return over time is low just like the return of cash is low (though it behaves spectacularly in the times of greatest need), over long periods of time that better return-to-risk portfolio comes at the expense of a lower return. Because I like the better return ratio and don't want to lower the expected return, I hold my gold position as an overlay, or I lever up the whole portfolio a bit so as to have both the better return-risk ratio and the same expected return. That’s how I view, the right amount of gold to have for most people.

As for tactical bets, that's another subject that I have shared my points of view about and won't reiterate here, other than to say I wouldn't encourage others to make them.

How has the expansion of gold ETFs (dominated by retail) affected the overall direction of the price of gold?

The price of anything equals the total amount of money buyers have to give sellers divided by the quantity of the item that sellers have for buyers. The motivations of buyers and sellers and the vehicles used to buy and sell are of course important influences. The rise of gold ETFs has created more vehicles to buy and sell for both retail and institutional investors, and this change has generally increased liquidity and transparency while making it marginally easier for a broader range of investors to participate. But at the same time, the market for gold ETFs is still much smaller than traditional physical gold investment or central bank holdings, so it has not been the main source of buying or the main reason for the price increase.

Has gold begun to replace US Treasury holdings as the riskless asset? If so, can gold support a massive shift in holdings?

A factual answer to your question is yes gold has begun to replace some US Treasury holdings as the riskless asset in many portfolios, most importantly in central banks and large institutional portfolios. The holders of these portfolios have decreased their U.S. Treasury holdings relative to their gold holdings. By the way, anyone with a long-term historical perspective would say that, compared to Treasuries or any other fiat currency denominated debt, gold is the more riskless asset.

Gold is the most well-established currency—in fact it is now the second largest held by central banks—and has proven to be much less risky than all government’s debt assets. Historically and now, debt assets are commitments by debtors to deliver money to the creditor. Sometimes that money was gold and sometimes it was fiat money that could be printed. Historically when there was too much debt to be paid back with the money that existed, central banks printed money to pay back the debt. This devalued it. When money was gold, they defaulted on their promises to pay back in gold and instead paid back with printed money, and when the money was fiat money, they just printed the money. History shows us that the biggest risk is that debt assets like U.S. Treasuries will either be defaulted on or devalued, more likely devalued. History has also shown that gold is a money and store-hold of wealth that has intrinsic value, so it doesn’t depend on anyone giving the holder of it anything other than the gold itself. It has been a timeless and universal money. History has also shown that, since 1750, about 80pct of all currencies have disappeared and the other 20pct have all been severely devalued.

In my mind, Gold as a store of value is only a intersubjective reality—it’s rare and pretty but has little value as a metal—despite millennia of use as currency. What is your view of crypto-currencies—also as an intersubjective value, but those that are re-usable are proofs of work and stores of computational energy with tangible usage (as barriers to networks) and blockchain zero-trust implements?

There’s no doubt that gold is money and has been for thousands of years. For example, it's now the central bank's second biggest reserve currency and it’s limited in supply. It's gained that status because of its qualities - universal acceptance, portability, limited supply, etc. There might be - in fact there are- better investments (just as there are better investments than cash) - but there is no doubt that gold is a non-fiat currency, right? How its price behaves is another question for another time, though I will say, like all other things, its price is a function of its supply (which is limited) and demand (which depends mostly on the attractiveness of it relative to other monies, most importantly debt monies like cash, and other investments). Agreed?

The same is true for crypto currencies but much less so, right? Also crypto currencies are much less private and some would say much less secure from other governments which affects the demand for it. For example, it would be hard for me to imagine China feeling as secure holding its reserves in Bitcoin as it feels holding it in gold. What do you think?

One question I have is whether digital assets and payments systems will serve transactional needs and as a store of value. The experiments that some Central Banks are undertaking is interesting - will these developments evolve and erode the value of fiat currencies that have been abused by profligate governments?

While central bank digital currencies (CBDCs) show great promise in improving the efficiency of payment systems and have the potential to expand financial inclusion, that isn’t the same as having the qualities of being a safe, widely-accepted, and money-like storehold of wealth like gold. CBDCs are more like efficient credit card systems than widely accepted non-fiat currencies. They’re denominated in the same inflation-prone fiat currency (dollars, yuan, euros), so holding them doesn’t protect against monetary debasement. Also, the transactions on them can easily be monitored, frozen, and taxed, and they pay little or no yield. Also, there are some people who believe that emerging technologies can lead them to being broken into, which makes them far less safe than one would want in an asset that is held to be safe during times when such things are prone to happen. Also, regarding safety, there are compliance issues that have to be enforced—such as making sure that CBDCs are backed with real money and that one can get the real money—to make sure that these CBDCs can really deliver the value back in all circumstances. There are lingering questions about that. For example, one needs to be sure that they are fully backed by government debt, and the question of what happens to them if governments default on their debts is still unanswered. For these reasons, I can’t imagine central banks or most other asset holders would hold them as reserves. In short, I don’t see them as effective, safe alternative non-fiat currencies (i.e., a good alternative to gold.) Bitcoin, unlike CBDCs, is limited in supply, so it doesn’t have the currency debasement problem, but it has most of the other problems.

The other question is whether beyond gold, other commodities that are critical to economy of the future will become more valuable and a new theatre of contest.

The prices of commodities, like prices of everything, are determined by their supplies and their demands. In the case of commodities, their supplies and demands are determined much more by their utility purposes than by their monetary purposes. In other words, they aren’t bought and sold as a monetary storehold of wealth because they don’t have good qualities for being that. Having said that, changes in a well-constructed basket of commodities will be driven by economic demand (so economic growth) and will roughly correlate with changes in the value of money (so inflation), especially in periods of great inflation. As a result, commodities are relatively poor vehicles in being storeholds of wealth. Having said that, I do use some of them, and I also use inflation-indexed bonds—especially break-even inflation positions (which I get by going long inflation-indexed bonds and short nominal bonds) as parts of an inflation hedge basket.

I just saw a YouTube video on rare earths- China has the largest production today. Rare earth is needed in submarines and other military hardware. The US has quartz at Pine Valley which is critical for semiconductors. In an age of AI these are valuable. So a new theatre of contest may emerge?

Probably the biggest reason for whatever success I have had is that I do a pretty good job of knowing what I don’t know and making a point of not betting on it. I certainly don’t want to give advice about things I don’t know enough about. Because I know that I don’t know enough about how to bet on critical resources prices (which I wish I had the knowledge to do), I am going to pass on answering your question, which is best for both of us.

Question: With gold at $4000+ how should an investor move into your suggested 10-15% of your investment portfolio? With the 2X rise in price since post COVID, does one just close their eyes??

It’s best if you don’t try to time your purchases and sales of gold because you will probably do that badly. Instead you should decide how much gold you should have in your portfolio (e.g., 10pct) and keep it around that regardless of the price. I’ve written and spoken a lot about that approach, so don’t hesitate to ask more about that.

Think of gold as a hedge against uncertainty—particularly valuable when real interest rates are low or negative, money growth is high, and geopolitical risks are elevated. These factors can drive volatility in traditional markets and make gold’s stability attractive. However, if you’re going to tactically increase and decrease your ownership stakes in gold, which I recommend against, keep in mind that gold doesn’t have a cash yield and it doesn’t improve its earning power like stocks and bonds, but over long time periods, it tracks the value of money. This means that when inflation is high and interest rates are low and/or growth in earnings is low and/or there are big credit risks that can hurt stocks and bonds, and/or there are international conflicts that drive money away from debt/money and equity assets because of lack of trust, those are the special times that gold is a great performer and diversifier to the other assets in your portfolios.

Question: If I don’t have any gold in my portfolio or not enough how do you recommend I time my getting more?

I will start with a transition timing principle before I answer your question directly. The principle I want to convey is: “When thinking about what positions you have, what positions you’d like to have, and what to do to get the market positions you’d like, view your risk in terms of those positions that you want to eliminate as soon as possible rather than the trade you will do (like buying at a price that is higher than you could have bought at if the price might go down). In other words, I often watch people make the mistake of moving slowly into their desired least-risk position because they think that’s the least risky way of getting into their desired position when the opposite is in fact true.

Still, it is true that psychologically buying or selling a large amount at a bad price isn’t good, and that taking on a big position at a bad price is painful. So, you might consider the following approach that will give you some comfort. Quickly buy an amount that will make you equally regretful/happy if the price goes down as if it goes up. For example, quickly buy half of what you want to buy. If the market goes up, you will be glad that you bought what you bought (but wish that you bought more), and, if it goes down, you will be glad that you didn’t buy it all at the higher price and will still have the ability to buy more at the lower price.

So, if you’re starting from scratch, I recommend allocating 5-10% of your portfolio to gold and then using dollar-cost averaging to phase into the rest over the next few months. If you already hold some gold and want to increase your allocation closer to the 10-15% range, I also suggest dollar cost averaging into that position over the next few months. And remember that your greater risk is not being in the position you want to be in, rather than being in it.

Ultimately, successful investing requires a) balancing conviction with humility, b) diversifying well in good assets (betas) and good alphas (good tactical bets – depending on your ability relative to your competitors’ abilities to place those bets), c) having a well-thought out and back tested game plan, and d) staying disciplined.