Top of Mind: Is Gold a Good Hedge Against Inflation?

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Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of the Invest Like a Billionaire podcast. I’m your co-host Ben Fraser, joined by fellow co-host 

Bob Fraser: Bob Fraser, 

Ben Fraser: and today we are coming on to talk about gold investing in gold. So this is a top of mind episode. So these are, hot takes from Ben and Bob on things we’re seeing in the market, questions we get from investors.

Things we follow. And I think this is something we’ve talked, a decent amount about on the podcast, probably more about a year or so ago. We hit on it quite a bit. But what we find inevitably, and I think what spawned this was an email I received recently from someone I won’t name but we would definitely put them in the hard money, economist camp, a well known economist.

And what’s so interesting about the space that we’re in, where, we invest a lot of real estate, we talk a lot about it, real estate. We love real estate. But it tends to attract, the hard money. The Austrian economists, which believe, real assets are the only way to go. And you gotta, fiat currency, fiat paper, it’s, and the gold.

It’s meaningless. Only protection. And gold and real estate are your only protection. And so we love the real estate side of it, we have some different takes on gold. This is the Invest like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth.

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What’s so interesting about your story, which you’ve shared before, but I want to hear it again just on your journey from.

Being the gold bug, back in the day and investing in gold, trading gold and really being a hardcore Austrian economist to now, having a more broad viewpoint on it and just talking about the performance of gold. Because what it’s always comes down to, and I feel like right now, is the heyday of all the gold bugs that are, touting that gold is the ultimate inflation hedge.

Cuz that’s what it always comes back to, right? It’s gold is your hedge against the stupid government. And so now’s a great time. The government’s printing a lot of money. We’re seeing really high inflation. Gold is just pent up, ready to just blow up in price. It’s just perfect storm for gold and we have a hot take.

We don’t think it’s gonna, it’s gonna do that. Yeah. So share a little bit of your story 

Bob Fraser: In gold. Yeah. Let’s let’s give a little background because, one, I love gold. Okay. I love gold. So I actually brought a little gold coin here and this is a 2006 gold bullion.

This is a buffalo coin and it’s got a beautiful picture of a buffalo back there designed, I believe in a 1917. And here is a beautiful Indian head and it’s just gorgeous. This is actually pure gold, 24 karat gold. It’s a ounce of gold and I love owning this. Yeah. It is beautiful. What’s not to love about this?

I love gold and I have brought here a little brother, a a silver bullion coin and this is a beautiful liberty. Liberty head and an eagle back here. Just gorgeous coins. And I love these things and historically they are money. This is how money money was made. And so I, because I loved gold and I became a gold investor in the eighties I became a gold mining and investor investing, gold mining companies, actually made a lot of money buying, mining, buying and selling gold mining companies back in the eighties.

Naturally became this this hard money economist and was quite shocked when, for example, in the 2008 crisis, gold didn’t do well, and and it just never seemed to get out of, never seemed to track inflation. And so what actually did to Europe, to your point, it’s the ultimate inflation hedge, right?

Everyone knows gold is the ultimate inflation. You just know 

Ben Fraser: it, it’s just every, everybody knows intuitive, 

Bob Fraser: right? So I actually put together some of the basic, some of the biggest winners and losers during, by decade. And compared to inflation to see what it is. And I have a little chart here that you can see and this chart.

So I look at the decade of the seventies, decade in the eighties, the nineties, the two thousands, and the 2010s. And if you look in the very left of seventies there, that’s red is actually the rate of inflation. So the seventies was a high inflation time. It was roughly seven, 7.5% inflation average over the course of the decade.

And you can see gold skyrocketed, but you can’t give gold all the credit uhhuh for tracking inflation because gold was at fixed at $35 an ounce. And so they basically unfixed it and let it free trade. They blocked the convertibility to gold at 35, and so gold skyrocketed up. So I would argue that’s the decade of the seventies.

It’s really not the decade of seventies. That’s the 200 years of prior, prior gain, all right? In, in, in a one kind of decade. And you can look at housing beat, beat inflation, commercial real estate beat inflation. Stocks didn’t quite beat inflation during the seventies, during the eighties eighties was also very high inflation decade.

We’re averaging over 5% 

Ben Fraser: inflation. Yeah. Probably closest to what we see now. Exactly, yeah. From an inflation standpoint. Yeah. 

Bob Fraser: Very high inflation. And you can see housing went up, actually beat inflation. The green commercial real estate didn’t quite beat inflation, but tracked pretty close gold, lost money.

What? 

Ben Fraser: No. We say gold is the ultimate inflation hedge, 

Bob Fraser: And it lost money. You actually lost money in gold. This beautiful gold coin, I think I bought this in 2006 for, 1500 bucks. Today it’s 2000 bucks. All right. Yep. 20 years later, you, yeah. Yeah. You know it, it’s, it’s not that great.

Okay. Let’s skip ahead. Gold had a bad decade, right? Let’s skip ahead to the 1990s. Now inflation is cooling down. It’s more 3% range. Gold loses money again through the decade of the 1990s. For 20 years, gold is actually losing money. And then now inflation is cooling off even more in the two, two thousands.

It’s still, it’s two ish percent. All of a sudden gold decides to take off. And I liked that it took off cuz I made a lot of money and that’s what actually, I actually rode that whole wave up and sold gold when it was $1,900 an ounce. I think it hit $1,922 an ounce, something right around there.

And I pinged the top, I pinged the bottom and pinged the ping the top And did super well. And And then gold just has not been able, it really crashed pretty much right after that. And I believe that was a, and then, and so it’s really not been a great inflation hatch and it’s not enduring high inflation.

It really hasn’t proven itself as the ultimate hedge. Let’s talk about some of the 

Ben Fraser: reasons why we’ve done this in past episodes, but it’s, it’s difficult to store it, it costs money to store. You’ve mentioned these things before, right? So 

Bob Fraser: gold. Think about it.

Okay. If I buy a piece of real estate and I’m renting that out, I have a yield, right? Gold has a negative yield, it doesn’t earn me anything. If I own this, it doesn’t produce anything for me. And it has a, I’ve owned this for a long time and has produced some joy. But it hasn’t produced any economic benefit to me.

It whereas I own a real estate, I’m getting paid for that thing, right? So this doesn’t pay me, in fact, I have to pay to keep this safe, right? I have to put it in a safe deposit box. I have to pay somebody to keep it safe for me, right? So it’s it’s really not it’s not ne, it’s not positive.

It doesn’t actually do anything, so what people do with gold is they bury it. What good does that do? Anybody? You know it, it doesn’t have a ton of utility and if you actually look at it, you know what’s happened. Truthfully. Now, Bitcoin has replaced gold, right? To a lot of investors and because, so if I was to take a million dollars.

And I was to convert it into Bullon one, that’d be darn hard to do. And my pants would be sagging pretty low. This stuff is, it’s heavy. It’s heavy. It’s, this would be a thousand coins. I don’t know what this would weigh, but it’s a lot. Trying to transport that, taking that on an airplane, you’re never gonna do it, and that’s just a million dollars, right? If you have a billion dollars it’s unwieldy. And so Bitcoin is obviously much more liquid, much more convertible, much more easy to hide and put in little thumb drive and Yep. Go wherever you want with it. And part of the appeal 

Ben Fraser: of gold is there’s a limited supply, right?

There’s only so much that can be mined. But the same, but physically for the same thing with Bitcoin it’s solved a lot of that supply challenge. 

Bob Fraser: So for hard money analysts, one of the reasons they like gold is because it has a limited supply. Yes. The idea is that no government can print this thing, right?

Yep. And so if they can’t just print these willy-nilly, then it’s gonna retain its value. And there’s definitely some truth to that. But what happens is when you tie a nation’s economy to gold, you limit that economy by pre pretty dramatically. And here, so here’s an example. So let’s say we have, we have a population a hundred years ago of America.

That’s, and I’m probably not even close, but let’s say it’s, 20 million people. Okay? And we have an ounce of gold for everybody in our vault, in the Fort Knox. So we have 20 million ounces, and our entire economy is based on the convertibility of that. But let’s say that economy now we have 400 million people.

So we’ve gone up, 10 x in pop, 20 x in population. But the amount of gold in circulation is exactly the same, right? So it’s actually deflationary, massively deflationary. There’s not enough currency in circulation to actually feed the economy and the population. And so what happens?

So during the Great Depression so what happened, the, all countries used to be on the gold standard or some form of the gold center with convertibility. So convertibility means you can, I guarantee you, as the US government, you can give me a paper dollar and I will give you a gold dollar back.

That’s convertibility. And so that was very kind of standard. Everybody believed that, yeah, you, the only reason you can trust paper currencies if they were backed by a gold dollar made sense back then, two, two countries that had been used to hard currency dollars. So what happened during the 1930s?

During the Great Depression is there was a deficit of demand. So you think about it, people stopped buying things and when people stopped buying things, people started going outta work. And when people started going outta work, they stopped buying things. And it still became this negative doom loop that happened.

And countries wanted to do deficit spending. And this is, I’m a fan of this, okay. Deficit spending. So when the government steps in and that point. And they go and create demand. They’d go say, okay, no one wants to buy widgets I the US government and go out, buy a hundred widgets today. All of a sudden now the widget guy are going, okay, I’m not gonna fire anybody today.

In fact, I might hire some people. And then the people that get hired, now they start earning a wage and they start and it’s not inflationary. If I were to print money to create demand, when there is no demand, when there’s a huge deficit demand, it’s not inflationary. And this is one of my points.

And so the, so there’s a huge misunderstanding around the 1933. Act where FDR confiscated gold, right? The idea is that the evil government desperately doesn’t want you to own gold because it’s power and they wanna keep power outta your hands. And so they confiscated gold. The reason he confiscated gold is because he was on the gold standard.

Yeah. And in order to deficit spending, he knew he needed to spend to create some demand to keep this doom loop from getting domer, right? But he couldn’t do it. He couldn’t spend money unless he had gold. In his vault. So what he did is he confiscated gold to get gold in his vault, and then he had a bunch of money that he could then do deficit spending.

Okay. And guess what? It worked well, here’s the other, here’s the other story. So in, in the 1930s, all the economies of the world were in this same doom loop, and they’re all going down. As soon as they all exited the gold standard one by one, there are economies. You can look, I can show you a chart. And the charts just immediately, their economy just reversed.

So it actually creates, it actually is a it. It’s not designed, the gold is not ready for modern economic systems to be the foundation of all trade and AC and economic activity. It just isn’t, there’s not enough of it. Not enough of it. And it doesn’t expand with population and with economies, which we need it to do.

If you wanna have zero inflation and zero deflation, you’ve gotta have an audience supply. That exactly equals economic activity. And gold certainly doesn’t. Right? 

Ben Fraser: And it goes back to an earlier episode that we did talking about the fate of the US dollar, right? Because a lot of these hard money economists say that we should go back to the gold standard, right?

Or they’re, they’ve been waiting right, for however many years for the dollar to crash, just because it’s not backed by a goal, hence fiat, right? It’s not backed by anything hard, but. To your point, that’s, it’s all an old way of thinking. It is. Has not kept up with the modern economy, 

Bob Fraser: modern needs.

There’s no way we could we couldn’t go back to a true gold standard. You can’t fit, there’s, there’s, how much, what’s the M two or the M three? There’s way too much currency in circulation relative to the amount of gold. Gold can’t keep up. And it’s just not gonna happen.

There’s no way we can go back. There’s maybe some kinds of limited convertibility if people want to do that, but again, there’s just, there’s no reason to do that. You look at the currencies are, there’s, the Swiss Frank is considered a hard currency today, and, but it’s not backed by gold and it’s backed by a government that’s very conservative, right?

And that doesn’t do a lot of deficit spending, and that maintains a currency with great discipline, right? And that’s really what’s necessary. And I concur, I concur with the people that say, Hey, we need more discipline. Discipline in Sure. In our fiscal policies. But, so they want to, hang a gold, gold ball and chain around the neck of the politicians and hey, it sounds like a great idea cuz you know, I want some discipline as well.

And I think we’re outta control, but this is not gonna help. And Sure, as beautiful as it is so what do you 

Ben Fraser: feel like the role of gold in a portfolio is? And again, this is not financial advice for anybody, but Great 

Bob Fraser: question. Yeah, great question. And I like gold. I have a little bit of gold, yeah. It’s, it’s really, the role is really more of an insurance policy. It’s a chaos head. Yeah. It’s catastrophe, one point I was reading about, EMMP. Electromagnetic pulses, which, come from, a nuclear explosion in the atmosphere.

It literally blacks out all electronics, it wipes out electronics, everything. And the same, the sun does the same thing. When it does these reduce, these, does these massive CMEs corona mass injections, it causes the mps in the atmosphere and can wipe out electronics. So I’m thinking, okay, so worse, let’s say, you get these massive mps and wipes out, that kind of thing.

You probably want a little bit of gold, but you probably don’t want a $2,000 beautiful gold buffalo. Probably want something, and I really liked it. Some at one point, this, with these called, these bags of gold right there, bags of silver. They just called junk silver.

And it’s right pre 1965 silver coins, which were, 85% silver. And those are presumably spendable. So let’s say, you’re type of really end of the world scenario, Hey, why not have a little bit, but let’s go back to just even you lose power for, you’re in Puerto Rico and the hurricane comes to, and you’re without power for 60 days or 90 days.

You want to have something that you passes for currency when there is the credit cards are not working. So I would argue that. And, maybe it makes sense to have a little bit of chaos currency around. But, and so insurance, but I wouldn’t put more than, 5% of your portfolio into gold and silver, except the beautiful part of it.

I just, I like looking at it. I’m never gonna sell it, because I just like it so much. It’s just stunningly beautiful. It’s work of art. Yeah. And metal that I can. Hand around and talk about so conversation piece, but it really has no utility besides that, besides your joy factor, yeah. 

Ben Fraser: Hopefully, these thoughts are helping you think you know differently about, some of the headlines maybe you’re seeing. So obviously we love feedback and we have a lot of people write in and share thoughts and obviously our opinion is one opinion, but hopefully, some of the data, the data doesn’t lie.

The, if you look at the inflation, And the performance of gold by decade. It’s hard to make the argument. The correlation’s probably pretty low, right? Yeah. As far as gold tracking inflation. And again, hopefully this was valuable and you got something out of it. We always appreciate you sharing this podcast with friends, family, and of course, rating and reviewing on the platform of your choice so that we can continue to share this with more people.

Thank you so much. 

Bob Fraser: Take care, all.