In this podcast, we interview Max Belmont, Associate Portfolio Manager for the First Eagle Gold fund. What does First Eagle know about gold? Well, they just might own more gold than any other private entity in the country. How much gold can fit in a swimming pool, what is the difference between gold out of the ground and gold mining stocks, what is the role of gold in a portfolio, and how do crypto currencies factor into this environment? These are all questions that we will cover. This is a fascinating interview, chock full of facts and tidbits about gold. Grab your ear buds, get on your exercise device and buckle up. Here we go.
Max Belmont - First Eagle - Gold
Tue, 4/26 5:08PM • 1:00:01
gold, jeremy, price, stocks, currency, miners, asset, investment, hedge, bitcoin, inflation, bullion, money, people, portfolio, increases, interest rates, supply, risk, return
Welcome to the podcast Deconstructing Alpha. I'm your host, Geremy van Arkel. And on today's show, we have a great guest for you. We're going to be interviewing Max Belmont, who is an associate Portfolio Manager with First Eagle Funds. And, he works on the First Eagle gold fund. So today's subject is going to be gold, all things gold. And I think that this is a really timely subject for today's market environment, where we're seeing inflation and stocks and bonds both declining in value. And, you know, gold is sort of, for some people sort of lost its luster a bit. And so we're going to try to bring back some attention on gold, we're going to get to a lot of questions about gold. And this is one of my favorite topics. And it's with just such an experienced portfolio manager who really knows a lot about gold. So this is going to be an interesting and fascinating podcast. As usual, please stay on the podcast till the end for our disclosures and notes. And ladies and gentlemen, without further ado, Max Belmont First Eagle Funds, and let's talk gold. Max, welcome to the podcast.
Thank you very much, Jeremy, great to be here and excited to be part of this podcast series with you and your listeners.
Well, thanks for being here. So we'll make this fun. But we're gonna I think this is going to be a really cool subject. I think everybody likes to talk about gold. They're interested in how gold works in a portfolio. They're more interested in how gold works in a portfolio today, I think and then anytime in the recent future, and the recent past. And so So tell me, let's start with the light here. What is your role at First Eagle?
Jeremy, my role is First Eagle is as you already alluded to, is I'm an associate Portfolio Manager on the gold fund, and have been looking at this industry since 2014. So I have extensive experience working in analyzing the gold market overall and the companies that produce gold and in the world.
So you, you you analyze both bullion, which would be physical gold. And then mining companies, is that correct?
That is actually halfway correct. So while we analyze the bullion and we look at macro economic events for the bullion, my primary research responsibility is analyzed within the mining industry. As the bottom up investors that First Eagle is and value investors. But you know, one doesn't go without the other. So you keep an eye on everything outside of the miners. And given that the miners are price takers of the bullion, you want to make sure you understand what goes on in the world. But we do not forecast the price of gold, even though like you can even make the argument and even in our models, we do not forecast the forward curve, we just take the spot price of gold and look at what makes sense in terms of bullion or miners what is cheaper for us to own at any particular moment in time.
All right. So that sounds like to me, you've been analyzing gold for quite a while. And both aspects of both the physical market even though you don't make predictions on gold, but how gold could how the price of gold could impact the stocks, the mining stocks that mined gold. So how much gold does First Eagle own on behalf of your clients?
It's a very good question, Jeremy. And so as of last publicly available data and number that we published, First Eagle manages approximately 14 billion in gold exposure across various investment strategies on the First Eagle platform. So part of that actually sits in a vault and in allocated accounts and the other part is invested in the mining companies overall.
Yes, that is correct.
Does that make you one of the largest holders of gold of any investment companies?
That's what we have been told we are currently by our custodians as a privately owned entity. Yes. So our clients are a part of this of course.
I think that's really neat. Okay, so let's go real quick. A little side, a little side bar here. So you said the gold is held in vaults. So like in James Bond style underground vaults are like who holds the gold where, where? What does that and tell me more about that?
So by can't tell you the exact location Jeremy. What I can tell you is it is held and involved. That is a little bit of like James Bond style. If you want to make that analogy. Yeah, it is very secure. It's quite ironic that you take it out of the dirt and then put it back into the dirt in an unsafe place. Yeah, but But yes, it is it is held in allocated accounts. And what that means is, you want to own gold for the cycle, and you want to own gold, outside of the financial architecture, meaning when you own gold, one of the neat things about gold is that it's an asset and no liability, right? It has no Counterparty. Hence, what you want is, and the reason why we own gold, for our strategies is to own something strategic for the long term that is outside the system. And that's why you wanted to hold it in allocated accounts, which are audited yearly. And, you know, you want to make sure that that that gold is there in case something ugly in the world may happen.
So it is physical gold, it's held in vaults. Do you have cameras on it? Can you see it at any given time?
I don't, but there are the security people have cameras and everything on it. So they look at it all the time. And, you know, like, it's quite hard to have a live cam in my own office.
Right, right. Well, I just think that's really, I think it's just really cool. So how so? Okay, so you own $14 billion for the gold. So how much a gold and miners? So how much gold is there in on Earth?
So just to give like, your listeners a perspective on this, because know, maybe it's probably obvious that gold is indestructible. And it's also non consumable. If you look on the periodic table, you will find that gold is one of like the most dense, and one of the most scarce elements that occur in on this planet. But it is also an inert and by inert I mean, still, and it is perpetual. But what does this mean? It means like the emergence and still being still means that it doesn't have a natural beta to, like other commodities that are used in industrial processes, such as iron, copper steel, that tend to go up or down with on price with the business cycle. But to answer your question, because I maybe I jumped a little bit ahead, like effectively, what I mean by that is that all the gold that has been mined so far, it sits in above ground stocks, or somewhere like on the bottom of the ocean. And the best estimates that we have today is that there are around 205,000 metric tons of gold. And you might ask like, what does this mean like to under 205,000 metric tons of gold? Visually, Jeremy, think about like, I don't know if you're a swimmer, or a tennis player, because this is how I think about it. So. So if you're a swimmer, think about like four Olympic sized swimming pools with a depth of two meters. But that's all the gold that has, like, is in above ground
let me recap that you just said all the available gold in the world. That's in aboveground stock that somebody either owns or is at the bottom of the ocean or is in someone's jewelry jar can fit into four an Olympic sized swimming pools.
Well, we don't know how much sits on the on the bottom of the ocean. We know how much sits it like sits above? Yeah, now and that's four Olympic sized swimming pools. Or if you're a tennis player, Jeremy think about a tennis court. Yeah, you know, baseline to baseline where you serve and where you get the return. Yeah, that's like built a cube on that. So build a cube with the length side of 73 feet, approximately 73. And that's all the gold that is above ground to build a cube with a side length of 73 feet if you want to say so which is approximately like a tennis court
and how tall would that be?
So okay, so if you just piled bars up on top of each other on a tennis court and filled the whole green area, it would be they go up 73 feet and that's all gold in the world.
All the gold in the world that we know sits today and above ground supplies. Yes, indeed.
That's truely incredible. No, that's way less than I would have thought. Way less and then and then so the nature of the gold is that it you know it lasts indefinitely, right. And, and so it has the and It, it's, it lasts indefinitely. So it has the ability to stand the test of time, as long as you can store it. So. So another thing you said I want to touch on there is you said, you know, gold, I'm gonna paraphrase what you said. He's like, you know, and I actually heard this in their first Eagle offices years ago, when when we were talking about gold. And somebody up there said, well, gold's value is that it has no economic use. That's its value. So can you touch on that?
Absolutely. And I think, you know, I touched a little bit on this with the natural beta, what what does it mean? And the paradox that that you have to think about is that both usefulness lies in its uselessness isn't it industrial metal, because, like one of the draw downs, and one of the pushback that you always get when he talks about gold as an investment, you get the pushback that gold is not productive. And it is not productive because it is so dense, it is so heavy. And it is also scarce, but doesn't occur in nature, like in abundance. What this means is that it doesn't because you can't consume it. You ultimately what I mentioned before is you don't it doesn't get consumed in industrial processes. Only 7% of annual gold demand come from industry that those are the estimates. So you don't use gold, you don't use gold, such as like copper, or iron ore or oil. You don't consume it that way. You also don't consume it the same way you would use actually like silver, or the platinum group metals, which are used in cars, because silver still has some industrial uses. And photovoltaics and other like industrial applications, or like solar panels. But all this sits a little bit outside of this. So the I would say the you know the fascination for gold is not that it's that it is shiny, like for us as humans because it is ultimately shiny. But it is also the fascination for gold because it has been for so long on something that was regarded as a currency as potential money. Yeah, right. Think about it like 1000s of years ago, either was jewelry that people like was jewelry, or stored, or they even like even stored and see as investment or store a central bank vaults. Right. So like the demand profile for gold is quite unique, the physical demand profile. Right, right. And it sits outside that architecture.
Yeah. And I think all throughout history, it's, you know, it's been portable as well. So because it's very dense, you can transport a lot of it in a small place. Right? Like so, or, or, you know, if you had a lot of jewelry, you could escape your country wearing all your jewelry, right. And you take it to a different country, and it's worth the same amount of money. Right. So well, that's really, yeah, that's really interesting. So let's, let's drill down a little bit deeper on the characteristics of gold, right. So so, you know, you know, gold is really, you know, its characteristics. It feels like for 1000s of years, it's been a quasi currency. Right? So what why can you drill down on why that is?
Yeah, so I think one of the important things is it has a long history and doesn't rock rust or tarnish, right, an ounce, an ounce of gold that you might own today or go jewelry that you might own today may have been mined like either yesterday or it might have been mined like 500 years ago, we just don't know it can be endlessly recycling. Right? So but within this context, it has also stored for a very long time as a store of value. And there's a very good book Jeremy out there. The flagship book of Roy Jastram, and Roy Jastram in his book, The Golden Constant showed that from 1560 to 2007, gold maintains its purchasing power. So the period of 460 years, he showed that gold was a store of value. Now, there are two different periods within this because until 1971 here in the United States, remember that gold was fixed at $35 an ounce. So before 1971 Gold was either money or closely linked to money, and in times of inflation, meaning when prices rise, the value of money for. So it's therefore not surprising that when you look at the data to 1971 in contrast with the to the current experience, that the purchasing power of gold tended to fall in times of inflation, for example, during the Napoleonic Wars or, and vice versa, it rose during times of deflation. So this was until like, 1971. What do you what you found now after 1971, the picture changed and there was almost like a paradigm shift, where gold traded more in line with inflation with real rates over over over long periods of time. So this is important to remember and for instance, for your for your listeners. In the gold industry, there's there's a saying that an ounce of gold bought you a nice suit 100 years ago in London. Yeah. And I would make the argument yes, that for $1,900 an ounce today, you may actually get also a nice suit. At the department store.
I if you're if you're me, you get for I can get value, I can get four suits for $2,000. So that's okay. So then, so then you mentioned real interest rates. So what are the drivers are gold like so if somebody said well should go should gold go up in value in the future should go down in value in the future, give us a give us a starting point of what people would look like look at.
So while I well, I don't have a crystal ball for Jeremy. And I don't know what will happen in the future, I can give you some some drivers of gold prices. And one of the drivers there are actually four buckets that you may think about. And one of them is currencies. So think in gold in terms of currencies when you do not because gold can be denominated in every currency worldwide. Meaning you can think of gold in US dollars, you can think of gold in euros, you can think of gold in Australian dollars. What this means is, though, that gold because the unit of account is always constant, it's always an ounce of gold. When the gold price rises, it's not that the gold price actually rose, it's that the underlying currency depreciated. Right, and vice versa. So say, an ounce of gold in the past was $1,500. Now you have to pay $2,000 for the same ounce just as a hypothetical example. What that would mean is, well, it's not that gold that appreciate it, it's that you need to put more money to buy the same ounce of gold. So hence, your currency depreciated. So currencies are very important. The context.
Yeah, in a lot of a lot of people talking about the Fed and the creation of money, and QE and all this stuff that's going around around the world to create money and expand the money supply, would in in theory as a whole, cause all currencies to be worth less. And that's what we're seeing today with inflation, right. And so then the gold is the gold or the inflation is kind of the constant and the currencies are either depreciating or appreciating relative to that.
Absolutely, and very closely linked to this is actually the second bucket, which are economic variables. And what we have seen for the long term, medium term, and also with like, with some, some deviations here and there is that real interest rates have been a very good explanation on where gold prices are headed. And gold has benefited from a decline in real interest rates. And remember that real interest rates are the difference between a nominal interest rates and inflation. And real interest rates represent the opportunity cost of owning gold, because gold is an asset and no one's liability, hence, it doesn't pay a yield, because there's no counterparty to it. Right? But gold can be very expensive, Jeremy when say, real interest rates are 2%-3%. Because then you actually have forgive giving up real interest of 2 to 3%. And you're owning something that is yielding you nothing.
Quote Unquote. That makes a lot of sense.
So real interest rates have been a very good explanation, albeit with some aberrations and like in the short term, and sometimes in the medium of the equilibrium price of gold.
That makes sense. Well, what are real interest rates today?
Today they actually negative and Jeremy we have seen them negative for since COVID broke out and you know, they're like right now as we talk here. They're like negative 50 basis points. Right? So you are in an environment where in real terms, you're, you're actually losing money. And the question is, right, these are the tip Co. That are 53 basis points negative. The question is really like, looking at CPI and other numbers, what is what is real inflation out there? Right. I think that's a that's a bigger question that we may postpone for another day.
Yeah. So if interest rates are below inflation, storing money in bonds is losing to inflation. Therefore, that's to be more emphasis to store your money in gold, which doesn't lose to inflation.
Excellent. You got it. That's exactly that's, that's that's the point here as a very good bucket. So think about real interest rates.
Yep. All right.
So, you know, I've always thought that the depreciation of money or the expansion of money, and then real interest rates would be the two things that I would be researching if I wanted to determine some sort of equilibrium price of what gold should be. So that makes a lot of sense to me. So, absolutely. So when you own a portfolio, right? Most people want a portfolio, they store their money, they do not, but not many people store all their money in the bank anymore. Most people have what's called a custodial account. And when they go into their custodial account, they can buy stocks, bonds, commodities, cash, managed futures, and all sorts of other things. So what is the role of gold in a portfolio? In a portfolio setting where you have lots of different assets?
You have a lot of assets. And why does Postigo actually believe and make an allocation, a strategic allocation to it? So let me give you a little bit of like background here. So I think like Jeremy, if you're a long term investor, you may want to own productive, well positioned businesses at sensible prices, right. But the question for financial advisor for an investor always arises, what do you do to diversify? And is there a way to potentially hedge some large equity corrections or unexpected bouts of inflation that we talked about? Right? And simply put, you can use gold for its potential hedge characteristics and diversification benefits and a portfolio right. So I talked a little bit about like that gold maintains its purchasing power over long periods of time. But in the long term since 1971, Jeremy, what do you have found is if you analyze the data, and again since 1971, because 50 years ago, a little bit over 50 years ago, this is when gold started trading freely, because before that it was fixed at $35 an ounce, what you find is that gold returned around 7.8%. Annually, stocks as measured by the s&p only the price return, yielded 8% per annum. So gold kept up over the long term with stocks, the price return of stocks that as Jeremy This is a very important distinction, because this is not the total return.
Right. But now, you know, that's only 50 years max, I think we need another 50 years to feel confident that gold can appreciate with rising prices.
But but but the rule of thumb, here Jeremy that you actually pointed out is that M2 growth, and M2 is the aggregate money supply for this time, appreciated by 7.1% over the last 50 years to give you like the full picture.
All right, hold on, hold on. So over 50 years, what we've done here in the last 50 years is we've deflated or we've increased the money supply or deflated the value of the dollar by 7.1% a year. Coincidentally, coincidentally, I say that in jest, the price of the stock market just the price of the s&p 500 over that 50 approximately year period has returned seven point or 8% 8%
Yes, of which 7%
was just expansion of money in theory if you make a linear Yeah. And gold did the same thing. Because gold it basically is your hedge against the expansion of money. So So over the last 50 years, did we do anything here like or did we just deflate currency and inflate prices?
So let it sit for a second because it's a very good question for a moment here but this is exactly the jist because it's I mean, stocks did much better like if you look at like the dividends that they share buybacks then A lot like, you know, like, lower double digits. Right. But importantly, I think what what the mental model here is Jeremy. And this is like what you highlighted is if you have something that is in short supply, such as gold, or another basket such as equities. And if you deflate the currency by 7%, then those people, assuming it isn't short supply should bid on the same basket of goods, and the same proportion. So this is why it actually works over so long periods of time. Because think about it, you are depreciating the value of money by 7%. But then gold increases by 7.8%. So it actually maintain that purchasing power that we talked about before. And we're very long periods of time. And this is the important factor here. Now, you can say, well, it had fluctuations during this time, which is very true. But over long periods of time, this is what what you want. As a long term patient investor, it's very hard to trade gold or any other asset class tactically. Right. Right, and make up make a timing decision when it might go up, or it might go down. But this is what the data that we have, and this is the data that we work with today.
Yeah. So so as a portfolio manager, I can say, well, I like to own stocks, because stocks have a natural growth driver, right? They have the economy, they have sales, margins, and earnings. And every year, they become more valuable. As long as a company, you know, makes $1 and has $1 worth of new sales, it's more valuable than it was last year, right. And so it doesn't matter what the stock price is doing. The companies are constantly becoming more valuable. And I want to own as many of those as I can, but I know some investors are risk managed. And they might want something as a diversifier against their stocks. And this is where it gets really tricky, because most diversifiers do not have a positive expected return. Most things that are completely different than the stock market have a very low return profile, right or negative return profile, you've usually short stocks, you're basically have a negative expected return. And and so gold is basically as long as the money supply continues to increase, and we continue to have an upward sloping inflationary environment, then, in theory, the value of gold over long periods of time should grow. So So now I've got a hedge that actually has a positive expected return.
And that is absolutely correct. So I will call it it's a it's a relative hedge and a potential hedge. It's not an absolute hedge, because but your your idea is absolutely right, Jeremy, because usually hedges cost you. That's right here you have a potential like an asset class with potential hedge characteristics. And I can talk about like what it does in market drawdown. But it shows long term appreciation real returns for the patient investor,
right. So if we have logic that tells us that it should have a positive expected return over long periods of time. And we can also see that it is clearly different than owning equities. And it's a hedge against inflation. It sounds like it's a portfolio a powerful portfolio component, the final component to be the most powerful portfolio component would be does it go up in value? When your growth driver, ie your stocks go down in value? That would be the final thing to make it a good, you know, a very good hedge.
And yes, it does. You hit you hit the nail on the head, Jeremy, because if you look again, from 1971, to today, and you look at all the draw downs of the s&p 500. Take the draw downs of the s&p 500 from peak to trough that are larger than 10%. An arbitrary number, but say 10%. And you look at like, what were the returns of the s&p 500 During these periods? You're not timing it, you're just looking at it like a peak trough larger than 10%. That's the screen that you're putting on. And what you find is that stocks as measured by the s&p 500, here, were down 26% During these periods, okay.
On average, however,
on average, yes, that's the the geometric return. Looking at gold, the question is, does gold behave better than this? And does it have those diversification benefits that we like alluded to, historically, does it like, Can we back it up? And yes, it can because gold is Increase by plus 3%. Right, just going to stop here. So you have the market that has declined, on average 26. Every draw down larger than 10%. But you have gold in the same period, that increases, relatively speaking, its purchasing power during these drawdown. And it increases by 3%. However, over very long periods of time, it also compounds at 6.8%, over the 50 years that we talked about.
Yeah. I mean, it's, that's an excellent synopsis of it, we, you know, we're always looking, it's, it's, you know, most people are allocating their money, and they mostly want to own stocks, and then they say, I want to risk manage my portfolio, and then that's when the conversation becomes really difficult, right? And so, so say, for example, you know, it just today, I'm going to add a little color on hedge value today. And that traditionally, most people during a fall, you know, after 40 years of falling interest rates, most people's hedge is in bonds. And most people really don't even think about it, they just buy an index fund, right? So a lot of people are in or just indexing their bonds, they own the the bark, Barclays AG, or the Bloomberg ag index, maybe in an ETF and they say, Hey, I'm, I'm balanced, I'm diversified. I've got bonds, but this last quarter bonds are down more than stocks. And specifically, the, the intermediate bonds, were kind of really the worst. And so I think people should be really thinking about the way they are diversifying their portfolios. And was that the, is that going to be the right way to diversify your portfolios? If there's inflation. And if interest rates are sort of reached their bottom, and maybe are going to have a different path going forward? It's going to really be it's going to be hard to manage risk in portfolios. So, okay, so you manage the portfolio you manage owns bullion, and miners?
So how do you choose between one or the other? Is there a percentage? Is there a ratio you keep? Or does it shift?
So it shifts? Yes, it does. But the premise, Jeremy is to get exposure to favorable ounces. And by favorable ounces, we mean, what is the cheaper way? What is the most like, the most favorable way? And the cheapest way to own these ounces? Is it through Boolean? Or is it through the miners? And now, let me make also the distinction between those two, because bullion tends to be viewed as one of the safest forms of gold ownership, because it has the least risk, right? It's an assets that is already like out of the ground that has been extracted, but free and clear of mining. And that's important, and it has minimal counterparty risk, right. But, but we like to say that gold in the dirt, Jeremy may be as useful as gold in the vault. And it may be a sensible thing for an investor to to allocate to a mining entity with a margin of safety, given the runoff of the miners reserves, right. So if you can get if you every miner has multiple mines, or just a couple of mines, and those mines have reserves, reserves are the is the mindful universe of up in the ground, so to speak. So what are the reserves of the miner at that particular mine? And if you discount those, and you have, and you can own the company at a margin of safety, meaning cheaper than what the trades in the market, it might be actually good for you to allocate to that miner, right?
Yeah, so that's actually looking at, it's a brilliant way of looking at it. So if you owned a gold bar in a vault, it's clearly a gold bar out of the ground, but the miner owns the gold is just in the ground. And so if you say the gold in the ground is extremely inexpensive, and the gold out of the ground is extremely expensive, you would want to just buy the minor for their reserves.
Exactly. And you do that at current spot. And you did that Jeremy has current spot prices. And what this means is you do not forecast the price of gold in the future. You just look at it. If the price today this very minute would be the price 1020 years out whatever that means, whatever how many reserves there are in the ground. Yeah. So you're kind of like creating a balancing act between the miners and the bullion and depending on where in the cycle where you are, if the miners are more expensive, or the miners are cheaper, you would want to allocate based on that, based on the relatively to the gold bullion price. And almost a counter cyclical, like application.
I, I love it, it's it's I love things that are, are just so simple. It doesn't sound like I mean, I understand there's art and a science to it, it takes decades to figure all this stuff out. But it's a very simple concept, you just want to own gold, you don't really care where it is. Right? And you just want to make sure you get a good price.
You want to buy it at a good price given also the idiosyncratic risks that potentially come with the mining entities or the royalty businesses because Jeremy mining is a risky business, right? There are operational risks, there are financial risks, there are technical risks. Value is directional risk. There are currency, capital inflation risks, there are a lot of risks inherent in mining. So you want to be very thorough when you do this analysis and make sure that there is that the Miner is resilient and has that duration in terms of the balance sheet duration and others. And judicious management team. So you want to be still thorough, it's not just about the price, but the price is also a big component in there. There's no question about it, because that's why you want to own those businesses.
Yeah. So you just want to make sure that if you're if you're pricing the gold for 20 years, you know, if you're taking today's price extrapolating out 20 years saying if it's the same 20 years from now, what's the value of my gold in the ground, you want to make sure that that business entity is going to be in business at that time? And then furthermore, that they can efficiently get it? Right.
You put it much more eloquently than I could Yeah.
I imagined some of the gold. I imagine some people say yeah, we've got lots of gold and you go well, where is it? Well, we can't get out of the ground. It's just too deep, or it's just underneath. It's underneath a you know, uranium mine or some I don't know, I imagine there's places where you just can't even get the gold. So Well, on that note, this just kind of jumped into my head is is Russia a producer of gold?
Yes, Russia is a very large producer of gold. It is the second largest producer of gold after China in the world. Those are the numbers that we have. And that we know of. Yes. But the short answer is yes.
So will you know Russia is sort of, at least for now. Looks like it's been canceled, like canceled? I mean, I'm not making light of this. I mean, I think this is a very serious subject. But, you know, it seems like a lot of their businesses are offline and, and the rest of the world is not going to do business with them. And, and maybe rightfully so. So not to express an opinion but I'm very proud of those Ukrainians I just just so proud of of their defenses. So if we does that mean Russian miners are sort of off the grid now, or, or is this is gold, such a long asset, long term asset that it's okay you don't need to account for that, the second largest producer of gold is really kind of maybe out of business.
So, yes to both first of all, the above ground supply of gold that sits in above ground stock that we discussed before is around 60 times annual production.
So 60 years 60 years worth of
exactly. So, when you when you think about that, and in simple terms, what you will realize is that a production shock will be less pronounced and result in a price shock compared to other asset classes. For instance, let me give you an example. If you have crude and you have 90 days of inventory of crude sitting in above ground like storage, a supply shock either direction can have very impactful effects on the price right. For gold, because you have it in above ground supply. That is not the case so much. But it is true also to what you said that the largest six Russian refineries have been sanctioned and banned from selling gold into the public markets to like either the LBMA the London association of the bullion or the CME Group here in the United States, which is, you know, the Chicago Mercantile Exchange and the other exchanges that form part of this group syndicate. So, there is less gold coming out. But it still does mean like that gold doesn't get produced in Russia. Right, because most of the, like, the most of the mines, like they haven't shut down. So in Russia itself, it's still business as usual, so to speak, except that gold cannot be sold in the public markets.
Yeah, but I guess that's not a huge impact, because there's no immediate demand for gold other than asset ownership. And, and, and gold hasn't kind of an infinite life. So they can and it's so it's just like being stored in a central bank in New Zealand, or wherever else it really, it's not being traded. It's not flowing anywhere. So it's, it's, it's not like you have to reduce the available supply. Because it's better through Yeah, I understand. So
it can be so bought by law, it can be so bought by the Russian Central Bank or, or other like local entities. Yeah, totally. Like, we don't know, at this point, we don't know. And then where that gold is going at this point.
And as with, as with oil, it's very hard to trace. They find ways to move it around. And then all of a sudden, it's coming out of a different country and you don't know it's, it's gold from Russia. Okay, so.
there's this new thing? I've heard about it. I think it's really hip with the cool kids, but I think it's called cryptocurrency.
So is crypto digital gold, right? You hear that all the time? Well, it's an inflation hedge or it's not stocks or and it's a it's a hedge against currency. It's, you know, there's lots of stories on what it is I think it does a lot of things. I think there's even a crypto ATM, I'm still not sure how that works. But, but so I think a lot of the natural buyers of gold people who would like to protect themselves against inflation, protect themselves against increases in in fiat money supply. And to hedge their portfolios. I think a lot of them have turned, it feels like a lot of them have turned to crypto to crypto currencies, for that hedge. So is crypto digital gold? Does it serve the same role?
The simple answer is we do not believe so. I do not believe so. Jeremy. And let me let me expand a little bit on this to make it clear. I think they're complementary assets, but they're not mutually exclusive. Right. And the appeal from individual investors towards Bitcoin, I think rests on the high returns that it has been able to deliver, right? And think about like an early adopter, like a decade ago, that invested in Bitcoin, and that may have been like the investment of his lifetime, because the life changing investment. However, what is often overlooked in this in this timeframe of like, a decade plus is the difficulty to achieve those returns because you had in 2013 and in 17, you had drawdowns larger than 80% a zero in Bitcoin. So just think about like, would you stomach that? Would you effectively stomach that putting $1,000 in having less than 2200 outdoors 10,000 in and less than 2000 at one point or another? Now if you have held full time, then yes, I would have been again like you you would have been like rewarded long term. And you get ahead with your investment in Bitcoin compared to gold. But again, when you think about like what Bitcoin is compared to what gold is, I think for your listeners and for yourself, the easiest way to think about it is that Bitcoin is a risk on assets. Right? It's very similar to a growth stock. And gold is a risk off asset that trades more like a currency when we're the net dynamics are driven by real interest rates as we discussed before, rather than tweets or the acceptance of holding that Bitcoin in your wallet because that's what we have so far. So I think Urmi grant, but Jim Grant, excuse me, put it, I think, best at one point, and he said that the price of gold is the inverse of confidence in the system. So when confidence is high, you'd expect the price of gold to be low. And then vice versa. Right? And I think that's like, that's the way you would differentiate gold from Bitcoin. Remember, Bitcoin is a man made construct there is, I mean, there are a lot of there is a substitute threat out there, versus gold, which is a unique asset. And a unique element on the periodic table. So if you will, one is nature's currency. And the other one is the manmade currency. Yeah, even though they share similar characteristics and should actually do well over long periods of time in volatility goes down, given that the volatility goes down. Again, true, with the passage of time,
well stated. So
think about it, like, think about it, like this way, I think it's more risk on versus risk off. And you saw this also in 2020. Bitcoin was down 50%, more than 50% from it from its peak at the onset of COVID. And I think, during that time, only crude oil performed actually worse. But it's not to say that afterwards, it really increased in price. And you made up handsomely for like for that, for that temporary loss during that period of time.
Well, in the in the, in the COVID, explosion of risk seeking, a lot of things made a lot of money. All right, so on a final note, I you know, I'm I know, we mentioned the war in Ukraine very briefly, and I want to get real deep into it. It's, as you know, for me, it's tragedy, and I just, it's just painful to see. But I did notice that you're also a defense stock analyst, at least in your history. So do you want to comment on No, on any input, like, maybe sticking to economic implications of the war in Ukraine? And and what, you know, any implications on the economy from that? Sure,
Jeremy, I think, you know, the implications are that, simply put, I think that this may lead to inflationary pressures when we least need them. And what do I mean by that? Just think about that Russia and Ukraine, we talked about Russia being a large commodity exporter, especially in Mikasa gold, but it does also other commodities. And Ukraine is a large agricultural exporter. So coming out of like, you know, the last two years, it seems like, you know, we have this potential inflationary shock when we least needed because we came off the labor shock, and the supply chain shock. That came from COVID. But now we have all the sanctions put on Russia, and we also see corporates pulling out of that country, out of the country. So these soft sanctions may potentially lead to more inflationary pressures. But also, like the derivative of that is just that, that, that this crisis may lead to more like defense spending, right, in Europe or other countries. Because you had like, even like in the UK, you had, like, you know, the political party as labor that called for an increase in defense spending, and the defense budget in response to this war. So the question is, will this ultimately leads to even like and accelerated this, this issue that we have, because the war, most of the time is inflationary, by definition? Right. Right. And so all of these, like, play into this, this bigger picture of maybe a paradigm shift that we that we see and that we're currently in and you know, in hindsight, we may be able to say, yes, this was this was the time when we should bend when the when the writing was on the wall, and how clear was it and today, like, the crystal ball is foggy at best, right? Now, let's say seeing the solid in the midst is part of an art that, you know, that that you see some of these things. The second I think change, you see, it goes from the 1% to the 99%. It goes from Wall Street to Main Street that goes from wealth accumulation, potentially to wealth distribution, from inequality to inclusion, right so and also maybe like, this war and The COVID just made the idea of isolation rather than globalization a little bit more clear to corporates, meaning I can't depend on receiving my supplies just in time. Right? Maybe it makes sense to either produce them myself, or carry potentially a little bit higher inventories around. Right. So it's a it's a very fluid environment, I think. And, you know, we're thinking out loud here with you, Jeremy. Yeah, as it's as it's a complex situation, rather than a complicated one where the where the solution is, is not clear, because anything can happen at this moment in time.
Right? It does, it does seem like initially, inflation higher for longer. It does seem like defense, defense budgets have been shrinking all over the world. And they'll probably be increasing. And that tends to be fiscal stimulus, right? Because the government pays for the military equipment. So if the government's are essentially going to borrow more money, and just pump it into the economy, which is, yes, maybe thought of as inflationary as well. And, and, and then finally, I think, yeah, I think a lot of people are talking about onshoring. Now, which is this, you know, as globalization reached its peak. Right. And, and just pulling back on globalization is going to be an expensive proposition, right? So to build factories here in the United States, it takes years, yes, it's expensive. We have a worker shortage, we have high commodity prices to onshore all this stuff is going to be a huge CAPEX expenditure. Which could be a hit to earnings or it could be a boom to the economy, it's hard to know which side to fall on, you know, is it? Is it a boon to the economy at a greater level than it is to the hit to the earnings? Right? We don't know. Right, right. All right. So Excellent. Thanks for that point. I know that was a little bit off script. But this is an unscripted podcast. Okay, so we've been on here about an hour. And I've promised my marketing people that we would make this 20 minutes long. So I've still never been able to do that. This these subjects, these two subjects deserve discussion.
Right? I mean, yeah. And I know, we can go on for much longer. Jeremy, we probably
it's, as we used to say, at First Eagle, Jeremy. Gold is, is a percentage of our portfolio, but it makes like, 90% of the question.
Yeah, there you go. Right, right. Yeah, I've just been traveling and giving presentations, and I've been talking all about the markets and interest rates and all that. But I'm not talking about what we do. And I'm not, you know, and we don't even really do a lot of prediction in markets. And yeah, so everybody likes to talk about markets, they like talking about gold. And, and, you know, and it's a really fascinating subject. So, so, all right, so before we leave, is there is there anything we missed? Is there anything you'd like to leave our listeners with any important message here any any piece of what we talked about, you think you'd be pulled out as a key point?
Maybe just to reiterate on on a few things that we discussed, Jeremy and I think if there are just a few underlying themes that I want to leave you and your listeners with, it would be that there are reasons to own gold and one of them is the long term appreciate historical appreciation for the patient investor, remember how we discussed that over 50 years compounded? Right? At 7.8%. And it was a relative hedge that didn't cost you. I think we discussed also like the diversification benefits and moments or you know, when when when the stock market and the risk on moves to a risk off environment. Think about 2008 We discussed a little bit also tooth 2020 and history overall. And just remember that it's it's a perpetual asset, right? It doesn't rot rust, tarnish, think of jewelry, when you think about gold, gold. Think that it's it's going to be here for for the future. And we're not gold bugs, but we just admit that being students of history, you just learned that this is something unique and unless we find something else, then we're willing to go there. around, but so far it's, you know, it's an asset that has been around with us. And we started as, as humans. So that's very important.
So when we talk about modeling asset classes, we talk about a it has whatever we're modeling, or whatever we are think to consider in our portfolio, there has to be a logical thesis, it has to make sense as a portfolio component. The second is it, it has to have history so we can understand its patterns and how it works and how it works with other assets. And thirdly, it has to have, it has to be proven in history, that it actually is a good asset. Right? Because there are a lot of there's, you know, today, there's just a lot of investment, quote, unquote, products, and a lot of thematic ETFs. And all of those things. And a lot of them don't bear out as actually being long term having a long term benefit for investors. And then finally, we have to believe that the relationship that we have determined is logical that has worked in history, that is modifiable, will continue to hold that relationship relative to other assets. And I think so far what we've talked about here is that gold fits those characteristics.
Yes, indeed. All right.
So this is great. This is super fun for me. I really love this subject. We'll have to have you back. You know, obviously right now we're in the middle of quite a quarter here. Although gold is performing well, and mining stocks are performing well. So this might be timely on that aspect, too. But I really appreciate all this insight. I think that this was fascinating. There was so much great information in here. And I just really appreciate your time. I really appreciate what y'all do it for steagle as you know, and and he's, you know, you've been a great business partner, great person to work with. So I really appreciate your time on the podcast. And hopefully we'll catch up soon.
Thank you very much, Jeremy looking forward.
All right. Thank you. I really appreciate it. Thank you.
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