We Study Billionaires - The Investor’s Podcast Network - TIP426: Gold and Commodities w/ Lyn Alden

Starting point is 00:00:00 You're listening to TIP. With the crazy macro environment and the heavy money printing we see these days, it seems right to take a step back and look at how to position our portfolios in a time of inflation and uncertainty. In this episode, I sit down with fan favorite Lynn Alden, who exploring whether now is the time to invest in gold or commodities and what we can learn by tracking the growth in the M2 money supply. So without further ado, here's my interview with the always thoughtful Lynn Alden.

Starting point is 00:00:27 You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Dick Broderson, and I am here with one of our most popular guests, Lynn Alden. Lynn, welcome to the show. Thanks for having me back. Happy to be here. So, Lynn, let's just jump right into the discussion here today. So in the recent paper tied, the best strategies for inflationary times, the author looked back to 1926 and studied the eight different inflationary regimes, which was 19% of the time.

Starting point is 00:01:18 So I'm just going to throw some stats out there. If we look at equities in those inflationary times, equity had a negative real return of minus 7% and a positive 10% real return whenever it was not. And all the entire period, the real return for equities was 7%. Now, let's turn to commodities, which is one of the main topics here for today. Commodities netted 41% in times of inflation, but minus 1% in non-inflationary periods. And then for the entire time period, commodities had a 3% real return. So that is in comparison to the 7% real return for equities.

Starting point is 00:01:57 So in other words, if you don't have any opinion, it's typically better to hold equities than commodities. But what if we can get the best of both worlds? You want to screw your portfolio in the direction of where you see inflation go. But as the proverb goes, it's difficult to make predictions, especially about the future. So before we discuss where we think commodities, gold, and inflation are going, let's start with the basics about commodities. Why do commodities perform well in inflationary times?

Starting point is 00:02:27 Commodities tend to do well in inflationary periods almost axiomatically, because if you have a period of high inflation, it means that things are going up in prices, particularly commodities. You don't really see any inflationary periods where commodities stayed super low. Technically, you could have, you know, say very specific supply chain disruptions where somehow commodity prices stay low, but that inflation's high. But that doesn't really happen in practice. Generally, inflation is a result of using issues on the money supply side and then also something related to CAPEX and under supply on the commodity side because commodities go through these big cycles. And as we should expect, things that are able to compound and grow

Starting point is 00:03:05 should outperform things that don't. And so a company that has thousands or tens of thousands or hundreds of thousands of employees working every day to make that company better, should, over the long run, outperform just like a hunk of metal or a barrel of oil. But basically, the thing that both stocks and bonds have in common is that they do very well in disinflationary regimes, basically stable monetary conditions, good long-term planning and pricing power, whereas commodities are the best hedge in those more inflationary environments. And so there's multiple ways to defend against inflation, but having commodities in a portfolio where commodity producers in a portfolio is one of the cleanest ways to do it. And you can either do it in terms

Starting point is 00:03:45 of a sort of a permanent portfolio approach, where you always have some slice of commodities that will be an underperformer much of the time and then a dramatic outperformer. And some of those times where equities and bonds don't do well, or if you're more active, you can tilt towards commodities around the time that you expect inflation or you're seeing signs that inflation is starting to build. If you, for example, follow the CAP-X cycle more closely and have a better grasp on inflation than maybe the average market participant. So, Lynn, one of the typical arguments for buying gold is to have an asset outside of the financial system. I can't help but wonder, how does that translate into investments in commodities?

Starting point is 00:04:24 Many of our listeners, due to what you said before, in terms of managing their portfolio, they might want to own an asset that perhaps correlates with the price of a specific commodity. It could be oil, but they're not keen on holding the actual commodity. So how can investors, if possible, get the best of both worlds? So gold and commodities can almost be considered two different asset classes, because although gold technically is a commodity, it has more characteristics of a currency. And what I mean by that is so most commodities have. a low stock to flow ratio. Basically, the amount that we have stored in the world is, in many

Starting point is 00:05:00 cases, lower than the amount that's produced annually, or maybe it's one or two times as produced annually. It depends on the specific commodity. There's not very large inventories. Usually, they're very bulky. They don't last a long time necessarily, and they require expensive storage facilities. And so we have rather low inventories at any given time. And so those are necessary inputs into the economy. And that's why they're so closely tied with inflation, because if we have shortages and those, pay more to get them. Basically, we squeeze other parts of the economy. Whereas gold, because the vast majority of it's not really needed for things.

Starting point is 00:05:33 I mean, there is an industrial use for it. It's usually a small percentage of the price of the good that it's going into. And most of it is used for jewelry or just outright monetary use or store value purposes. So coins, bars, as well as jewelry, that in many cases, especially in some countries like India, very much overlaps with the store of value aspect of it. It's another way of storing value. And so gold is in some sense, it gives us that long-term protection against inflation. If you have, you know, fee currency is going down in price, down in value.

Starting point is 00:06:04 Gold over the long run has historically held up equal to or actually better than official CPI closer to money supply growth. And the advantage of it is because it has, so it has a high stock to flow ratio. So it's not like, you know, disruptions really affect the gold market too much. And two, because you can store a lot of it for a long time in a small amount of space, it's one of the rather few commodities that could be suitable for people having some at home. They can have gold coins at home. And the main advantage there is a lot of us are in developed markets.

Starting point is 00:06:34 And we've had this very long period of stability where we, you know, something like having gold in your home sounds totally necessary and kind of silly. We trust our financial institutions. Whereas, for example, right now when we're seeing currency crises in different countries, you know, some of them have bank balance when that happens. Some of them have, you know, hyperinflations happen, right? Not just going back to Weimar, but in some emerging markets today, you have either outright hyperinflations or you have things that might as well be, right? There's double-digit inflation, super high. Maybe it doesn't meet the definition of quote-unquote hyperinflation, but it's a destruction of currency. And then in those environments, usually you have, even if you're, say you're in Lebanon and you're storing dollars in

Starting point is 00:07:15 in the bank or Argentina, basically there's a precedent where they come in and say, okay, we see that you have dollars. We're going to go ahead and take those because we need. them and we'll give you our local failing currency in exchange. And that's something that basically anything that has counterparty risk, when you have a truly inflationary or really kind of problematic financial environment, you can't necessarily 100% trust your cash assets, even your stock assets, whereas having physical self-custody gold or say gold stored in a private drinks vault or something like that. It's just another lever that those, say, authorities would have to go through to basically defraud you to take your assets or forcibly convert your assets. And so that way,

Starting point is 00:07:59 it serves as insurance. Whereas commodities, if you say invest in oil features or oil stocks or copper stocks or things like that, they're not giving you that defense against that confiscation type of approach, but instead that's more of a normal financial play within the confines of the financial system. So you have, say, copper stocks through your broker account, for example. And that's just giving you a strong inflation hedge. So if you go through a more inflationary environment, a period of more commodity shortages, those should be good hedges for your portfolio, not necessarily in the same sort of like disaster scenario that gold can protect against, but in that more directly inflationary environment. And as you've seen, for example, gold, because it has this high stock to flow ratio,

Starting point is 00:08:40 it can behave oddly, right? So you can have 7% inflation and gold not do well. Whereas, The other commodities are actually, in some ways, better inflation hedges in the sense that almost by definition, if you have high inflation, it means most of those are probably doing well. I also think whenever it comes to, say, gold, it's so different what people hear and how that's perceived depending on where you live in the world, perhaps also depending on your age. You know, I live in Denmark, and every time I bring up, say, something like Bitcoin or gold, people are like, that makes no sense. Why would you do that?

Starting point is 00:09:16 Like, Daniels Kroner, that's a good currency. What's wrong with that? How can anything go wrong? And they would say, invest in stocks if you want to make more money. And then if you go to Asia, they would say gold makes a lot of sense. That's safe. Don't speculate in stocks. And I know I'm all generalizing here right now, but I just think it's very interesting

Starting point is 00:09:37 whenever we're having this discussion about gold and currencies, how that's just thought of so different depending on. where you are. And yeah, I guess the experience is not just of your generation, but also your parent's generation. Yeah, it's interesting because if you look at different stock markets around the world, you know, many of them have had 10, 20, 30 year periods of very poor returns compared to just even in dollar terms, let alone in gold terms. And so partly where you go in the world, that will dictate how they perceive stocks in the United States where we've had one of the best performing stock markets, especially over the past decade, but going back a number of decades,

Starting point is 00:10:15 people have this idea that stocks only go up and they go up at like 10 to 15% a year, almost like clockwork or more than that in bull markets, and why not just invest in that? Whereas if you go to many other jurisdictions around the world, that's not necessarily the case. And then as we talked about before, you know, basically in disinflationary environment, stocks are among the best investments you can hold. And the world has been in, you know, we've had some inflationary bursts over the past 40 years, but for the most part, we've been in this kind of 40-year disinflationary period. And so a lot of recency bias really focuses on the power of stocks. And I think that's one of those

Starting point is 00:10:52 things to be mindful of going forward is to try to avoid that recentity bias. Now that we've gotten all the way down to like zero industry rates in many places, now that stock valuations are very high in many places, we shouldn't necessarily expect the same amount of broad stock indices that we've come to expect over the past 40 years. And I think some markets, It's kind of ironically, the markets that have done poorly, I think that people are more attuned to that and might navigate that better than people in markets or that invest in markets that have just gone up for 40 years almost, especially the past 10 to 15. Whenever we analyze data series, and I know you definitely know this, Lynn, because you do

Starting point is 00:11:31 a lot of data analysis, and you typically use American data, and you do that for a number of different reasons. One of them is just very practical because it's there. It's available and it's so easy to work with U.S. data compared to many other countries. But there's a huge survivor bias. You're looking at U.S. data. Well, there's survival bias because the U.S. stock market did so well. The U.S. the superpower, like a lot of tailwinds going for it.

Starting point is 00:11:56 How U.S. got out World War I, World War II, compared to, say, Europe, for example. So if you look at those stock markets who survived, you have three stock markets that survived with the past 100 years. It was the U.S., Australia, and the U.K., and the U.S. did best of those three. Many of the other major stock markets, they just oblivied, you know, the Japanese stock market, the German stock market, the Russian stock market. So you have a lot of survivor bias whenever you're looking into that. So whenever we're talking about commodities, and I have this horrible habit where I'm saying, well, you should just buy this asset class. And I tend not to be very specific. And people are looking at me and like, so how do I do that? Let me give you that question. So if you're discussing, well, why not have an allocation to commodities? How does that work in practice?

Starting point is 00:12:43 So basically there's different ways to do it. So my preferred way is to invest in commodity producers because I tend to be rather equity-focused. So even when I'm looking at commodities, my first instinct and my kind of my best understanding is to look at the equities that are involved in commodities, which is most of the commodity producers. You can also look at commodity transporters, things like that, kind of, you know, the surrounding ecosystem. And so that's one of the better ways to do it because even in, say, flat or mildly up commodity environments, You know, those companies are profitable. They're paying dividends. So they can kind of combine the commodity elements, basically the good inflation protection, with the compounding of a company. Now, they generally will have less compounding than like a software stock or a healthcare stock. So they, you know, these are often not the best long-term performers. But they kind of combine that commodity element with that ability to also just compound and pay capital over time. So that's, I think, one of the better ways to do it. Also, I mean, you can just hold them indefinitely. They're, you know, an infinite durations, unlike, say, a contract with a specific date. Now, if you are active in features,

Starting point is 00:13:48 obviously, there are another great way to play commodities. And the advantage there is that, for example, let's say your thesis is that governments are going to hamper energy companies' ability to produce more energy, right, for whatever reason, ESG reasons, whatever the case may be, maybe say, well, part of my thesis is that commodity companies are going to have a problem. So I just want to buy the underlying commodity. And so that's actually one way to do clear out some counterparty risk is to just directly get exposure to the commodity via futures. And so I think in a portfolio, the way I handle it personally is for most commodities, I go with the producers. For a handful of commodities where there's good ETFs or funds that are not

Starting point is 00:14:27 futures-based, so the problem with, if you have an ETF-focused portfolio, a lot of those commodity ETFs use these rolling futures, and those are not the great long-term and hold investment. So holding specific futures can pay off really well. But if you hold like a, commodity ETF through like a neutral to bear market, you can lose money on these rolling futures contracts. And so I generally avoid those kind of futures-based ETFs. So I either split it up to buying commodity producers like oil producers, copper producers, things like that, or I go and I buy a gold ETF, a silver ETF.

Starting point is 00:15:03 There's even a uranium holding. It's a closed-end fund, similar to an ETF. So there's a handful of these commodities that you can get physical exposure to them. which is useful, and I combine that with the producers in many cases. I personally mostly avoid the futures, but they are a very good way to play it if you're active in that market. Yeah, I think that's an important thing to understand because most people might think, well, if they're buying to, say, in the old future, it will be falling in the spot

Starting point is 00:15:29 price. And that's just not the case because it's tied up to those futures. It's more expensive. And they might be thinking, well, I'm going to hold this for 10 years because I believe in the oil price going up all the next 10 years and whatnot. And then you have rolling futures that might be replaced once a month. And you're like, where's my return? I think it's important you brought that up. And also, I would encourage listeners as they're going through this to make sure to check that, like what has the performance been in ETF compared to the spot price. And then also read up on whether or not it's if it's a future based or not.

Starting point is 00:16:00 When we're discussing equities, bonds and gold and whatnot, we often tend to discuss how much the asset classes are manipulated, often but not only by central banks. Who are the big players in commodities and are they being manipulated? And I also want to clarify, of course, whenever we say commodities, there are so many markets that can be defined as commodities. So perhaps we can stop with that. So with commodities, what you generally find is that the higher the stock to flow ratio of the commodity, because there's more of it available to re-hypothecate and play with compared to commodities where, let's say, you need 100 million tons a year worldwide and they

Starting point is 00:16:40 produce 100 million tons a year, and there's not a lot of existing stock to play with, right? It's a very tight supply to man bound. They might have, say, six months in inventory. It's hard to move. And so basically, it's something like the gold market is easier to manipulate than something like the copper market. Now, for those larger commodities, like let's say copper or oil, the main way that you can manipulate them is if you have a cartel of producers, right? So something like OPEC can manipulate even those low stock to flow ratio commodities, but basically it's really hard to do because you have to have a quorum of the market. You have to have a meaningful percentage of global production, which is hard to do outside of the oil market. And so that's kind of been a long-known

Starting point is 00:17:25 purposeful thing in the oil market that's not really present in a lot of other commodity markets in large part because it's such a key commodity. It's kind of a master commodity. It's even used as an input to get all the other commodities out of the ground. And so that's a lot of That's such kind of the backbone commodity of modern civilization is these various fossil fuels. And so one of many manipulated is to have that cartel. But then if you're doing the more like direct type of manipulation, generally it's limited to commodities that have that high stock to flow ratio. And so for example, you can either have central bank manipulation or you can have commercial bank manipulation. And so commercial banks, there's been a number of them that have been fined for manipulating, you know, gold and silver markets. You can do things like spoofing, where you purposely, like, you know, you put in limit orders and then

Starting point is 00:18:12 pull them out. You're kind of manipulating price. And then also, because of, say, gold is very centralized, right? So over the time in human history, it got centralized in banks, and then they got centralized in central banks. And so it's actually, there's very large pools of it that are held by these major kind of vaults, like in London, in New York. And what you can do is you can basically issue more claims against it than you have, you

Starting point is 00:18:37 amount of gold that you could theoretically deliver now. And the problem there is that more people kind of think they own gold than really own gold. It's like a game of musical chairs, where as long as things are working, they all get exposure to the gold price. There's no major risk. But it's like you could have a once-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a-a couple decade event where you have such a dislocation in the market that that could break. And the most famous examples, the London gold pool failing. That was kind of an intentional manipulation scheme to maintain, you know, kind of maintain the Bretton Wood system when it started to run into headwinds. But basically even today, you have that re-hypropication problem where,

Starting point is 00:19:15 you know, there's X amount of gold, but then there's, say, five X amount of claims on that gold. And that size of that market can change over time. And it's kind of tied to the fact that one, you of a high stock to flow ratio, and two, taking physical delivery is not easy. It's not a trivial process. You don't just get a UPS shipment in the mail. It's this whole detailed long-term delivery scheme. And so most players, either they hold on allocated gold, so they have counterparty risk. And so there are manipulation that happens in these markets, but more so on that, say, the gold and silver side and less so on, say, the copper, than nickel, market. markets like that.

Starting point is 00:19:57 So, Lynn, let's talk a bit about the weighting of commodities and gold in a well-balanced portfolio. I think a lot of our listeners are probably familiar with Redallio's old weather portfolio. And he says 7.5 in commodities, 7.5 in gold. But that also had the underlying assumption that you don't know what's going to happen. You don't want to have an opinion of the market. You just want to set it and forget it. So how do you think about waning into commodities in gold and how do you do you,

Starting point is 00:20:26 think about it specifically in the environment that we're in right now? So I think that's a reasonable all-weather allocation for someone who just wants like a permanent portfolio. I think in this day and age, I would split the gold allocation to say gold and Bitcoin, right, because you have to be, now gold has for the first time in a very long time some semblance of competition. Basically, Bitcoin is arguably a digital commodity with a higher stock to flow ratio than gold.

Starting point is 00:20:50 Obviously, it's been on an upward trajectory as of late. And so, one, they have to manage that risk. And then on the commodity side, there's a couple ways to play it. So there's another kind of permanent portfolio known as the Dragon portfolio. And what that one does, that has like a 20% allocation to commodities, but it does so through commodities trend following. And so for people that aren't familiar trend following, it's basically like using an algorithmic, systematic approach to identify markets that have an uptrend

Starting point is 00:21:18 to only own them while they have that uptrend. So a very simple way of thinking of it is you can say, I want to own this asset, but only when it's above. is 200-day moving average, right? If it goes below a 200-day moving average, I want to get out of it and go to cash for that segment of my portfolio. And that's a simple method,

Starting point is 00:21:33 but it's the most kind of just for illustrative purposes. And commodities tend to work better than other asset classes for trend following because, as we discussed, they're very boom-bust in nature. They're very binary. So most of the time, they're not working very well at all. And then other decades, they're like the best thing out there by far. And so you basically have this thing where you're not exposed to them until they start to do well.

Starting point is 00:22:00 And then you have a pretty sizable allocation. So I think how much you allocate to commodities in that sort of all-weather portfolio, I think will depend on whether or not you have any sort of trend following component. If you have trend following, you can ratchet up that allocation to a higher number. Whereas if you don't have that trend following, you want to be careful about how much you allocate to an asset class that over the very, very long run does not have great returns. And then if you specifically want that exposure because you specifically have a thesis that is going to do well, there's really no upper limit other than just how diversified you want to be, how comfortable you feel with your thesis, what is your level of conviction with your thesis? You know, I mean, there are funds out there that go 50, 60, 70 percent into commodity-oriented

Starting point is 00:22:45 investments when they have a very kind of value and inflation and commodity-oriented theme. But I think that's, you know, that kind of concentration I think is best left to the expert. or people that are, you know, poor, you know, they're the ones with super high conviction on what's going to happen and they'll get rewarded or punished for it, you know, thoroughly. Whereas I think the average person, you know, I think having a slice in your portfolio makes sense. Another thing we're pointing out is that, you know, part of the reasons that equities in general do poorly in inflationary environments is because, because they're, you know, when we look at indices, they're generally weighted by market cap. And right before you get an inflation environment,

Starting point is 00:23:23 You've been through a long disinflationary environment. And so the companies that are on the top of the index are the ones that are most adapted to a dysflationary environment. So kind of growth-oriented equities tend to do best in these more disinflationary environments. And so it's kind of like an extinction event happening and the most ill-suited animals are like right, are like the ones you're over-allocated to. And the animals that are going to like survive it, like let's say, you know, commodity producers are part of the index.

Starting point is 00:23:51 they're like at unusually low allocations because they just went through a disinflationary decade. And so basically the risk of not having a commodity slice in your portfolio, and let's say you're entirely invested in, say, the SP500 and bonds right before an inflationary period happens, is that the bonds are obviously bad with inflation. And then the equities, not only invested in equities, you're invested in specifically, mostly the ones that benefit from that disaffirmationate period. So, for example, in March, like in mid-2020, energy stocks hit their lowest-ever percentage in the S&P 500.

Starting point is 00:24:28 They got down like 2% of the S&P 500. So if you then go through an inflationary period, you know, if that 2% starts to do very well, it's not going to hedge your other 98% equity exposure very well at all. Whereas if you had a, say, 5% to 10% allocation and that goes up threefold, that can give you more hedging power if the rest of that equity index starts to run into turbulence. And so I think that's the way to think about it is that you don't want to be underweight commodities at the end of a long disinflationary period going into an inflationary period. And that can either be making sure you actively approach that or by having, you know, a larger

Starting point is 00:25:07 permanent allocation that either does is just always there or it does some sort of trend following. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world. many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to,

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Starting point is 00:29:23 So on your wonderful blog, one of the things that you said is that you discussed your turnover. You mentioned it was pretty low, but you also adjust a periodical based on where opportunity exists. And one example you could point to would be something like bonds.

Starting point is 00:29:38 You hear all about these bond allocations and how that should be. and how they should be placed in the portfolio. And for a very, very long time, bonds haven't really been that attractive whenever you look at the yield, when you look in inflation. And still, bond price have rallied because of the cycle that we're in right now. As we thought, it couldn't get lower. It still did.

Starting point is 00:29:56 So you could still make some very decent return in bonds, depending on how you played it. So with that said, I don't know if you should talk specifically about bonds, but just about the major asset classes in general. Would you ever have asset classes you would not own at all? say, for instance, something like bonds or something like stocks, simply because you think it's just so much out of favor? Or do you always approach this as saying, I just don't know what's going to happen? I just play the probabilities. So I should always have at least just coming up with a number 10% in this asset class, whatever that might be.

Starting point is 00:30:31 So I'm some of the middle. Things that I don't like at all, I generally dial them down to very, very low percentage of the portfolio. There are some cases where I could go to zero. I mean, I don't think, you know, I think for young people, I don't think you have to own bonds, for example. You know, if you don't need your capital for 30 plus years, I don't think you need bonds. But it will partially depend on what country you live in and what equity markets are talking about. What are your other investments? What is your financial situation like?

Starting point is 00:30:57 So right now, for example, I'm using bonds and cash as basically an expensive form of optionality, volatility reduction, rebalancing fuel. Right. So I try in some cases, I want to be underweight. cash and bonds, but they're kind of my hedge against like a liquidity crisis. If you have some sort of, say, you know, March 2020 event where most correlations go to one, everything crashes, I want to have some fuel to rebalance into that. But, you know, the expensive part of that is I'm holding cash and bonds that are yielding, you know, zero to two percent while inflation's running a seven percent. And so that is like, it's kind of like selling puts in your portfolio,

Starting point is 00:31:33 like a little hedge that loses money over time and then pays off once in a while. And so that's I approach that. And if someone doesn't want to do that rebalancing aspect, you know, there's not a great reason to own bonds and stocks in this environment, especially compared to like value stocks and compared to, you know, some of the commodity producers, in my opinion, if you're looking at the very long run, rather than say what might do well over the next six months. You know, there are, so, for example, I didn't own any gold from, say, 2012 through 2017. And part of that was luck. Basically, gold had that huge run-up going into 2011, 2012. I was a younger and less experienced investor back then, but I still had that kind of

Starting point is 00:32:14 contrarian value-oriented approach. And so I had gold that I had been holding since like the late 90s. And I decided to sell into that strength. I started to see on, you know, commercials for like gold. Gold vending machines were popping up in some markets. People were talking about it's going to go to 5,000. I was like, I don't really know how to value this. but it's gone up a ton and everybody seems super bullish.

Starting point is 00:32:38 So I'm going to go ahead and sell that and buy some more stocks. And that worked better than I could have guessed. I mean, I kind of accidentally got the top. And then over time, I kept analyzing the market. And eventually in, you know, late 2018, I got back in. Right. So there are environments where I might go to, say, zero gold or at least zero kind of portfolio gold, like gold ETFs and things like that.

Starting point is 00:33:03 I might not, you know, I think it's, if you're using it as insurance, you kind of, we talked about that, that self-custody physical aspect. There's a case for just never selling it, just like literally hold it in your basement and give it to your grandkids, whatever. But, you know, other than that, I think that there are, there are times where it's just, it's not super useful to own commodities unless you're kind of very specifically following a permanent portfolio where you were, you know, even if you're bearish or something, you're kind of sticking to it algorithm. But I don't think everybody has to have commodities at all times if they don't want to follow that sort of permanent approach.

Starting point is 00:33:41 Linda, last time you were on the show, we talked about inflation. And I've seen a lot of references where the growth in the M2 money supply has been used to discount the return on asset classes. Is that a prudent way to measure real returns of whatever asset class you're looking at? I think it's a, for lack of better benchmarks, I think it's one of the best benchmarks that's still available. And one way to think about that is so, you know, over the long run, because technology improves, right, we have this kind of background negative inflation, deflation that should occur. So, for example, someone used to harvest food by hand, and then, you know, we've ended the tractors.

Starting point is 00:34:21 So one person can now do the work of 10 people. And then we have, like, self-driving tractors. So one person can do the work of 100 people. And so, you know, the amount of the percentage of our economy that we have to focus on getting food for ourselves has gone down dramatically to like, you know, 1% of us can take care of that whole thing and that's solved. And so we have this kind of background disinflation. So when you're measuring CPI, right? So let's say on a normal environment inflation is 3%. It's not really 3%. It's like, so let's say the background inflation is negative 2%. So really what you're having is like, 5% monetary inflation on top of what should otherwise be negative inflation, technologically driven deflation. And so you generally have this gap between money supply growth and CPI.

Starting point is 00:35:11 So if you look over the long run of the United States, you know, money supply might be growing at, say, 7% on average over the long run, whereas CPI might average 3% over the long run. And so you have that gap between the two. And a lot of that is, I mean, one of you have different ways of measuring it. So people can argue about how accurate either those metrics are, especially the CPI metric. But then also there's that kind of background, semi-permanent technological deflation that's happening. And so when you have, say, zero rates, the problem is if you're using like a treasure, a 10-year treasure yield as a discount rate for your equity analysis, you know, you'll come up

Starting point is 00:35:49 with almost infinite valuation. Like there's almost nothing you shouldn't pay to own stocks because if you just run the numbers, you're like, well, there's still a positive equity risk premium here. I'd rather own it than a treasury yielding 1.5%. And so you buy it. The problem is that you're then vulnerable to a massive amount of volatility and downside, and you could have five, 10, 20 year periods where those equities don't do better than treasuries because you can get into a bubble and roll over.

Starting point is 00:36:17 And, you know, so I think permanently having a higher hurdle rate, a higher discount rate, a higher benchmark than whatever the lowest rates happen to be, especially in some countries, they're negative. They're really negative rates. And so I think a proxy that you can use is a smooth money supply growth rate. And you can even, you get adjusted if you want for a money supply per capita or you can leave it unadjusted. It doesn't make a huge difference in most markets.

Starting point is 00:36:44 And that'll generally give you in, say, a normal market that will give you a mid to high single digit hurdle rate, which I think is appropriate for equities. and in a more inflationary environment, it gives you a somewhat higher hurdle rate that could be in the low to mid-double digits. I mean, obviously, in some markets, we have a true inflationary event. You can have massive money supply growth. Then you're just in full-on protection mode. That's where things like gold and commodities shine. But in general, in most environments, I think the money supply growth is a much better hurdle rate than trying to use something like a long-duration bond because it's like you're filtering out the extremes.

Starting point is 00:37:22 in some ways. And so when you have these periods of rapid money supply growth without CPI growth, generally you get asset price inflation. So that money's going somewhere and we're constantly, you know, if money supply is growing at, say, 12% a year, as it has been over the, say, the past year and rates are near zero, you know, do I want to hold this asset that is, you know, going up in quantity by that much and not paying me for my dilution, right? So I'm holding, It's like I'm holding a company that's constantly diluting its shares, and yet it's not paying a dividend and not growing or growing very slowly. Or do I want to go and buy a company that's buying back at shares? It's actually a deflationary asset and paying dividends, right?

Starting point is 00:38:05 And so I think that's a useful way to think about it because if you look over the long run, things like gold track broad money supply growth more closely than they track CPI over the long run. So, for example, if you just said, okay, gold should have held up against CPI. of the past 50 years, you'd expect that it would have matched that, but it actually beat that. It's actually closer to broad money supply growth per capita over the past 50 years because it's kind of benefited from both CPI, as well as the fact that we're just printing so much more money that when we compare that money to those assets, we get higher prices than we'd expect because you have asset price inflation. Let's continue on that thought and specifically talk about valuing gold.

Starting point is 00:38:48 I read that you like to compare the price of gold to the growth of the broad money supply per caverta. Why is that and what does it tell us about the current valuation of gold? So there's two ways to do it and they give you roughly similar numbers. And so one thing worth pointing out is that gold has an inflation rate of about one and a half percent per year on average. And what I mean by that is like the amount of new gold added to our existing supply, if you look over it like a hundred year chart, it averages between one to two percent a year,

Starting point is 00:39:20 and it's almost exactly at 1.5 percent on average. And that's actually pretty close to population growth over that time. And so one way to think about it is that, you know, there's basically the same amount of gold per person in the world as there was 50 years ago. You know, there's somewhat of a rounding error, but that's roughly true. And it comes down to something like one ounce of gold per person in the world. And so depending on the data that you're working, working with. I think the cleanest way to do it is that you can kind of estimate the market capitalization

Starting point is 00:39:50 of gold, right? So there's entities at the World Gold Council that give their estimates for how much a stored gold there is. And then you can go back and look at this long-term inflation rate, which again, we have pretty good data on. And you can kind of chart out the market capitalization of gold over time. And then you can compare that to, say, the U.S. broad money supply over time. or you can compare it to global broad money supply over time or OECD broad money supply over time. You can pick your benchmark. And I think comparing those to data points is useful because it kind of gives you at least like a situational awareness. Is gold undervalued compared to that money supply growth?

Starting point is 00:40:31 You'd expect over the long run, as we talked about, that if say, you know, if we double the amount of money units in the system and the amount of gold in the system is the same, Of course, year by year, you can have anything because it's just buyers and sellers and who knows what they're going to pay for it. But over the long run, we've generally seen that gold keeps up with the money supply growth. And so if you see these unusually strong divergences, it's worth taking note of. And then, you know, you can come up with your own conclusion. Maybe you can say, well, Bitcoin is demonetizing gold. Or you can say gold's just super undervalued and it's going to catch up, right? So depending on if you're a bull or bear, you can interpret that in different ways.

Starting point is 00:41:04 But I think it's at least useful to be aware of when it happens. In addition, there are times where it overshoots, right? So, for example, we talked about gold going in a bubble in 2011, 2012. You know, by those ways of measuring it, gold had gone up very quickly, and then it went up past where it expected to be based on money supply growth. And so it gave you like a cell signal, or at least not necessarily a cell signal, but an overvaluation signal that then people can, again, interpret how they want, right? They, you know, whatever other information they might be combining that with, but I think

Starting point is 00:41:35 it's a very good data point to know. And so during those bubble periods of 1980, and then again, in 2011, 2012, that gave you a warning signal that this might not be an undervalued investment anymore. Basically, it's a very crowded trade. It's already been driven up in value higher than it should have been. If you don't want to work through the market cap of gold, another way to do it is if you can just chart the gold price, and instead of adjusting gold for its inflation rate over time, you can go back. and look at the broad money supply per capita. So you're kind of factoring out the roughly the same growth rate from the other side of the equation. And so either way you get, you know, the amount of gold per person staying the same. So you're looking at broad money supply per capita relative to that gold or you're looking at the total pool of money and the total pool of gold and you're taking out the population component and you're just looking at those compared to each other. And you get roughly similar result just because it happens to be that the gold's inflation rate and human population growth are rather similar numbers over time.

Starting point is 00:42:39 So whenever we talk about gold, very often we hear, well, it's a good inflation hedge, which it is. So a lot of people have this expectation that you could plot gold, the price of gold and the price of inflation, and they were more or less follow each other. But it's not always the case. For instance, if we look back at the 1980s, we had high inflation and gold prices dropped sharply, we should instead look at gold compared to the changes in real interest rates. Why is that? So this goes back to what we talked about before, where gold is more of a currency than a commodity. And so if you were to chart commodities compared to inflation, you'd have a very strong

Starting point is 00:43:16 correlation because commodity prices going up is almost the definition of inflation. I mean, it's a very big component of inflationary environments is the price of commodities going up because those commodities are needed all the time and there's no big stockpiles of them. Whereas gold, because most people don't need it at any given day, other than very, you know, kind of select industries for a small percentage of the market. It's more like investors choosing to allocate to it instead of other things they could own. And so basically what you're comparing it to is like a long duration treasury, if you're in the United States, for example, or if you're a foreign central bank and you're choosing what to have in your reserves.

Starting point is 00:43:54 And so in 1980, basically, we had just gone through the 70s. Gold had an absolutely massive run-up as a very inflationary decade. And then they finally got a handle on inflation. They jacked up interest rates to be higher than the inflation rate. So you have positive real rates. And then you started this 40-year cycle of disinflation. So inflation was still high in the 80s, but it was coming down compared to where it was in the 70s. And then more importantly, even though it was still high, your treasury yields were higher.

Starting point is 00:44:23 So you were getting compensated in real terms to own a long-duration, And that was true from many other countries as well with their sovereign bonds. And so in the 70s, let's say inflation, you know, at any given point was, say, 7%, while your bonds were yielding 5%, you were getting devalued. Whereas if you have the same, let's say you have 6% inflation in the 80s, but your treasury is yielding 8%, you have a positive return. And so because gold can be thought of as like an infinite duration, zero yielding asset that has some degree of long-term inflation indexing.

Starting point is 00:44:57 Another hand, when you go through an environment, either because yields got so low or inflation got so high, then inflation is equal to or higher than bond yields, suddenly that gold that's yielding zero, but it's keeping up, you know, over the time with broad mice by, that's a scarce asset, looks a lot more attractive. Zero is kind of like the threshold, but there's a degree. So, for example, if, you know, real yields are negative 5%, that's more of like an emergency than if real yields like negative 1%, because you're getting devalued a much. faster rate. And of course, the complication there is how do you measure real yields? Because we can, for example, just look at, you know, 10-year treasury yield minus CPI year every year. That's one way to do it. That's, you know, historically, that's kind of the cleanest data set we have over the long run. But we also have tools like the tips market and inflation break-evens. They give us, you know, the investor expectation. Basically, what is the market currently telling us that it expects

Starting point is 00:45:53 inflation of view of the next five years, for example. And that actually in the current environment is lower than your current CPI. And that's more closely tied to what is happening with the price of gold. So it's not the only variable this is involved, but it's certainly one of the key variables. That basically if you had an environment of negative real yields, and especially when it's getting worse, when those real yields are getting even more negative, you tend to have more capital inflows into gold. And then it's also, because it's forward-looking, it's more focused on those inflation expectations than what, you know, trailing the year inflation looks like compared to current yields.

Starting point is 00:46:32 When we talk about gold, we also talk about how to study history. And gold has historically been valued at 10 to 20 times the price of silver. You also had periods where you have great discrepancies. You had periods between Asia and Europe where it was 1 to 5 one place and 1 to 15. the other. So it's a fascinating story in itself, but it's the very opposite of high frequency trading. You literally have people like traveling through continents to make that three to one, you know, from one to five to one to 15 arbitrage. And yet the, you know, the principles of that, you know, state the same. And they could do that because of all the risk that was involved

Starting point is 00:47:15 and also because of basically just the time they were in. But regardless, the ratio has always seemed to revert to that 1 to 10 or 1 to 20. And you have detailed information from Greece, Rome, Japan, China, the Middle East. And it always seems to go more or less back to that. The U.S. followed Exxon Hamilton's advice and set the goal to silver ratio to 15 to 1 in 1792 with the Cornyn's Act. So having known all that, it might be surprising if you look into the goal to silver ratio today. Silver is about 19. times as abundant as gold in the earth crusts, only has eight times the output, which of course is also a function of demand supply here. But then you consider that gold is currently valued

Starting point is 00:48:03 around 80 times the price of silver. So this is my long way of saying, could you please Lynn paint some color around the gold to silver ratio, why it's so different today than it has historically been? Yeah, as you point out, we have pretty good data stretching back on multiple continent to thousands of years. And that, you know, it varied, but that 10 to 20 ratio tended to be the norm. And silver, you know, is like the commodity with the second highest stock to flow ratio, right? So gold is over 50 at the current time. So we have 50 years of annual production estimated to be stored up in our vaults. Silver is lower. There's different estimates, somewhere between, say, 10 and 30 stock to flow ratio, probably around 20 or so. Whereas most commodities, you know, a lot of them

Starting point is 00:48:48 aren't even above one, right? So there's a big gap between gold, silver, and everything else, including things like platinum, even though platinum is super rare and other platinum grew metals, because they're so heavily used in industry, they actually end up having low stock to flow ratio despite being very rare elements. And so historically, over most of that period, gold was the harder money in the sense that it's rarer, higher stock and flow ratio, more desirable, more identifiable, but the big caveat that it was not as divisible, because even a small gold coin was like a full week of labor for like a worker, whereas silver was like the second best commodity in most metrics as money, but it had more divisibility because the units just happened

Starting point is 00:49:32 to be like the right amount of value for daily transactions. And sometimes you'd have to go down in copper pieces when you really wanted the smaller transactions, but silver was kind of the sweet spot in terms of being a monetary asset while also having reasonable divisibility. And so there's different thoughts on why silver got partially demonetized over time. So when you started to have it be more set formally, the problem that maintaining a biometallic standard is that you run into Gresham's law. And so, for example, the global price of gold and silver at the time of like the 1700s was like 15.5 to 1.

Starting point is 00:50:06 And so if the United States said it to 15 to 1, you know, basically it's making silver be overvalued. And so what happens is like the global market can come in and arbitrage that. And you basically, you know, whatever metal ends up being overvalued, ends up going out of circulation. It gets kind of pulled out of your country. It gets arbitraged. You're either hoarded in the country or it gets arbitraged out of your country. And then what they did is they flipped it. They said, okay, no, no, no, we're going to make a 16 to 1.

Starting point is 00:50:34 And then the other metal got arbitraged out. So even though it actually doesn't seem like that big of a thing, over the course of years and years and years, these arbitrage just keep leaking whatever gold, whatever metals overvalued away. So it's actually pretty hard to maintain a biometallic standard because there's no exact ratio that's like, quote unquote, the correct ratio. It's kind of just based on market conditions. Now, there are some economists that theorize on why silver eventually encountered a far more weaker ratio over the past. say 150 years. And a lot, so I think that in my view, the most convincing argument is that when we created paper money, and especially like modern telecommunication systems where like, you know, you invented the phone, so you could deposit money in a bank and have that show up in another bank

Starting point is 00:51:22 across the world just because it's all bank ledgers that are just agreeing on how these numbers are going to settle. You suddenly made gold far more divisible, right? Because you had gold-backed paper money, the money was more divisible than silver in terms of the units it could be broken up into. And so silver over time became less useful because gold fixed its one weakness, which was divisibility. And so you started to get basically evidence of demonetization of silver, and so that ratio started to flip. If you look at earlier parts in history, there were other times where other commodities were used as money, things like feathers and shells and beads and certain types of stones. And the problem is that when they encountered a harder money, like another

Starting point is 00:52:05 civilization would come with better technology and they'd have gold and silver, and that, you know, that technology could, you know, that culture could come and make more feathers, you know, find more feathers and get more shells and they had better technology to do it. They could basically break the stock to flow ratio of that other culture's weaker money. And so you've always had this kind of history of, you know, different commodity monies beating out other ones. And gold and silver have that survivor bias if they're the ones that beat everything else for like you know thousands of years and you can argue that eventually gold beat silver uh with the invention of modern banking and that the fia currency kind of beat the dot beat beat gold because they you know it's its other big shortcoming

Starting point is 00:52:46 is it's as we talked about it's easy to centralize and then re-hypothecate and kind of you know make make multiple claims per ounce and so now we've encountered that new environment but i would say that I wouldn't necessarily rely on the gold to silver ratio going back to or it was before. That's not to say it won't, but I don't think there's no sort of law of nature that it has to. And I think there's a compelling argument that, you know, things have changed enough. That ratio is now kind of structurally different. But I still think that, you know, in the grand scheme of things of thousands of years of history, you know, 100 or 150 years is still kind of ironically not a huge sample size to work

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Starting point is 00:56:51 You know, it's interesting. You would say that, Lynn, because I feel the exact same way. Whenever you do study history, you would think, yeah, it makes sense why it would be around 15 and why in some societies might be 10 or 20. If you look at this situation today, it would make no sense why it would revert back to that ratio. It just wouldn't, the way we structured the system here today. I just wanted to give a shout-up to a book called The Power of Gold. I can highly recommend it if people want to read it. It's if you want to, I could just teasingly say that if you want to phrase yourself in like 140 or 280 characters, this is not the book for you. It might be on the more intellectual side that can be a bit dull to some.

Starting point is 00:57:28 But if you're really into like the Coroninac Act or what Magu Polo saw whenever he served under Kubla Khan and silk and silver-back standard and how that worked, you know, if you really like into history and the history of money in the light of gold. So let's continue talking even more about gold. People can probably tell that I start to get excited here. Many investors have historically argued for buying gold stocks rather than gold itself. And you could say that it makes sense because the best gold stocks outperform physical gold or the long run because they're short dollars and long gold. And gold has historically performed better than the dollar.

Starting point is 00:58:08 On the other hand, mini gold stocks underperform the market price of gold because they have a destructive capital allocation. Could you please paint some color around whether gold bullion or gold stocks are most appealing? Going back to our prior question of whether or not it's good to have a permanent allocation to some of these commodities. So I think that you can make a much stronger case to having a permanent gold allocation or let's say gold and Bitcoin, whereas it's much harder to make an argument that you should have a permanent gold stock allocation.

Starting point is 00:58:37 And that's because, unlike gold that over the long run kind of keeps up with money supply growth and does what it's supposed to do, gold stocks, as you pointed out, have this destructive capital element. And basically, one is that mining is already a hard business. You don't control the price of your own product. You have a lot of hard capital expenditures. You're often working in jurisdictions around the world that are emerging markets, right? So you're managing these different jurisdictional risks. You face, you know, at the extreme end, you face nationalization. Your countries can just take your minds from you. Or they can change their tax policies. You're dealing with usually more problematic infrastructure, less developed infrastructure. And so it's a challenging business to be in. So there's more things that can go wrong that can go right to start with.

Starting point is 00:59:26 Two, if you have an inflationary period, you know, some of those gold miners, I mean, they use a lot of energy as an input. Right. So they have, all of their machines are using fossil fuels, the gigantic tires on their machines. You don't even think about it, but the amount that they spend on tires for these huge dump trucks that are like, you know, the tires are like the size of a car. Those are mostly made out of fossil fuels. And so when you get like an inflationary period of energy prices going up, it can actually squeeze the margins of gold miners, especially if gold's not, you know, yet keeping up with the price of energy, sometimes even if it is. And then two, you have managerial mistakes. So, you know, during very highly valued gold environments, there's usually a lot of euphoria in the space.

Starting point is 01:00:10 There's a lot of new capital coming in. And managers tend to overpay when they do acquisitions. So they'll take on debt and they'll buy a company, a smaller mining company. And then the problem is that the price of gold goes down, as it did say after 2010, 2011. It turns out you took on too much debt and you overpaid for this asset. And then so now you're channeling money to try and pay off your debt. You might even have to sell your asset, you know, divest it to raise capital. And now you're selling at a much lower price because gold's a lower price.

Starting point is 01:00:42 And so you generally have this kind of pro-cyclical, non-contrary investment cycle that destroys capital. Now, really, really good gold company CEOs are countercyclical, very disciplined with their expenditure. very selected with their acquisitions, they basically are very good at allocating capital and unlocking value. And so the best gold stocks over the long run outperform gold, whereas the majority of gold stocks ironically underperform gold, which is like basically imagine being an industry where like most of you destroy capital. That's what happens in that space. And that's generally true for a lot of commodity industries. Oil's been somewhat an exception because of the, the OPEC and the cartel-like aspect of that industry that has smoothed that out compared to many

Starting point is 01:01:32 other commodity industries. But basically, it's just a very challenging environment. And so there's a much weaker case for owning gold stocks long term. There are some business models like royalty and streaming companies. They are financiers of gold miners. And so they have less operational risk. They usually have, you know, break even prices that are much, much lower than gold miners. And so they're kind of the exception where they've been able to compound capital in a way that most miners do not. And so I think gold and streaming companies can be a long-term hold. But for most gold and silver miners, you have to be very selective with them and only hold them in environments where you expect gold and silver to do pretty well. Otherwise, you're just destroying capital. So I think that's more of like

Starting point is 01:02:18 you don't marry those positions. You might invest in them for one, two, three, maybe even five years, if you're very bullish on it for this part of the decade. But I wouldn't say have a permanent allocation to gold miners in the way that I would consider a permanent allocation to gold itself. So one thing I really like, well, one among many things I really like about speaking with you, Lynn, and following your research is that you seem so balanced in your thoughts on hard money. It seems like these days everything is so polarized. You have a lot of people who distrust the global financial system and they invest almost entirely

Starting point is 01:02:58 in hard money, whether it's gold, silver, or Bitcoin. And then you also have more the, let's call it the quote unquote, more mainstream investor who have zero exposure to precious metals, or Bitcoin for that matter, because they don't feel that hard money has any place in a respectable portfolio. And it just seems like the number of people who embrace both worlds are just getting getting smaller by the day. So being an average reader of your blog, I'm very curious to hear your thoughts on the next topic here because I had the pleasure of reading Redalia's book, The Changing World Order,

Starting point is 01:03:33 which is just a fabulous book in itself. And in the book, Delio documents that throughout time in all countries, you had three types of money. So you had hot money, claims of hard money, and fiat money in that order. You could even argue that over the past 80 years, we had three. different monetary systems. And Fiat money always reset and turns into hot money again. And that's because policymakers have an incentive to always run deficits, typically either by increasing spending or lowering taxes. And so the next question is, I hate to put you on the spot here,

Starting point is 01:04:09 and yet I still do it. So with all of that set as the backdrop, what would the next reset to hot money look like. Yeah, it's a really good question. And it's something I think about a lot because I obviously want to have the best grasp on that question, both for in terms of whether and which hard monies to invest in. And then two, how it can affect other investments? Like how does it affect my equities? How does it affect bank stocks? How does it affect payment stocks? You know, PayPal, things like that. So it is an important question to be aware of. Historically, as you point out, fee currencies eventually fail. Now, what makes this? period unique is that, you know, this period since the 70s has been the most extensive

Starting point is 01:04:51 attempt at fee of currencies. It's the only time that the entire world was on fee a currency. You know, we have better technology we've ever had before, better organization. And so this is like the most credible attempt we've ever made it via currencies. And even in this environment, you'd still have, you know, in emerging markets, a lot of their currencies fail. And then they resort to hard currency, which ends up not being gold, but ends up being like the dollar, which for them is a hard currency because they can't print it. So even in this environment of, you know, 50 plus years of fee a currency, you still have that keep happening to countries over and over and over again where they resort to a harder money standard. Either people in,

Starting point is 01:05:32 you know, people in those countries can protect themselves with, you know, gold, silver, real estate, things like that, as well as by owning those, those harder foreign currencies, they can get through that. As long as, like we talked before, as long as they're not invested in a bank where they risk getting confiscated from you, you know, for the sake of like national solvency. And so this is something that we see even to today. It's not even like a theoretical framework. It just keeps happening. And so far, the survivor bias is that the, you know, the major developed countries have been able to go over 50 years without the system breaking down. Now, critics of the system point out that it's gotten less stable over time. And I would agree

Starting point is 01:06:09 with that, that I think that I think the Petroddala system is less stable than it used to be. I think that the, you know, Ray Dalloy's concept of long-term debt cycle is accurate, meaning that when you eventually get to zero rates and super high debt, you kind of run out of room to keep kicking the can down the road the same way that you have been. And the problem now is that this is the first time within this 50-year fiat currency period, they were going through a long-term debt cycle, meaning that, you know, historically the answer to that is financial oppression, holding interest rates below the inflation rate for a sustained period of time. And I've shown charts on this that basically over the past decade in most countries, cash and T-bill rates have been below the inflation

Starting point is 01:06:47 rate. In the past year, the past couple of years, even long-duration bonds have in many cases been below the inflation rate. And specifically for 2021, it was such a big gap in many countries. Like, the United States, it was 7%. You know, a difference between CPI and T-bills, which is the biggest gap since 1951. So it's the biggest gap in the Fiat currency system. I think there are credible arguments that this fiat currency era will eventually run and become so unstable that it breaks in some way, right? So we already see around the margins, you know, some central banks like Russia are buying gold. You know, they have like a 20% gold allocation. I guess, you know, maybe they read that book, permanent portfolio. So they, you know, they have mostly Euro-denominated assets, but they also have

Starting point is 01:07:33 like a 20% gold allocation. So generally you see a sovereign bid for gold ever since the global financial crisis, this kind of stirred back interest. I think, you know, different kind of serious market participants and sovereign participants started to maybe question the idea that this fiat currency regime might not last forever. We always have a tendency to think we're at the end of history. Like we've solved the prior problems. This happens in commodity markets because people think during disinflationary decades, when commodities are cheap, they kind of think we've solved the commodity problem. We're never going to have high commodity prices again. And then no investment money goes into it. And eventually you get shortages and you get a higher

Starting point is 01:08:10 commodity price environment. Same thing I think that we're going through in terms of, you know, a lot of people, especially people that are very strongly believed against gold, against Bitcoin in favor of the fee current system, that the idea of we've solved history, we've figured out how to do it this time. I will take the under on that view. I think that probably, you know, I think we're already seeing signs that it's not working well. I think we're going to revert back to, you know, some period of either standards go back on a hard money standard or they don't, but people can protect themselves by having those types of assets. So commodity producers, commodities,

Starting point is 01:08:42 or self-custody types of hard monies. What the system looks like going forward, I still think it's an open question, right? Because in some ways you can look back and say, well, gold already failed. You know, maybe we will go back to it, right? So it failed only in the sense that it was too centralized, right? So gold itself as an element didn't fail,

Starting point is 01:09:03 but basically it didn't have an ability to keep currencies tethered to itself. and people didn't have an ability to exchange for it and portably hold it. You know, Bitcoin proponents would argue that the future is Bitcoin. I think that's credible, but I think it's still early, right? So it's a very volatile. You know, right now it's less than a trillion dollar market cap. You know, where's gold is over a $10 trillion estimated market cap. Global assets are something like $700 trillion.

Starting point is 01:09:32 You know, Credit Suisse estimates that, you know, global net worth is like $500 trillion. That includes assets minus liabilities. with the asset side is much larger. And so I still think there's a lot of open questions about how the system ends. And I think it's something that it's, you can't have like a, if you have like a firm view on, the risk is that you're wrong. But it's also not something you can ignore entirely. I think it's a question that we all have to study and look at history, but then also

Starting point is 01:09:58 look at, you know, current geopolitics, current technologies, where the trends are going. And so it's, I think it's an important question to watch. night. So I do think that we're going to, you know, that hard monies are going to have their place in the future again, and that they already do in many countries. You know, Redalia has this great quote where he's talking about that the reason why he made so much money is because of what he knows, but what he knows he doesn't know. And I can't help but think of that quote whenever we have this discussion, because I don't know what's going to happen. I do know that the system we're going to have now isn't going to be here forever,

Starting point is 01:10:32 because that's just the nature of history for everything. It's so. So tricky figuring out what's going to happen. Now today we talked about gold. Are we going to be on the gold standard again? I don't know. It's just one of many possibilities. And whenever you do read up on it, you'll, I'm sure you know, Lynn, but there's just so many different types of gold standards that we've been on in different countries.

Starting point is 01:10:54 So, you know, okay, so what do we refer to whenever we talk about gold standard? So that's one major topic in itself. Bitcoin, I understand the intellectual argument why it has all the. the capabilities that, say, if your money you don't have, but it just becomes so much more complicated whenever you're thinking about the incentives. Who has incentives to do this? You can make the argument, oh, you don't have this issue, the inflation issue you have right now, it's deflationary by nature, it's a better money, ergo, let's use it as a world currency. That's just not how the world works. At least that's not how the world works now. That's not

Starting point is 01:11:31 how you define a reserve currency. That is not how countries sell transactions. So I think it's very, very, very early to consider Bitcoin in that realm. Something I sometimes refer back to is SDR. The reason why I'm saying in that, it's not necessarily because I think that's a great system. It just seems to be a system that countries might be able to agree upon. Yeah, so in my article where I talked about kind of the current, you know, we can call it the petrol system, the system that's been in place since the 70s and why it's failing and where it's going, I outline those possibilities. So I discussed like an SDR like basket, either say a global

Starting point is 01:12:08 SCR or like regional SDRs, which for people that are listening and don't know what that means, that's essentially a basket of major currencies that serves as like a unit of account for like global reserves or international trade. And that was actually proposed as the bank were in it, rather than the Bretton Wood system. But it was not voted on. It was basically, it wasn't the one that, you know, one in that system. And it's one of the ones that would be more balanced in terms of managing trade balances and things like that. And the challenge there is that if fiat currencies start to fail, a basket made of fiat currencies would also fail. It would just fail at a smoother rate. Because if one of them, if say there's five currencies, if one fails quicker, it's balanced by

Starting point is 01:12:53 the other four. But because they're all tied together in some ways, we all have kind of the same roughly zero rate policy in developed markets and high inflation. I think that you generally would have them each pulling each other down, taking turns. I think if the system were to like fail next year, gold has kind of the claim, right? That's kind of the default assumption. I think it was the Dutch central bank published a piece a couple years ago saying that if for some reason the system failed dramatically, gold would likely be the fallback. And so I think that's kind of the default.

Starting point is 01:13:27 And, you know, like we pointed out, that even in a non-gold standard, central banks still use gold as a reserve asset. They're still actively, in many cases, buying gold as a reserve asset. The United States is not. But I think so let's say if we're having this conversation in 10 years. So when it comes to say Bitcoin, I'm like, well, like, wake me up when it's $5 trillion market. Then we'll have that discussion, right? And one thing we're watching is that the market is kind of assessing how hard is the money, right? So it's only 13 years old, right?

Starting point is 01:13:58 So it's kind of like they're testing all these different aspects of it. What happens if you're making a lot of alt coins? Can any of them kind of take market share? We're finding, okay, what if we try to hard fork it? Does that work? What if we, you know, it's just kind of like all these what if questions. And so over time, we're testing it. We're doing different things.

Starting point is 01:14:16 We're the mining hash rates moving out. We're seeing how different countries either ban it or approve it. And as it gets more widely held and less volatile, it could grow in market cap, and then it becomes a more serious discussion, is this something that major central banks are going to hold? And then if they do, and there's a currency failure, couldn't end up being kind of a global substrate for money that kind of compete the gold. And so I think that's a reasonable long-term outlook, but it's like you have to hit certain benchmarks before that becomes the one that would fall back now, right? So right now it would still be

Starting point is 01:14:49 gold. And so I think that's the way to think of it, that basically, even with the SDR, in some ways, whether or not you expect the SDR to win versus, say, gold or Bitcoin comes down to whether not you expect global collaboration. So if you want to short the idea that countries are going to come together and decide on something, you would generally err towards gold and Bitcoin. Whereas if you do expect that they're going to say, okay, we need to do Bretton Woods 2.0, we need to fix the system. And you're going to have U.S., China, Europe, major countries, and currency regions come together and agree on something. Then you could have an SDR. You could have an SDR with a gold component, you could have, you know, there's all sorts of things that could

Starting point is 01:15:28 come together. And of course, in the modern form, that would take the form of like a digital SDR, right? So they would incorporate probably central bank, you know, digital currency technology into the SDR to kind of reinvigorate it from the version that was, you know, initially, that existed since the late 60s. Yeah, I think it would be a default for a lot of people listening to this. They would say, well, the world's governments can't agree on anything. And I'm not the one to say that they necessarily can. But what history has shown is that whenever you do see a reset, what typically has happened at that time,

Starting point is 01:16:00 countries are so exhausted. They're so exhausted upon that. Brent Woodson, in 44, would be one example, that they are willing to come up with that agreement, not a great agreement, but something that just works because the just can't do it anymore of what they've done so far.

Starting point is 01:16:16 So, but Lynn, I know we can go on for hours talking about a monetary policies. You've been very, very generous with your time, And I wanted to give you the opportunity to hand off to your wonderful blog and any other resources. And I can just say that I subscribe to Lynn's blog. It's just such a wonderful resource. So Lynn, please tell the audience more about it. Yeah, so at Linnauld.com, I do public articles, long-form pieces that dive into a subject usually.

Starting point is 01:16:42 I also have a free newsletter that comes out every six weeks that usually talks about more topical subjects. I have a low-cost research service if people are interested. I'm also active on Twitter at Lidon Contact. Another book I could recommend, it's not my book. It's called Money Dithrowned, and it kind of covers this traveler from North Africa, kind of like Marco Polo. He traveled around multiple continents. And the person kind of uses, relies on some of his writings to just analyze commodity

Starting point is 01:17:10 monies from around the world and why certain monies beat other monies and what happened when they interacted. And so, you know, I think we're used to having to change our investments from time to time, right, because we know that they're volatile. We're not used to having to change our money from time to time or even think about what is money. And I think that we're in this environment where we have to think, and it's probably going to be a question for the next 10 years, is what is money? And so I do think that it's basically a subject matter that people would be good to read up on. So the one you recommended or that one or other ones in general, I think

Starting point is 01:17:45 it's going to be a topic that we want to know about. You want to know the history of money. we want to know what are the current proposals for what money is going to look like going forward. Do you want to focus on a money you think is going to win? Do you want to diversify your monies? I think that's going to be, it's already an important question. I think it's going to be increasingly an important question over the next decade. It's something I have future articles I plan to write about. I've already written about it to some extent.

Starting point is 01:18:10 And it's something that just like I analyze different investments, I'll be analyzing different monies. and just basically just like anything else trying to fit into a portfolio and determining where do I want to hold my assets for different types of environments. Lynn, it sounds like we already have the outline in place for the next interview. So with that said, Lynn, it's been absolutely amazing speaking with you. I cannot wait until we can invite you back on and talk about what is money or whatever kind of direction we're going to go next time. Thank you so much for making time once again for the investors podcast.

Starting point is 01:18:44 Thank you. Thanks for having me. for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors

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We Study Billionaires - The Investor’s Podcast Network - TIP426: Gold and Commodities w/ Lyn Alden

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