The Pomp Podcast - #623 Is Gold Failing As An Inflation Hedge?

Starting point is 00:00:00 What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Hey, guys. Today I'm analyzing gold performance over the last 12 months. Then I evaluate the pros and cons of the asset. I compare the performance to Bitcoin and real estate. And I ask the question, is gold's narrative falling apart as an inflation hedge? You can watch more segments like this every day on our new live show, The Best Business Show, which is streamed on YouTube each day from 11 a.m. to 1 p.m. Eastern. We're going to keep experimenting with various types of podcast episodes, so please tweet at me and give me your feedback

Starting point is 00:00:39 on whether you like these types of episodes or not. Before we get into today's episode, I want to talk about our sponsors. First up is Circle. Circle is a really interesting business in the crypto industry. It's a global financial technology firm that enables businesses of all sizes to harness the power of stablecoins and public blockchains for payments, commerce, and financial applications worldwide. Circle is also a principal developer of USD Coin, USDC, which is the fastest growing, regulated, fully reserved dollar stablecoin in the world, now standing at more than $15 billion market cap and adding nearly $300 million of net new digital dollars in circulation every single week. The free Circle account and suite of platform API

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Starting point is 00:02:38 dollars, euro, and yen. LMAX Digital, if you're a retail investor, you've probably never heard of them because they only serve institutions. That's why they're the number one institutional crypto exchange they do billions of dollars per day of trading lmax digital secure liquid and trusted learn more by going to lmaxdigital.com pomp again lmaxdigital.com pomp all right let's get into this episode comparing gold bitcoin real estate and what is the true narrative of an inflation hedge i hope you guys enjoy it anthony pompliano runs pomp investments all views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investment. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to

Starting point is 00:03:23 make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. We're going to talk about Bitcoin and gold here because I found a very interesting chart yesterday that I want to make sure that all my friends know. So last year in March of 2020, there was liquidity crisis. What that meant was everyone was scared. They sold all their assets. They wanted dollars. And so all these asset prices sold off. Bitcoin went down 50% in a day. Gold was down like 15%. Equities were down 30%, et cetera. Everyone wanted to know, is the government going to come save us? Is the government going to step in? Central bank's going to step in? Are they going to intervene in the markets? They did.

Starting point is 00:04:01 When they intervened in the market, every single investor had asked themselves, okay, now that I know that the government is going to step in, they have two emergency rate cuts. They're going to put interest rates down to zero. They're going to pump trillions of dollars into the economy. What should I do tactically with my portfolio? How should I allocate my capital in order to best position myself? Immediately when people hear quantitative easing and they think about low interest rate environments, they start to worry about inflation. And so there was tons of talk about what would be the best safe haven asset? What would be the best type of inflation hedge asset? So yesterday I was looking and first, you know, to make sure that everyone remembers the

Starting point is 00:04:37 Fed's balance sheet has exploded. It has hit an all-time high. We are now sitting at over $8 trillion, $8.2 trillion on the Fed's balance sheet. When we see the balance sheet that high, remember it was about $900 billion in 2007, 2008. So we're up almost 10x on the Fed's balance sheet. But then I saw this chart of comparing Bitcoin, gold, and the S&P 500. This chart specifically comes from casebitcoin.com, one of my favorite websites to look at all of the metrics and numbers around Bitcoin. And it's green, except for one little section. How is it that the entire chart is green except for gold is down 10% over the last year? Absolutely bonkers. So literally, if you look at Bitcoin up 247% over the last year, the S&P 500 up 33%, gold down 10%. Now,

Starting point is 00:05:30 that is the nominal number, right? Meaning nominal means what is the actual change in the number itself. But the real return, meaning if you account for inflation with a 5.4% CPI number or a 4.5% core inflation number, means that gold is actually down 14% to 15% in the last 12 months, including inflation, in a real return basis. And so if you start to think about gold a year ago, telling investors gold will be down 14% or 15% in real terms, it'll be down 10% in nominal terms, they would have laughed at you. There is no way they would have thought that if the government was going to print trillions of dollars, they were going to drop interest rates to zero, and we would still see gold suffer. Absolutely dismal performance. At the same time that that's

Starting point is 00:06:18 happened, we have seen, same time that this has happened, the Fed's balance sheet, we have seen Bitcoin absolutely explode. It's up 247%, still up 240% or more in real terms as well. And so when you start to look at this, you have to say to yourself, is Bitcoin now killing the gold narrative? Gold for decades and centuries has served as a safe haven asset. It has served as a store of value asset, and it has been seen as an inflation hedge. But what we're seeing here is that at a time when investors needed a safe haven asset, they needed a store of value, gold was destroyed. Is the narrative dead? Joe and John, you both are in your 20s. Do you have a single friend that owns any gold no no i who am in my early 30s also do not have any friends that

Starting point is 00:07:05 i know of that actually hold any gold so if people are looking for store of value or a inflation hedge how many of your friends own bitcoin a lot a lot a lot for me too there is obviously these are one-off data points. But I think in general, what we're seeing is that gold is being dropped by an entire generation. It is not an asset that they find attractive, nor that they want to gain exposure to. And instead, they are still looking for those sound money principles. They're finding it in the digital application, which is Bitcoin, rather than the analog application, which is gold. And so part of why I find this chart so fascinating is starting around last year, kind of middle of the year into Q3, I started to think a lot about the idea that gold's market

Starting point is 00:07:50 cap. We like to think a lot of times it's around $10 trillion and people come up with these prices around $400,000, $500,000 of Bitcoin will eventually surpass the gold market cap. But I actually think it's going to happen much sooner than that. And it's not because necessarily Bitcoin's price has anything to do with it as much as gold's market cap is likely to continue to contract through the 2020s. Now, what that would mean is that more and more investors start to sell their gold. They are pushing the price down. As that price comes down, the market cap comes down and they are choosing to allocate capital somewhere else. Last year in Q4, I believe it was, central banks around the world for the first time were net sellers of gold rather than net acquirers of the asset.

Starting point is 00:08:29 And so it ends up being a very interesting perspective, where is there a world by the end of this decade that gold's market cap isn't necessarily 10 trillion, but could it be 7, 8 trillion? Could we see a 20, 30% contraction in the actual market cap of the asset? Yeah. So I was looking at the correlation of gold to inflation earlier. So if you look at you know zero being not correlated at all one moving in perfect unison with it gold over the past 50 years has a correlation of 0.16 so it's on the lower band of that having essentially no correlation to inflation over the last 50 years So no matter how much inflation has hit really golden that hasn't necessarily it doesn't move with it Yeah, did you happen to see what bitcoins was? No, so this only measures gold only gold

Starting point is 00:09:10 another piece of this that I find very interesting is that the gold narrative of of uh security and sovereignty right there like i have the physical gold is completely getting destroyed by bitcoin because john myself you we grew up with smartphones in our hand and this is where the assets that we own are held not necessarily being held on uh you know physical gold in a vault or safe in our closet under the bed under the mattress whatever do you think for crypto to rise kind of to that like nine ten trillion dollar market cap that gold has to basically come down i don't think that it has to steal its market cap almost i don't think that there has to be an inverse inverse correlation where bitcoin's market cap grows and gold's

Starting point is 00:09:53 contracts in order for bitcoin to continue to grow and eventually reach a 10 trillion dollar market cap but i do think that that is a natural effect of bitcoin's market cap growing and it's because when you look at the market of potentially uh new buyers or people who would want to own bitcoin uh there's an entire segment of the population in the investment community that already understand sound money principles. It's outside the system, and no one can create more of it. Once they see, wait, I own the analog version, there's a digital version, that digital version has some advantages that the analog version doesn't, I think you'll start to see a shift of capital into the digital version. On top of that, though, I also think that the net new flow of

Starting point is 00:10:33 capital and investors who normally would go into gold and be interested in inflation hedge store value safe haven asset they instead are going to start to look at bitcoin first not gold and so what you basically are doing is you're taking some of the gold investors converting them to bitcoin investors you're also diverting uh kind of the flow of new investors into an asset like gold and they're going to go into bitcoin and so you get gold's market cap continues to expand at a rapid rate over you know let's say a decade and then what you're naturally going to get is gold uh market cap is going to contract and it's just not necessarily uh it doesn't need to happen that way it's just that is what is going to happen because uh of the structural issues used for

Starting point is 00:11:12 bitcoin to continue to yeah you don't have to watch uh you don't have to pay storage fees while you watch your asset uh have negative return on both nominal and real interest rates as as inflation goes five six seven eight nine ten i mean we have 5.4 inflation in this country reportedly allegedly that's the official number and we literally have gold down 10 like it failed as an inflation hedge yeah failed done f minus you're out as an inflation hedge and when you start to look at what this is the relationship between gold and inflation oh just gold's price chart so this basically just shows uh down right just down like not good right and i think that part of this ends up being uh kind of a really uh interesting generational shift uh what i will say

Starting point is 00:12:00 along with gold and bitcoin is that gold in the 1970s was completely repriced as an asset right so if you go back and you look in 1971 came off the gold standard and we basically had the world say what is this asset worth and it went up i think it's up 40x or something i think gold's around 30 in 1971 uh and ended up appreciating very aggressively over the coming uh kind of couple of decades bitcoin feels like it's going through the same thing the world is looking at and saying what is this worth and so uh the saying of history doesn't repeat but sometimes it rhymes feels very relevant here. It's just that now Bitcoin is the kind of beneficiary

Starting point is 00:12:35 of some of this rather than gold. But that makes sense because we live in a digital world more so than an analog world. And we're definitely moving closer to a fully digital world rather than an analog world, right? I wonder what it would take people to move their assets from gold to Bitcoin. Like what's gonna be like the deciding factor?

Starting point is 00:12:51 Peter Schiff would be a billionaire if he did that last year. I think that this is a great question, John. Part of it is one, education, right? So people just have to understand, hey, you're still investing in sound money principles. It's just a digital application versus an analog. That'll get some portion of capital to flow. The second thing is time, right? The whole argument around gold has been money for 5,000 years, that really speaks to

Starting point is 00:13:12 people. So when Bitcoin is only a year old, people are like, ah, this probably isn't going to last. Five years, eh, probably not going to last. 10 years, eh, maybe it's not going to last. After you get to 15, 20, 30 years, eventually people just say, fine, it's definitely here to stay. And they'll go ahead and they'll shift capital. So you solve those people. The third thing though i think is when people start to really understand the difference between the sovereignty right i can hold the physical gold or i can hold bitcoin when you get the difference between those two things uh and you realize that bitcoin is more portable it's more divisible and it's actually cheaper to store to to move etc that's where i think the real game changer is

The Pomp Podcast - #623 Is Gold Failing As An Inflation Hedge?

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