Gold, Trust, and the Return of Real Assets ft. Philip Diehl

[00:00:01] Philip

I think we’re probably seeing it right now because central banks see an opportunity to buy gold at a relative bargain price when it’s going up. So, likewise, we urge our clients to buy the dip. And during this run we’ve seen multiple dips which have represented great… They’re basically time machines that have allowed buyers to go back in time to a month or two earlier when prices were lower, buy then, and then ride the next ride up.

[00:00:40] Intro

Welcome to Top Traders Unplugged. In markets success doesn’t come from predicting what happens next, it comes from being prepared for what you can’t predict.

In each episode we go deep with some of the world’s most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no short-cuts, just real conversations to help you think better and invest with confidence.

[00:01:14] Alan

Today, I’m delighted to be joined by Philip Diehl. Philip is currently President of the US Money Reserve, which is one of the world’s largest private distributors of US and foreign government issued gold, silver, platinum, and palladium coins. He was previously the 35th Director of the United States Mint. He is a frequent commentator on the precious metals industry and a well-known figure in that industry. So, Philip, great to have you with us today. How are you doing?

[00:01:41] Philip

It’s great to be with you. Thank you very much. I feel good. Here we are in April, in the Pacific Northwest, and we’ve got an early spring. It’s just beautiful here.

[00:01:51] Alan

Good stuff, and it’s definitely a timely occasion to speak. We’ve had tremendous moves in precious metals, and great volatility, and big price appreciation in recent years. So, hoping that you can help us untangle all of that and get some insight.

But we like to start off with our guests to get a sense on their journey and their career to date. How did you get interested in economics, policy, precious metals? Where did it all begin for you?

[00:02:23] Philip

Well, really, my interests originated out of the 1960s where I grew up amongst the Civil Rights Movement and the Vietnam War and the beginning of the ecological movement. And I just sort of took to those issues. They were really important to me. I was growing up in the little town of Lubbock, Texas, and far West Texas. And I was more interested in what was happening in the larger world. And my parents thought I would never be able to make a living because I was interested in policy. And so, I think they were ultimately surprised that I was able to make a go of it. And I’ve really pursued that since my teenage years.

[00:03:12] Alan

Very good. And along the way, you have been in government, in policy, and also you’ve served as the director of the United States Mint. I mean, how were all those experiences?

[00:03:25] Philip

Well, I talk about my career as being sort of a checkerboard career. I’ve done so many different things. I paid my way through college by working as a front desk clerk in a motel, and working hard labor and a pipeline construction firm. I then went to Austin, which is sort of the mecca of Texas, certainly during the 1960s and 1970s. I hooked up there with a fellow who was running for statewide office, who ultimately became a legend in Texas politics for decades. His name was Bob Bullock. And I really got my start.

My career really kind of took off there. I worked in policy, economic policy issues, and politics in Austin. My career took a side turn when I got a fellowship to go to Stanford University in a political science department program. And so, I went out to California for a couple years, discovered that academia wasn’t really for me.

And so, I came back to Austin and again worked in politics and government. And by the time I turned 39 years old, “Scotty beamed me up” to Washington, D.C., fairly late in a career, to work as a senior advisor to US Senator from Texas, Lloyd Bentsen. And I was in that role before I became staff director of the Senate Finance Committee, one of the most powerful committees in Congress. I was there in that role for only a short period of time before Bill Clinton was elected president. And then he chose my boss to be his first Secretary of Treasury.

And on the first day of the Clinton administration, I went in as Secretary Bentsen’s Chief Of Staff and a liaison with the White House. So, that was sort of the arc I took to get to Washington, D.C. and. And it was really unconventional.

And then it took an even more unconventional turn when I accepted the offer of the appointment as director of the United States Mint, which is a presidential appointment with Senate confirmation. And I’m happy to say that, back in those days, I could actually get a unanimous confirmation vote from both Republicans and Democrats. And thus started my quest at the United States Mint.

[00:06:08] Alan

Very good. And these days, you serve as President of US Money Reserve. Can you give us a bit of color on what US Money Reserve does?

[00:06:16] Philip

Yeah, US money Reserve is a company that sells retail. Sells retail gold, silver, and platinum coins, for the most part, also palladium. But our major product line is gold. And that’s really the area where I have my expertise. Silver is also part of my expertise, but I really focus on the gold market. And even though both of them are precious metals, they have very different market dynamics.

So, I joined this company because I believed it had a strong commitment to customer service, ethical business practices. That was really important to me when I was director of the United States Mint. That was part of the cultural turnaround that we accomplished at the Mint. And so, I really admired the leadership that the company has today, how innovative it is, and how dedicated it is to bringing great products to our customer base at an affordable price.

[00:07:31] Alan

Very good. Well, you mentioned your kind of focus on gold over the years and your expertise in that market. And I think it’s fair to say we’ve seen some extreme moves, possibly fair to say, but unprecedented volatility, or at least levels of volatility we probably haven’t seen in a number of decades. I mean, just taking a step back, I mean, how would you characterize the moves we’ve seen in gold over the last kind of three to four years? Do you think it’s kind of something not unusual given the macro context or how would you describe it?

[00:08:07] Philip

Yes, it’s a very unusual situation. Although I think it is becoming much more of the arc of gold prices in the foreseeable future. And by that I mean over the next 10 years or so. Beginning about four years ago, gold had really gone through sort of a quiet period as the world economy kind of settled out of the turmoil of the global financial crisis.

Gold had a stunning run from the beginning of the Crisis up to 2011, when it began to fall back to a level that reflected the settling of world economic and political markets. But beginning two and a half years ago, things changed.

And I really marked the beginning of this remarkable bull run in gold to the Hamas attack on Israel. That really began the shakeup that led to this 2 1/2 year run where gold went from US$1,800 an ounce to US$5,500 an ounce before settling back. Last time I checked, this morning, it was about US$4,800 an ounce. During that two and a half year period, a number of other forces came into play.

Now, geopolitical uncertainty (and certainly war) is one of the big factors, historically. And what I mean historically, I mean, over hundreds, if not thousands of years that has driven gold prices. When uncertainty strikes populations, they turn to gold to protect their wealth. And so, that was the first factor that emerged.

Then shortly after the attack on Israel, we began to see the first signs that inflation rates were falling in the United States. And with that came hopes that interest rates were going to be falling. And falling interest rates typically are really good for gold. And we saw gold respond to that as well.

Around that same period of time, it became clear that central banks, central bank buying of gold was entering the picture. And sure enough, now we have four years in a row where central banks have bought an unprecedented 1,000 metric tons of gold each year. And, typically, when that gold is purchased by a central bank, it comes out of the market, it goes deep into vaults and is not actively traded. So, not only do you have the purchase of the gold, but also driving prices you have that gold being deeply stored in the central bank vaults.

Another factor that we’ve seen that has played out over the last five or six years is that, despite the incredible price increases that we’ve seen, really since 2001, gold mining has not been able to keep up with demand. It flatlined beginning about five or six years ago. And despite this huge incentive of higher prices, the miners have not been able to increase production.

Then there is all of the turmoil and uncertainty around what has happened with the Trump administration’s change, and economic geopolitical strategy, its relationships with its allies, its adversaries. All of that is shaking up the market in a way that are not transient forces but are long term forces that I believe (and it’s not just me, I, of course, sell gold), and a lot of really brand name analysts who are from outside the industry, have come to a similar consensus, that we’re in for a long term growth in gold prices.

[00:12:44] Alan

Interesting. Well, you touched on a number of the factors, I guess, that are cited for the appreciation of gold in recent years. And, I guess, if you were to look at the performance of gold over many years, it was often common to point to interest rates, as you say, in real interest rates, and the US Dollar as being explanatory variables for the path of gold. And that makes sense.

But obviously what we’ve seen, up until I guess January or February of this year, was an unusually strong run-up even without those factors. And people attributed it, initially, to central bank buying and then more retail participation. In terms of the central banks, I mean, the other narrative around this was it was a debasement trade, I guess. It’s concerns about fiat currencies in general. And I guess the central bank argument is somewhat linked to that, but also, maybe, linked to the issue around how Russia’s assets were frozen after the Ukraine war and, I guess, what you call maybe the weaponization of the US dollar. So, I mean, from your perspective, what’s driving the central bank action? Is it concerns about the value of the dollar or is it the weaponization, or a combination?

[00:14:05] Philip

Well, there’s a combination of factors that are driving central bank gold mind. I think there’s been too much emphasis before this year. This year has changed matters, but before this year I think there was too much emphasis on the attempt to escape the hegemony of the dollar and world financial markets.

The dollar has had a very steady performance. In that role there has been tremendous confidence in the dollar. You can’t beat something with nothing. And when you look around at who the potential competitors are to the dollar, none of them really stand up. Certainly, until the Chinese establish greater confidence in the rule of law, then the yuan can’t emerge as that kind of a basis. So, I just think that’s been overblown in the wake of US action against the Russians.

Now, things have changed in the last year and there has been much broader use of the dollar, or the threat to use the dollar, against a much wider variety of countries, including our European allies. And that has spread the concern about how to take, and whether it’s necessary to take defensive actions against the use of the dollar in those circumstances.

Now, the other things that have been driving the central bank purchasing of dollars, and the selling of treasuries and other dollar based assets, is simply an attempt to diversify their holdings. Really, the recommendations that we give our clients are very similar to the policies that central banks follow.

Our buyers of gold tend to buy and hold the gold as wealth preservation and also wealth appreciation, but their primary gold is for wealth preservation. And that’s really what central banks are doing as well. But we don’t really recommend that people put 100% of their money or even 50% of their money into gold. We recommend a balanced portfolio.

And that’s what I think the central banks are doing is they are rebalancing their portfolios in recognition that the dollar was at very high levels, over 110 at that time, and that what goes up must come down. So, it made a lot of sense to sell dollar-based assets and to buy gold, especially here in the last two and a half years as gold prices have been on this extraordinary run.

And then also there’s another force that’s driving, and one of the things is, we talk about central banks buying gold as if they all have the same incentive; that they’re all buying or selling gold for the same reason. Well, that’s not the case. You could look at some of the central banks in Eastern Europe and you get a pretty good idea that they’re buying gold for protection related to the Russians and what the Russians might be up to. And in the case of Turkey, there’s been buying of gold in an attempt to build confidence in their currency.

And so, you look around the world and there’s various reasons for why we see this very strong, steady interest despite the increase in the price of gold out of central banks. And I think we’re likely to see that. I think we’re probably seeing it right now because central banks see an opportunity to buy gold at a relative bargain price when it’s going up. So, likewise, we urge our clients to buy the dip. And during this run we’ve seen multiple dips which have represented great… They’re basically time machines that have allowed buyers to go back in time to a month or two earlier when prices were lower, buy then, and then ride the next ride up.

[00:19:05] Alan

Now, you mentioned central bank buying, but you also mentioned Turkey. And one of the interesting themes that’s emerged in the market in the last month or so is the idea that maybe now central banks have done so well with gold that they may be sellers. And there’s a story in the FT this week about Turkey has sold quite a lot of gold in the last month and lent out some of its gold, I guess, to generate dollars to help stabilize its currency. But I mean, it’s interesting how quickly the market narratives can change.

Do you think that’s an isolated incident or do you think we could see new supply coming from central banks now that they’ve profited so well from the run-up?

[00:19:48] Philip

I think this is a temporary situation. I think that some of the countries, of course, with the shutdown of the Strait of Hormuz, and it’s not just oil, it’s fertilizer, it’s microchip manufacturing. The fallout from this is huge and global. It hits some countries much faster and harder than it does others.

We here in the United States are being affected, but not like many other countries, including countries, of course in Asia, Southeast Asia, Japan, Europe, Africa. We are relatively insulated here because of our large production of oil and gas here.

And it’s really crucial for Americans to recognize that others, because of our policies, others are hurting even worse than we are. And I think that’s beginning to sink through to people that we need to have this bigger view of the world, that we’re all in the same planetary boat together.

So, I think this is a temporary move by the Turkish Central Bank. We may see a few other countries sort of move against their previous policies of buying gold. After all, when we, as individuals, buy gold, one of the reasons we buy it is to have an asset, an outstanding, reliable asset available to us in times of emergency.

Now, if we face an emergency and we dip into our gold holdings and sell them, that’s not an indication of a lack of confidence in gold. That is an indication that we were wise to buy gold and have it available for those emergencies. And yes, there are countries that are facing significant economic and financial pressures right now, and they are finding that their investments in gold are serving their purpose.

[00:22:18] Alan

Interesting. The other constituency that’s been mentioned, as a big buyer of gold, has been Chinese demand in the last while; retail and I guess spec buying as well. I mean, that was really attributed to the last run up in gold prices right before the correction, I would say.

Is it more retail or, I mean… Chinese (I like to speculate) is the stereotype, is it that kind of speculative demand or is it more institutional? Or how do you see that, the nature of the Chinese demand?

[00:22:54] Philip

I think the foundation of the Chinese demand… I’m really glad you brought this up because here, in the United States, of course, we think we’re the center of the world and that our weight in any market is the weight that matters. The reality is, probably, oh, I don’t know, it varies, 60%, 65% of retail demand for gold comes out of China and India. The United States represents maybe 5%. Europe might be another 5% to 7%, We’re the tail that is wagged by the Asian dog.

And so, what has been happening in China… First, understand the Chinese market. It’s crucial to understand that there’s a deep cultural attachment to gold that is foreign to us here in the West. And one of my colleagues, a former director of the Mint, Ed Moy, his family was able to escape China because of the gift, the wedding gift of gold to his grandmother. And that gold financed their escape from China after the revolution and was able to be their device by which they got to the West.

This story has been told thousands of times, how families in Asia have been able to survive. And I don’t just mean surviving economically, I mean to survive physically because they had these assets in hand. And in Europe, the same story can be told about Jews being able to tap their family wealth in the 1930s in order to escape Germany.

But here in the United States, we haven’t ever had a history like that, except perhaps maybe after the Civil War. But all of that is a foreign concept to us, that deep rooted reliance on gold. So that’s the first thing to understand.

The second thing to understand is that with the central bank buying so much gold, the Chinese have taken their cue from their own government that there must be something to gold because the Chinese central bank is buying it so heavily.

The third thing is that the Chinese economy has been in the tank for several years and this has included the collapse of their real estate market, virtual collapse of their stock markets, and people have been burned terribly by these other assets. And the Chinese government restricts the ability of Chinese citizens to buy assets from outside the country in order to control currency. And gold is one of those few alternative assets that is beyond the control of the government, that hasn’t been inflated artificially by either corruption or government overinvestment.

And so yes, Chinese retail buyers have gone all-in for gold and they have been a huge player in this run. And then, on top of that, you have the traders who have recognized this dynamic and have joined the bandwagon, using ETFs in particular, and have also contributed to prices in China.

And then there’s yet another factor, and that is the value of the dollar. The demand out of China came well before the Trump administration came in, the second Trump administration, but it’s been clear from the beginning that the Trump administration wanted to lower the value of the dollar to make American products more competitive overseas.

And because gold has sold in dollars all over the world, then that has made gold less expensive to Chinese buyers. So even though the price in dollars is going up, it’s becoming less expensive otherwise for Chinese buyers until just really the last several months where gold has rallied as we’ve entered into this warfare in the Persian Gulf.

[00:27:51] Alan

Very good.

A lot of the factors we’ve been talking about, debasement and concerns about fiat currencies, etc., those arguments have also been put forward for Bitcoin, and Bitcoin being seen as a digital gold. But obviously we’ve seen a very notable decoupling between gold and Bitcoin over the last year or so, with, obviously, gold being a much stronger performer versus Bitcoin. Any insight as to why we’ve seen such a stronger reaction in this cycle from gold versus Bitcoin?

[00:28:32] Philip

Well, first of all, I’ll say I’ve never bought into the idea that Bitcoin was digital gold.

[00:28:39] Alan

Okay.

[00:28:40] Philip

I think whatever coincidence in movement of gold and Bitcoin was a result of simple coincidence or transitory forces. First of all, no product that loses 50% of its value over the course of a few weeks can be considered a store of value like gold is.

And that’s exactly what has happened with Bitcoin. Not once, not twice, but at least three times. And we know it’s going to happen again if it recovers from this last one.

I’m not sure that it’s certainty that we’re going to see a full recovery of Bitcoin from this disastrous last fall. There were a lot of people, many more people who were burned, who bought during that run-up, late in the run-up and who even lost life savings. And I have heard from them.

There’s almost no coverage in the media about how these people have been hurt by Bitcoin. And part of it is that nobody wants to… First of all, everybody wants to hear the get-rich-quick story because they think, well, that can happen to me too. And so, the story about the Bitcoin millionaires and Bitcoin billionaires get much more traction in the media.

The second thing is that there are a lot of people hurting for a lot of different reasons, and Bitcoin is only one of them. So, when we focus on the financial stresses people face, it’s a target rich environment. And Bitcoin’s not the only thing that is available to talk about. Bitcoin has a track record of what, 20 years?

Gold has a track record of 4,000 years as a store of value, especially in periods of crises, it’s been tested over, and over, and over again. And there’s a reason why gold also has a global… It has this long historical reach, and it also has a global reach.

So, it’s so unique compared to Bitcoin in that regard. I also find it ironic that people who complain about fiat currency, point at fiat currency, talk about how it doesn’t have any intrinsic value. And of course, I have heard a lot about that. I was director of the United States Mint. We produced the most powerful fiat currency ever in the world.

And one thing I think that’s really important to realize is that fiat currency has a physical presence in the world. And just like gold does, it has a value. Even though we don’t think of it as an intrinsic value, it has a value because we all have agreed on it, or most of us have agreed on it. It’s the same thing with gold. It’s the same thing in everything in human life. It has value because we agree it has value.

There are a few other things, like food, water, air, that clearly have intrinsic value to humans, but the rest of it is by consensus. And I think it’s ironic that a currency that cannot be seen or touched is now seen or represented as the great alternative to fiat currency that at least can be seen or touched.

[00:32:44] Alan

Now, obviously, in your position at US Money Reserve, you are seeing the trends in the actual retail demand for coins and for fiscal gold. I mean, what are your observations on that? Does it tend to rise after we see price rises or is it steady? And I mean, what’s the rationale or the basis for buying physical gold as opposed to buying, say, a physically backed ETF to get your gold holding?

[00:33:13] Philip

Several things. Number one, ETFs were created for a very specific purpose, and that was to give virtually instant liquidity to people who want to have a position in gold. Now, I’ve used some very specific language here. It is not to give investors liquidity in the gold they purchase. I didn’t say that. Because with ETFs, you don’t own the gold. You own the value of the gold. But that gold is never your goal. You can’t go anywhere, you can’t order it to be shipped to you. You only have the value of that gold.

So, that’s one thing that’s really important. And many people who are more naive investors, who have not really distinguished their interests in gold from those of other traders, miss that. They don’t understand. They don’t actually own the physical gold. They can’t have it shipped to their bank to put in a security box.

The second thing is it’s instantaneous, virtually instantaneous liquidity. And the reason why some investors want instantaneous liquidity is because they want to trade, they want to move fast in trading gold. And these tend to be pretty sophisticated traders.

The people who buy physical gold much more often buy and hold like you would hold an insurance policy. And, in many cases, they want it close to them in their local bank. Sometimes they want to keep it in a vault at home. Some people hide it under their bed, buried in a farm in the farmyard.

I had an uncle who had gold, owned gold and he owned a farm. And it was buried in the farm, in one of the farm fields. And when he passed away, suddenly people in the family realized nobody knew where that was except for my older brother. And so, he was able to help them sort that out. So, we don’t recommend storing it at home, under your bed, or burying it out of the yard.

But our buyers, physical gold buyers, want to buy and hold it. I mean, it’s the same thing as central banks. Central banks aren’t buying ETFs, they want to buy and hold the gold for very specific reasons. And, as I said earlier, I think our gold buyers, our retail gold buyers are much more motivated by factors like central banks are motivated. So, I think we’re really talking about two very different products and ways of using gold products in order to play in that gold market.

[00:36:36] Alan

Yeah, and I mean in terms of the trends you see, obviously, as you say, people buying physical gold are not going to be trading. They’ve got to go and pick it up and store it, as you say. So, they’re long-term investors, but presumably they are influenced by the price trend.

So, when you see the price trend accelerating, do you tend to see more demand? I suppose the frequent characterization is often that the retail is late to the party; that they’ll come in later and then they’ll get out. I mean, any observations on what you see from that perspective or is it fairly steady?

[00:37:10] Philip

It’s hard to talk about the retail market in general, and especially now because so much has changed in all markets. Part of it is due to the COVID 19 pandemic, part of it is due to the supply chain shocks that occurred during and long after the pandemic. The Ukraine war has changed matters and the second Trump administration has changed markets as well. All through markets we’re seeing correlations that we used to be able to count on to be rules of thumb and guidance. They have come undone.

Also, the other thing is that different retail markets respond differently. For example, my observation has been that Chinese buyers tend to be a little more savvy about buying. I think part of this is because gold has been so crucial of an element in the culture and in the financial wellbeing of the Chinese public that, of course, they’d pay closer attention to it.

So, I think there’s more of a tendency for Chinese buyers to buy on the dip, to see falling prices as an opportunity to buy rather than a signal that a run, a bull run has come to an end. Here in the West, I think there’s more of a tendency to hop on the bandwagon. And the fortunate thing is that this bandwagon has been running for two and a half years, and I believe it has a long way to run because of all the forces that we’ve talked about so far in our conversation, as well as others are all aligning to strengthen gold and support gold.

They won’t all necessarily play at the same time, but they are definitely playing a tag team in the marketplace that I think will drive gold, as I said, for the foreseeable future.

[00:39:38] Alan

Yeah, now you didn’t mention earlier, I mean some of these big cycles that we’ve seen in gold. And obviously, gold was fixed for a long time and then it was unleashed, I guess, in the Nixon era. And we had a huge run up in the 1970s. And then, obviously, Volcker came in and raised interest rates. And then gold began, I think it was, probably a two decade decline, I think until the early 2000s. And then, as you mentioned, there was a run-up to 2011, and a decline for a number of years, and now we’re in the midst of the next run-up.

So it is, as you say, over the really, really long-term it’s a store of value, but along the way it is volatile as well. So, I mean, how do you speak to investors about allocating to gold? I guess there is some kind of sense of risk with gold, at least that you could come in at a 2011 type scenario or a 1979 type scenario and see a big drawdown. How do you think about balancing the risk of a big drawdown versus the really long-term structural underpinnings?

[00:40:46] Philip

Gold is like every other investment class. There is risk in any decision to invest in any investment vehicle. There’s risk in deciding not to invest. If you keep your money in your mattress, you’re running a very significant risk in that situation. So, risk is part of financial life. What you want to do, and we really emphasize this, is it’s crucial to have a balanced portfolio.

Now what is a balanced portfolio? That depends on where you are in your investment life, your plans for retirement, what your goals are, your level of risk aversion. It’s very complicated. And I’m often asked, how much of my portfolio should I allocate to gold? I’m asked this by family members, and I say, I don’t know, I can’t tell you. Number one, I’m not a financial advisor. And number two, I don’t want to get into all those details with you. I’m just not qualified to do that.

But there are people who are highly qualified, who are changing their recommendations about portfolio allocations to gold. The most dramatic change occurred last fall by Morgan Stanley CIO Mike Wilson, who has really broke from the ranks that has have been absolutely solid for decades; the ranks of investment professionals who recommended a 60/40 allocation; 60% for stocks, 40% for bonds.

Wilson recommended a change to 60% for stocks, 20% for bonds and 20% for gold. We’re seeing others raising their recommendations to 10%, 15%, even 25% allocations to gold. Well, today the average American portfolio has 2.8% allocated to gold. So, any kind of a significant shift, following these top-level financial advisors, to move into gold, can have a huge impact on demand for gold.

And the thing to bear in mind is that, when we’re talking about moving 20% of allocations from the bond market into the gold market, the bond market is something like 8 times larger, 10 times larger than the gold market is, in terms of capital expenditures. And so, a small movement of bonds into gold will have a huge impact on gold prices because of not only the demand coming in, but how small that market is.

So, that’s sort of a long answer to your question. But I think that we’re going to see, and we’re already seeing, a major change in attitude toward gold.

There are a couple things driving this. This is the other point I wanted to make. Gold has outperformed the S&P 500 since 2001. I mean, very few people talk about that, and that’s including the reinvestment of dividends. Gold outperformed the S&P 500 over the last 10 years, certainly over the last five years. I’m not sure if it’s outperforming the S&P 500 so far this year. They’re both probably pretty close.

[00:44:56] Alan

Return expectations… If you’re investing in gold, obviously, you know, it’s positioned as a store of value. So, at a base level you would hope that your gold allocation should at least beat inflation if not a little bit more. But as you say, the returns since 2000 have been even better than equities. And obviously, which seems surprising because equities, their benefit is derived from earnings and economic activity whereas gold is an asset that doesn’t do anything except, you know, being used as a store of value, etc., or else in jewelry. So, I mean, it’s kind of linked to, what’s the right allocation?

But I mean to your mind it’s hard to put a figure on it. But what’s a reasonable kind of long-term return expectation, would you say?

[00:45:52] Philip

Well, you know, I’m not going to give a percentage. But I will tell you this, I am confident it’s going to outperform the S&P 500 over the next 10 years.

We’ve had an extraordinary run in stocks, in equities. And I think the general consensus, what I read from the financial analysts, is that we cannot expect those sorts of returns over the next 10 years. And I think the contrary consensus for gold is that gold will perform as well in the next 10 years, at least as well in the next 10 years as it has in the last 10 years.

So, I think that’s a clear indication that whatever returns we expect from gold or equities, that gold is going to beat it, just like it has for the last 26 years. And the thing is, equities carry greater risk than gold does and yet the returns are less than gold.

So, it’s like you have an insurance policy that is returning more than your equities portfolio, and that’s a head scratcher. You know, you can look at that and say, yeah, if that’s a 25 year trend that has held during most of that 25 years and over the entire 25 years, and you expect it to continue for the next 10 years, there ought to be at least a review of the portfolio and the role gold ought to hold in it.

[00:47:42] Alan

I mean, we’ve been talking about, I suppose, the long cycles in gold, and the obvious parallel between what we’re seeing now is with the 1970s, I guess, because a lot of people… back to a crisis in Iran and people worried about stagflation. I mean, in terms of this run-up, and the run-up we saw then, and the drivers, do you think they’re different? Is this more the central bank driver? Or do you think it’s all pretty much a similar set of concerns around the dollar inflation, kind of familiar trends? Or is there something different about this move, would you say?

[00:48:14] Philip

Yeah, this is very different. This is not the ‘70s all over again. In the 1970s, first of all, we had this extraordinary situation in which the value of gold had been set by law for, I don’t know, almost 50 years, 40. And as a result, really, Americans were new to the gold market. So, number one, that was a difference.

Number two, the inflation that came of that period came from two sources, but really one major source. One source was the cost of the war in Vietnam and the failure of the prior administrations, especially the Nixon administration, to raise taxes to cover the costs of the War. But the major cause was the oil embargoes that rippled through the global economy and showed up in American prices, just like we’re beginning to see now with the oil crisis, the greatest oil crisis in the world’s history with the close of the Strait of Hormuz.

And so we saw this rapid increase in interest, in inflation, and we saw a long period of inflation in which inflationary expectations got soaked into the economy, where labor and business all expected prices to rise. And with that expectation, prices did rise. It just set off a natural dynamic.

And that was one of the things that the Biden administration and the Federal Reserve were really focused on, during the most current bout of inflation, was to prevent those expectations from soaking into the economy. Because then it becomes really difficult to bring inflation down. And it never did.

And as a result, inflation did come down, beginning to get fairly close to the Fed’s 2% target. Now we’ve seen it jump back up again partly because of war and oil prices, but the tariffs have played a role and other forces have played roles too. So, those are really big differences.

The other difference is, there was really no big international geopolitical conflicts that were going on; warfare. I mean, there was the Soviet Union’s invasion of Afghanistan, but that was a regional war. It wasn’t a really… It was nothing like war in Europe, which we have seen going on for four years now, a mix of World War III, World War II and World War I dynamics working in Ukraine, and the expression of aggressive intentions on Eastern Europe and on Scandinavia, as well as now this broad war in the Middle east, and continuing frictions in the South China Sea. Nothing like that existed in the 1970s.

And then, you know, like you said, we had the central banks buying gold. Back in those days, in fact, right up until the 1990s, central banks were reliable sellers of gold, especially the Western banks. And that has been inverted. So no, the comparisons to the 1970s, I think are really off the mark.

[00:52:20] Alan

Okay. I mean, if people want to get gold exposure, the other thing that is highlighted is the gold miners themselves. And they’re obviously a slightly different proposition. I mean, for a while in this run-up, the gold miners tend to lag and then they kind of caught up a bit.

I mean, there’s been a sense, I suppose, the stereotypical narrative around the miners has often been as value destructors in the sense that between not fully capitalizing on the rising in gold prices. Do you have a view on the miners as an investment or as kind of a complement to owning physical gold itself?

[00:52:59] Philip

Yeah, I think the miners are really in a tough position, especially in terms of keeping their returns up to the price of gold. And it goes back to what I referred to earlier about how mine production has flatlined over the last five to six years, despite the fact that gold prices have, well, just in the last two years have tripled. And so, you’d think that there would be this response by the gold miners.

Now, the reality is that mining anywhere in the world takes a long time. From the time you discover a deposit until you’re actually able to produce and get it to market, in many cases is 15 to 20 years. Nevertheless, you would expect mines that are already in production, if prices tripled, to be able to increase output because portions of the field that were not economical become economical. And you’re already mining that field.

And I’m out of Texas. I follow mining, the oil in particular, because it’s virtually in my blood. I worked in the fields, and I advised the Secretary of Treasury, Lloyd Bentsen, on oil and gas issues. So, I don’t know gold mining that well, but I know the mining sector well.

I also know that like oil, gold is more difficult to find and more expensive to mine. Everything is going up in value; the equipment, the skill sets that are needed, the technology that is needed. There’s higher risk in the places and in the countries, both economic and political risk in the countries where gold is mined these days.

And the environmental restrictions and requirements placed on miners, that I think are absolutely appropriate, are beginning to make it more expensive to mine as well. So, I think the miners are going to continue to struggle despite these higher prices, struggle to increase production.

[00:55:34] Alan

Okay, well, we talked about Turkey selling some of their gold recently, and obviously central banks, as you say, and sovereigns hold a lot of gold. And there’s been some talk in the US about the gold that the US treasury owns, and should that be revalued, and what impact that would have. Would it free up capital for other projects, maybe even a sovereign wealth fund? Any thoughts on that?

[00:55:59] Philip

It’s not going to happen. That’s just my take. Now, the reality is that President Trump has been able to do a lot of things that, number one, I would have said were highly unlikely to happen. And where, you know, there’s been questions.

He has stretched the authority that he has been given under law and under the US Constitution, and in doing so has been able to do a lot of things that would otherwise have surprised me. For example, a small example, one that I know about, and that is his executive order eliminating the penny.

Now, the Constitution gives power over coinage to Congress exclusively, and a decision to eliminate a coin really sits in the hands of the Congress. But no one has fought him on this and for good reason. Number one, why, why would you fight the President on eliminating the penny when there’s so much else going on? And the second is, the penny is long overdue to be eliminated. As Mint Director, I guess, 25 years ago, I went in and recommended the elimination of the penny. It’s a disposable coin. So, it’s long overdue.

So, irrespective of what his authority was, the outcome was right. Now, revaluing the gold in Fort Knox. And by the way, Fort Knox is under the control of the United States Mint. It’s part of the United States Mint. So, it was under my authority when I was director of the US Mint. Revaluing the gold in Fort Knox doesn’t accomplish anything other than changing some numbers on a balance sheet. It does not create any additional funds that could be spent, irrespective of congressional appropriations.

Even if there were additional funds that were raised, that were suddenly available to the government to spend, it would have to be authorized and appropriated by the US Congress. And the Congress could do that by raising taxes, or by deficit spending, or by either of those mechanisms without touching the gold in Fort Knox. So, I don’t think there’s really much of a point in it, and therefore I don’t think it’s likely to happen.

[00:59:00] Alan

Okay, I’m conscious of time, and we’re coming up towards the hour, and we do always like to get some reflections from our guests over, you know, their career, and lessons learned, and also particularly any advice they might have for people who want to learn more, say, about the gold market, and global macro, and gold in the context of macro. So, any thoughts on that?

[00:59:23] Philip

Well, one of the real strengths of my company is its commitment to educating customers. We put a tremendous number of dollars of resources into educating customers.

I participate in a weekly podcast in which a young man, Brad Chastain, who’s very bright about economics and finance, he and I address issues of the day in layman’s terms. We try to keep it pretty simple and straightforward. And they’re probably about 10 minutes long, so there’s a whole library of those.

There’s other print material that is on our website, usmoneyreserve.com, and so there’s just this wealth of information that people can go to that is not designed to get you to buy from US Money Reserve. It’s just to educate you on gold, and on physical gold in particular.

Also, I’ve just gotten really into using AI for research purposes. And you have to be careful on AI. You can get led down rabbit holes. But I have found that it’s really useful in exploring topics and giving me a general overview and then digging a little bit deeper and in particular then looking at what the sources are to make sure that I’m comfortable with the sources that they’re relying on. But I’d encourage doing… I think that’s much more efficient research than Googling, simply Googling for articles.

And the other thing is that I want to reiterate that a balanced portfolio is what’s crucial. You don’t want to put all your eggs in one basket because the market, especially this market, is too volatile for that. You want to spread that risk among your stocks, in the bonds, and in precious metals, especially in gold because gold has performed in a very different way from the other precious metals. And so, I really encourage people to do that.

Now in terms of my career, I have worked half of my career in government and half of my career in business. I’ve worked in multiple industries, precious metals here for almost 20 years, including my time at the Mint, in telecommunications, and in hospitality industry. I was in lobbying and public relations for a period of time. As a matter of fact, I lived in Cairo and worked as a consultant in the Ministry of Investment for Egypt. And so, I lived in Cairo and in the region for a while. As a matter of fact, my business partners were Irish. The Irish offices of Fleischman Hillard.

So, I’ve done a lot of different things and I really recommend that to young people, to be open to going a lot of different places and working a lot of different organizations because the world is a complex place and you see a lot more of the world if you’re willing to do that. It’s not easy to do, but you gather a lot of tools that become useful later in your career.

[01:03:20] Alan

Very good. Well, that’s very sound advice and very much appreciate you coming on and talking to us today, Philip. And people can obviously follow your work via the US Money Reserve website and, and the podcast. So, we appreciate that.

And obviously, as you say, it’s an increasingly macro driven world that seems to be conducive to precious metals investing, so it’s very timely to hear your thoughts today. So, from all of us here on Top Traders Unplugged, thanks for tuning in. We’ll be back again soon with more content.

[01:03:56] Ending

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