We asked:
We asked:
00:00
blondemoney
Hello and welcome to the latest edition of BM Talks. My name is Helen Thomas. I am the CEO and founder of BlondeMoney, the macroeconomic consultancy. Delighted today to be joined by John Reade, Chief Market Strategist at the World Gold Council. And he is a 35-year veteran of the gold industry and I'm sure he won't mind me mentioning that. Hello John and welcome.
00:39
John Reade
Hi and thanks very much for having me on your show.
00:42
blondemoney
Now I think it's important to reflect on that time period because there will have been an awful lot of changes to the industry, some of which of course I'm sure we will get into in our discussion today. So let's … let's just reflect on the last sort of eighteen months where we've had a period of course that inflation has come back out of nowhere. It's often said of course that gold is an inflation hedge. Now, perhaps you can explain to us whether you agree with that or not
01:22
John Reade
Yes, it's ah it's an interesting topic and it's one that comes up a lot in questions. I would say gold is an inflation hedge. It's not the perfect inflation hedge and it's not the only thing that we would say that investors should have in their portfolio to protect them from the ravages of inflation but it certainly plays a role. One of the things I'd say is over the last twelve months we haven't seen a strong performance by gold despite the fact that inflation has been increasing and still is increasing but what I would say is that you got your performance from gold in anticipation of inflation. So if you look at 2020 the gold price was up 25% in US dollar terms and obviously we didn't have an inflation problem back in 2020 but rather it was reacting to the extraordinary monetary and fiscal policy actions taken by governments around the world to cope with the coronavirus pandemic and the associated economic turmoil that it was causing so I'd say gold anticipated the inflation, delivered a 25% return in 2020, and in 2021 hasn't performed as people might have expected if they were just looking at that year alone.
02:43
blondemoney
And so one of the other elements to gold that is often discussed is that it's a safe haven. Is gold still a safe haven?
02:53
John Reade
In part and a lot of these answers are going to be partly or a component or whatever because the nature of the gold market is very large and complicated with different aspects of supply and demand and different motivations for the buyers but certainly we do see buying of gold when there is geopolitical turmoil or geopolitical tensions. It has a longstanding reputation that it tends to do well in the run up to crises. Certainly the work I've done over the years looking at gold's performance in both Iraq wars is that gold was strong up until the war actually started. During the big troop build ups that we saw in the Middle East back then gold was strong and then when the US forces went in the first time gold fell because it was like it was all over in a couple of days and you know it's like what were we worried about I think the other point as well is that people may not necessarily buy gold to profit from geopolitical tensions. But rather if they're sitting in the market with short positions in gold and you're seeing troops massing on the border, the chances are you'll cover that short position. Not necessarily because you want to buy gold. But you're just worried that other people might do so and therefore you might lose money on your positions. But what I would say is that Gold is a much better protection against Financial Market turmoil compared to geopolitical turmoil. So if you look at its performance Um, during and after the global financial crisis 2009 through to its then all time high and gold in 2011 and then similarly how gold performed in 2020 during the coronavirus pandemic when it hit another new fresh all-time high, that is a much better way to think about its safe haven characteristics.
05:01
blondemoney
But how does gold fit into a portfolio when you're talking to people about the role it plays when they're thinking of allocating to gold. How should they think about it, it is partly a diversifier lower correlation etc. But what do you think if you know if you're a pension manager and you wondering and how to think about gold for the next twenty years how should they look at that for an asset allocation perspective.
06:16
John Reade
Well, the first thing I'd say is we make the case that gold belongs in virtually every portfolio at a strategic level as well. So often when we speak to investors they'll say oh we don't invest in commodities or I'm not worried about inflation I don't need gold or you know tactically I might buy it from time to time but I don't want it at the moment and that's certainly valid. That's a way of thinking about gold but the work we've done suggests that having a strategic long-term allocation to gold in your portfolio helps that portfolio in a number of ways. Firstly, gold has been a source of returns over the past twenty years which have been in line with or better than other asset classes. It's not just an asset that performs well during financial crises. Or in periods of inflation. It's delivered returns consistent with those of other asset classes. The second point and you mentioned it already was that of diversification. Gold’s not correlated very highly to other assets and it's basically got 0 correlation to equities and that's over the long run. But if you look at what happens during certain circumstances when equity markets sell off rapidly down by 2 standard deviations or more in a week that lack of correlation turns into a negative correlation. So you're now negatively correlated to equities which are falling.
07:56
blondemoney
How far back have you looked for this analysis?
08:04
John Reade
So back to the end of the gold standard back in 71.
08:09
blondemoney
You certainly couldn't be accused of not finding a number of different regimes within that period…
08:15
John Reade
No absolutely right? And I think what it's illustrating is the safe haven characteristics that we were talking about before - particularly financial market or safe havens from financial market turmoil. Although I'm sure there were also a few geopolitical incidents in there which caused equities to weaken and gold up at the same time as well. So you take those 2 characteristics, you take the characteristics of return plus diversification which works particularly well with its changing correlation when you really need it. You put those 2 together and we find that if you take a typical portfolio and it doesn't really matter where it is US, Europe, UK, Australia we've looked at portfolios in more countries than I have fingers and toes and in each case over the past twenty years having gold in your portfolio, an appropriate amount, would increase the risk adjusted return of that portfolio. So you would be contributing to returns and you'd be reducing portfolio risk which and that's the sort of diversification. That's the big free lunch in finance - diversify into assets which can help protect you and give you some returns as well.
09:25
blondemoney
So um, looking forwards and changes to the market. I want to ask you about crypto. Cryptocurrency which arguably has similar properties - I am told that some people consider it a safe haven for example, um, when a couple of years back we had threats from North Korea, the South Koreans apparently were interested in increasing their cryptocurrency holdings with the tail risk opinion that of course if you do go into some kind of dreadful nuclear war you're better off with something that sits in the ether that sits in the cloud rather than a physical asset sitting in a bank which may have been bombed. Now I fully appreciate there are people listening to this who just think that is outrageously ridiculous. But there're equally I know some people who will think oh yes, that makes a lot of sense and I try to be broad-minded when it comes to crypto and its advocates and how we look at it. So you know I've got an open mind here on this but how does gold then compare to crypto.
10:45
John Reade
If I was to be sarcastic I'd say well let's wait for a couple of thousand years and we'll find out. Gold has been around and has had the characteristics that I've been talking about in terms of its value and its safe haven characteristics for a very long time whereas crypto has been around since last Tuesday. Um, but in the 15 years or so the cryptocurrencies have been around, we're beginning to get a data series now that you can have a look at and that's becoming I think more valid now that greater institutional ownership or greater adoption of cryptocurrencies seems to have taken place over the last I guess what 9 years. Crypto assets don't seem to be that good, a safe haven in my opinion. If you look at how they performed early this year for example, um, when equity markets and particularly tech stocks were taking but a bit of a beating as people were readjusting their inflation expectations and their interest rate expectations, cryptocurrencies fell very hard as well. And if you look at correlations between crypto and equity markets particularly the tech stocks and in Nasdaq and the S&P and that correlation is probably you know, reasonably significant. Now I'm not here to criticize cryptocurrencies. That's not my job I work for the World Gold Council we talk about gold. But what I can say is that crypto cryptocurrencies are different from gold. If you go back to the argument I was talking about before about putting gold into a portfolio over say the last ten years so you can compare it with crypto, gold increase the risk adjusted return of that portfolio, somewhere between five and maybe eight ten percent. It increased the risk adjusted return on that portfolio. So that's good. If you do the same exercise with crypto assets say Bitcoin particularly since it's been around for a decent length for time. First of all, you end up with a much lower target allocation because of the very much higher volatility of Bitcoin. So say you end up with 1% in your portfolio and crypto assets. You also find it's increased the risk adjusted return of that portfolio which is good. It's what you want. But then you look at how it's done. Including Gold in a portfolio lowers the portfolio volatility and contributes to return. Including bitcoin in a portfolio increases your portfolio volatility and increases your returns by more. So yes, you're getting the boost to your risk adjusted return which is what you want but you're not getting it from diversification. You're getting from something which has performed very well but correlates more closely to tech stocks than it does to any other safe havens. So it's not a safe haven. It's been a source of return. It's been a source of volatility as well and that's worked out fine over the period. But you're not really diversifying. Not changing the characteristics of the portfolio in a good way. You're just taking on more risk which is fine but be aware of what you're doing.
13:54
blondemoney
Yeah, and of course actually getting exposure to crypto and potentially having to liquidate it in the event of some sort of tail risk is as it stands potentially still quite difficult and quite costly. How is liquidity in gold these days and how does it perform at times of stress?
14:22
John Reade
it's a great question and that's really important when you start talking about the benefits of putting gold in a portfolio particularly as a safe haven because you want to be able to buy it when you want but you also want to be able to sell it when you might have to. Gold is a deep liquid market - about one hundred billion US dollars of gold trades in markets around the world each day. About half of that in the OTC, the over the counter market based out around London and then good proportions of it on futures markets in the United States in China, Japan, and other markets around the world. Finally there's the exchange trade of funds as well. We monitor about 80 gold-backed ETFs around the world and their trading volume a day is probably 2-3 billion dollars on a typical day. So small components of the overall liquidity in the market but the way the ETFs are designed, you actually can tap into the underlying liquidity of the gold market as well. So that shouldn't be seen as a hindrance when investors are contemplating buying ETFs.
15:34
blondemoney
Actually I'm going to ask you about that in terms of the best way to gain exposure to gold - does it depend on the kind of institution you are? Would you tell a retail investor to do it in a totally different way from a massive pension fund?
15:50
John Reade
Yes, sort of but I'd also actually want to know what they're owning gold for. Some people want to own gold because they're concerned about the stability of the financial system and in that case, they are best placed to own physical gold and probably remove it from the financial system. Um, so we tend to see a lot of demand for gold goes into small investment bars and coins and that's the emerging markets. But it's also in developed markets as well. Some countries like Germany for example and the United States buy a lot of physical gold. But I'd say to people I'd only do that if you're prepared to pay the premiums that you do for these physical investment products over the underlying gold price and that you're doing it because you're specifically concerned about stability of the financial system. If you’re comfortable with the stability of the financial system, there are other ways that you can gain exposure to gold with probably lower costs. Futures markets as I mentioned before are liquid and very transparent in terms of their trading. Then there's the exchange traded funds which are generally listed on stock exchanges around the world. You can look at a total cost of ownership depending on how much you've got and how frequently you're trading - generally speaking the ETFs workout cheaper than trading futures. That's certainly been the case over the last couple of years. And then for a very large institution that wants to hold gold for a long time, they can probably open an allocated bullion account with a financial market counterparty. The costs of holding gold under that are probably the lowest of all and effectively what you've got is a safe deposit box with your gold in it. So if the financial institution were to go bust, you don't lose access to your gold so you don't have credit risk through an allocated account. So there's lots of different ways of gaining exposure to gold whether you want financial markets exposure whether you want the pure security of having you know gold coins and bars whether you want to play via the mining sector. For example, there's lots of listed gold miners around the world and a lot of people get their gold exposure through miners instead of actually the underlying.
18:02
blondemoney
You just made me think about the physical holding of gold and the pandemic and the shutting of borders and restrictions on international travel etc - has that had any impact on the movement of gold around the world? I guess I'd be talking about Central Bank holdings, very large physical holdings. How did it impact the market?
18:35
John Reade
The gold market like every other market was heavily affected by the events in 2020. The way to think about the gold market is don't forget the mines over the world producing some 3,500 tons of gold a year and they need to be able to sell that. So the logistical challenges started at the mine gate in the middle of Africa or Australia or whatever and you had to get that gold which is not in final purity form when it leaves the mine that has to get to a refinery to be turned into pure gold and then into the products that people want. And then from the refinery it needs to get either into the jewellery manufacturer or the central bank vault in London um, or into one kilogram bars that go into the Indian gold markets… you can imagine with all the with all the difficulties that we faced in the pandemic, the free flow of gold, like the free flow of everything else, came under a lot of pressure. Gold travels around the world on planes because it's highly valued. Um, and that usually means that it can get through relatively easily. But not if you close down 90% of the air traffic. So there were times last year when refineries were unable to source the product from gold mines and they were unable to ship their finished products to where they wanted to go. Well, it caused me one of the most exciting times I've had in the gold market in terms of terms of trying to work out what was going on and what it meant for the price and what was the outlook. Um, it's all calmed down now pretty much. There's another thing to bear in mind as well though - it wasn't only the wholesale movement of gold around the world. But it was the ability of people to go to the shops and buy gold jewellery or the ability of people to have weddings in India where there's tremendous buying of gold as a gift at the wedding and then suddenly these weddings weren't taking place because the economy was locked down so the last two years have seen probably the biggest change in the makeup of supply and demand in the gold market in my entire career. 2021 came back more to normal and I expect 2022 will revert to more normality as well. May you live in interesting times.
21:14
blondemoney
So in terms of getting back to normal… if we take it as an index of 100 just before the pandemic struck, are we yet at 95 as we're currently speaking?
21:27
John Reade
Um, in terms of mine production. We're probably back at 99 in terms of overall demand I don't know maybe 97, 95 there's still a few important markets that are getting disturbed from time to time. But yeah. 95-97 per cent in terms of the balance of gold demand though. Um, we're probably somewhere about I don't know 80-90 percent and what I mean by that is gold demand divides up into consumer demand so jewellery and electronics, mostly jewellery, then into investment demands so bars and coins exchange rate of funds and other products etc and then the central banks on the side. In 2020, we saw a collapse in consumer demand because people couldn't get to the shops to buy jewellery weren't having the events that require them to buy jewellery. And maybe they'd lost their jobs or were worried about losing their jobs. Electronics demand fell as well because you know the global economy went into recession at the same time investment demand was really strong particularly for ETFs but also for bar and coin as well. So that was a big disruption, a big change, in the makeup of gold demand back in 2020. In 2021 we came a long way back. So a big bounce back in in consumer demand for gold investment demand still remains strong particularly on the bar and coin side but bit of outflows actually from the ETFs. But bar and coin demand strong. And I'm guessing 2022 will see that normalization of the gold market go hand-in-hand with the normalization of the economy. So consumer demand continue to recover investment demand um more like normal and perhaps elevated as people are concerned a bit about inflation. That's probably going to be the most important thing I think for financial markets in general is how the inflation period that we've got at the moment plays out and how are central banks able to tackle it and as I say I personally think the Jury's out on the ability of Central banks to tackle inflation to the way that they confidently ah talk about but you know other people I'm sure have been on your program would have spoken lots about that.
24:09
blondemoney
So turning finally to central banks who have famously always I believe had gold in their balance sheets. How are their holdings looking these days. What is the outlook from how central banks deal with gold.
24:23
John Reade
Yeah, central banks have had gold as a component of their foreign exchange reserves well forever I think since there's been central banks. We spoke before about my 35 year career it's probably been one of the biggest shifts that's taken place over that 35 year period. In the 27 years I think it was in the run up to the global financial crisis central banks on a net basis had sold gold every year, traditionally the developed market central banks. So Bank Of England, Banque De France, Australia, Canada and, the Swiss National Bank etc. They had had a tremendous amount of gold at the end of the gold standard. It made up a very large component of their foreign exchange reserves. So they were selling gold particularly through the 1990s and perhaps a lesser extent through the 2000s but then the global financial crisis came along and they realized that this barbarous relic that they had in their international reserves actually had no credit risk. Unlike all the government bonds that they'd bought that used to maybe I don't know yield 4, 5, 7 percent were now yielding zero and we were concerned about countries defaulting. So the developed market central banks stopped selling at the same time emerging market central banks who had amassed enormous foreign exchange reserves since the Asian financial crisis but hadn't had those enormous reserves at the end of the gold standard so they didn't have any gold or didn't have much gold in their reserves and then they're looking at this big pile of money that they have sitting on their balance sheets thinking, well, now, we've got all this credit risk now we've got all this these low interest rates developed markets central banks have got gold. We should have some too. So since 2010, we've seen central banks now on a net basis buy gold each year. And the quantities that have been bought and the diversity of central banks that are buying, it has been very widespread. Now, 2020 saw a bit of a slowdown. The turmoil that was being caused by the pandemic meant central banks had other things to worry about in many cases, weak currencies, capital outflows et cetera. So they weren't topping up their gold reserves to the same degree that they'd done in previous years but in 2021 they came back to the market and added decent quantities of gold to their reserves again. And we saw all purchases from central banks that we really didn't expect to see. Um so Thailand bought gold you know highly influential in and the ASEAN Southeast Asian region. Brazil, ditto for Latin America. We saw another purchase from Hungary. But then we saw even Singapore a now developed market come in and buy gold for the first time in a long time and again I think that's really relevant. Singapore is seen as a poster child I think by many emerging markets - this is how you stop being an emerging market and you grow your way out of it and become a fully functioning developed market. So very interested to see that as well. Now one of the things we do at the World Gold Council is we speak to central banks regularly about gold and we've got decent relationships with almost all of them. We have conferences. We have we undertake annual surveys. We publish research on it. Based on the conversations that we're having with central banks we are quite quietly confident in saying that we would expect net central bank buying to continue for the foreseeable future. I think that lots of central banks that have been persuaded by the performance of gold. It's an asset you can have in your portfolio that helps protect you against the turmoil that's caused by these events and it's a diversifier and particularly while global interest rates and bond yields are so low. The opportunity cost of holding gold is pretty low too. So I think I think gold will continue to have a role in Central Bank Portfolios and think of it this way as well. The International Monetary Fund allows you to have financial assets like government bonds bills cash etc. As part of your international reserves. And it allows one other thing and that thing is gold. Not oil, not copper, not steel. It's gold. It gets to count it in where it matters, which is at the IMF.
29:04
blondemoney
Yeah, very good point. Well look. We are running out of time now and I think I will have to draw this to a close but always happy to hear about your quantitative analysis and I'm sure that the World Gold Council have done lots of reports on that about the actual basis point addition it can make to your risk adjusted return for those of you who like me like to dig into the to the geeky side of this. John there is all that sort of thing probably on your website I suppose?
30:01
John Reade
Absolutely we've got a comprehensive website called https://www.gold.org/ and a section on it called Goldhub which has all our research data some tools that can help you optimize your portfolio and work out how much gold you should put in it. Um, and also evaluation model as well which can help you think about what long-term returns you should expect for gold when you're building an asset allocation model. So I would encourage you to go along there. It's free to use just requires registration. The first time you go there and it gives you an opportunity also to ask us any questions that you'd like help with and. We do partner with lots of investors to help them include gold within their portfolios and some of the pros cons and methodologies of doing so. So please be in touch with us there and that's gold.org and Goldhub is the data and research and tools section.
30:48
blondemoney
That is a brilliant website gold.org I noticed that in your email address John I thought that is an email address to really be keen on at gold.org. Well look thank you so much. This has been great. My name is Helen Thomas if you want to discuss any of this with me or if you have further questions you want to put through to John then please email me at helen@blondemoney.co.uk or as always I am on Twitter @marketblondes and always keen to engage on there. Do you use Twitter John?
31:18
John Reade
I do yes. jreade@worldgoldcouncil. I enjoy Twitter too. Although I have to bite my tongue a few times as I'm sure you do.
31:28
blondemoney
That sounds a sensible way to approach it. Well it thanks for your time John thank you everyone for listening and um, we will be back with our next edition of BM Talks soon. Thank you.
31:35
John Reade
Thank you very much Helen.