Is Gold a Good Hedge Against Inflation? | Top of Mind Series

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. And today we are coming on to talk about gold, investing in gold. So this is a top of mind episode. So these are, you know, hot takes from Ben and Bob on, uh, you know, things we're seeing in the market, questions we get from investors, uh, things we follow. And I think this is something we've talked you know, a decent amount about on the podcast, probably more about a year or so ago. We hit, 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, you know, economist camp, a well-known economist. And what's so interesting about the space that we're in where, you know, we invest a lot of real estate, we talk a lot about real estate, we love real estate, but it tends to attract the hard money, the Austrian economists, which believe, you know, real assets are the only way to go. And you gotta, you know, fiat currency, fiat paper, it's, it's meaningless.

And gold is your only protection.

And gold and real estate are your only protection. And so we love the real estate side of it, but you know, 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. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors.

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What's so interesting about kind of your story, which you've shared before, but I want to hear it again, just on your journey from, you know, being the gold bug, you know, back in the day and investing in gold, trading gold, and really being a hardcore Austrian economist to now, you know, having a more broad viewpoint on it and just talking about the performance of gold. Because what it always comes down to, I feel like right now is the heyday of all the gold bugs that are you know, touting that gold is the ultimate inflation hedge. 'Cause that's, that's kind of what it always comes back to, right? It's gold is your, your hedge against the stupid government, right? 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, right? It's just, 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 in, in gold. Yeah.

Let's, let's give a little background because You know, well, one, I mean, I love gold, right? 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 1917. And here is a beautiful Indian head. And it's just gorgeous. This is actually pure gold, 24-karat gold. Ounce of gold, and I love owning this. Yeah, it is beautiful. What, what's not to love about this? I love gold, and I have brought here a little brother, you know, 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, right, money was made. And So I, because I loved gold and I became a gold investor in the '80s, I became a gold mining investor, investing in gold mining companies, actually made a lot of money buying and selling gold mining companies back in the '80s. So I naturally became kind of this hard money economist and was quite shocked when, you know, for example, in the 2008 crisis, you know, gold didn't do well, you know, and, and, you know, and it just never seemed to get out of, never seemed to track inflation. And so what actually did it to your, to your point, it's the ultimate inflation hedge, right? Everyone knows gold is the ultimate inflation hedge.

They just know it.

It's just, everybody knows.

Intuitive, right?

So I actually, I actually put together some of the, some of the basic, some of the biggest winners and losers during, you know, 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 '70s, decade of the '80s, the '90s, the 2000s, and the 2010s. And if you look in the very left, the '70s there, that's red is actually the rate of inflation. So the '70s was a high inflation time. It was roughly 7, 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 for tracking inflation because gold was 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 '70s is really not the decade of the '70s. That's the 200 years of prior, prior gains, all right, in, you know, in 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 '70s, during the '80s. Well, '80s was also very high inflation decade. We're averaging over 5% inflation, probably closest to what we see now. Exactly.

Yeah. From an inflation standpoint.

Yeah, very, 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? No, no, no, no, no. We say gold is the ultimate inflation hedge.

And, and, and it lost money. You actually lost money in gold. I mean, this beautiful gold coin, I think I bought this in 2006 for You know, $1,500 today is $2,000. All right. Yep.

20 years later. Yeah.

You know, yeah. You know, it's, you know, it's not that great. Okay, well, let's, let's, let's skip ahead. Gold had a bad decade, right? Let's skip ahead to the 1990s. Well, 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 2000s. It's still, you know, 2-ish percent. All of a sudden gold decides to take off. Well, and I like that it took off because I made a lot of money in that one. 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. I pinged the top, I pinged the bottom and pinged the top and did super well. And, and then gold just has not been able— it really crashed pretty much right after that. And that was a, you know, and, and, you know, so it's really not been a great inflation hedge and it's not— during high inflation, it really hasn't proven itself as the ultimate hedge.

Right. So let's talk about some of the reasons why we've done this in past episodes, but it's, you know, it's difficult to store, it costs money to store. You've mentioned these things before, right?

Well, right. So gold, think about it. Okay, if I buy a piece of real estate and I'm renting that out, I have a yield, right? Well, gold has a negative yield. It doesn't earn me anything. If I own this, it doesn't produce anything for me. And it hasn't. I've owned this for a long time and it's produced some joy, but it hasn't produced any economic benefit to me. Right. Whereas I own 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 so it's really it's really not. It's not. It's not positively. It doesn't actually do anything, you know. So what people do with gold is they bury it. Well, what good does that do anybody? You know, it doesn't have a ton of utility. And if you actually look at it, you know what's happened truthfully now, Bitcoin has kind of replaced gold to a lot of investors. And because, so if I was to take $1 million and I was to convert it into bullion, one, that'd be darn hard to do. And my pants would be sagging pretty low. You know, I mean, this, this, this, This stuff is—

it's heavy.

It's heavy. I mean, it's— this would be 1,000 coins. I don't know what this would weigh, but it's a lot. I mean, trying to transport that, taking that on an airplane, you know, you're never going to do it, you know. And that's just $1 million. Right. If you have $1 billion, it's, it's unwieldy. And so Bitcoin is obviously much more liquid, much more convertible, much more easy to hide and put in a little thumb drive and yep, go wherever you want with it.

Right. And part of the appeal of gold is there's a limited supply, right? There's only so much that can be mined. But physically, for the same thing with Bitcoin, it's, it's solved a lot of that, that supply challenge.

So, 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, well 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 pretty dramatically. And here, so here's an example. So let's say we have, you know, we have a population 100 years ago of America that's, you know, 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 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, you know, 10x in population, 20x in population. But the amount of gold in circulation is exactly the same. So it's actually deflationary, massively deflationary. There's not enough currency in circulation to actually feed the economy and the population. And, and, and so, so what happens? So during the Great Depression, so, so what happened, you know, the— all countries used to be on the gold standard or some form of the gold standard 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, right? And so that was, that was very kind of standard. Everybody believed that. Yeah, you could. The only reason you can trust paper currencies is if they were backed by a gold dollar. Made sense back then to countries that had been used to hard currency dollars. So what happened during the 1930s, during the Great Depression, is there was, there was a deficit of demand. So you think about it, people stopped buying things. And when people stopped buying things, people started going out of work. And when people started going out of 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, and that point, and go and create demand. They go say, okay, no one wants to buy widgets. I, the US government, go out and buy 100 widgets today. Well, all of a sudden now the widget guy's going, okay, well, I'm not going to fire anybody today. In fact, I might hire some people. And then the people that get hired, well, now they start earning a wage and they start— they start. So— 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 of demand, it's not inflationary. And this is one of my points. And so, so, 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 want to keep power out of 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 do deficit spending, he knew he needed to spend to create some demand to keep this doom loop from getting doomier, 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, 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 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, their 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's not designed— the gold is not ready for modern economic systems to be the foundation of all trade and economic activity. It just isn't. There's not enough of it, not enough of it. And it doesn't expand with population, with economies, which we need it to do. You know, if you wanna have zero inflation and zero deflation, you've gotta have a money supply that exactly equals economic activity. And gold certainly doesn't. Right.

So, and it kind of 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 kind of waiting, right? For however many years for the dollar to crash just because it's not backed by gold, 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 has not kept up with the modern economy.

And there's no way we could— we couldn't go back to a true gold standard. You can't fit— there's— I mean, there's how much, you know, what's the M2 or the M3? There's way too much currency in circulation relative to the amount of gold. Gold can't keep up. And, you know, it's just not going to happen. There's no way we can go back. There's maybe some kinds of limited convertibility if people wanna do that. But again, there's just, there's no reason to do that. I mean, you look at the currencies are, there's, you know, the Swiss franc 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 and that doesn't do a lot of deficit spending and that maintains their 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 in our fiscal policies. But so they want to, you know, hang a gold ball and chain around the neck of the politicians and, hey, you know, it sounds like a great idea because, you know, I want some discipline as well. And I think we're out of control, but this is not going to help. And sure, beautiful as it is.

So what do you feel like the role of gold in a portfolio is? And again, this is not financial advice for anybody, but great question.

Yeah, great question. And, you know, I like gold. I have a little bit of gold. You know, it's, you know, it's really, it's really the role is really more of an insurance policy.

It's a chaos hedge against catastrophe.

You know, you know, one point I was reading about, you know, EMPs, you know, electromagnetic pulses, which, you know, come from, you know, 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— does these massive CMEs, coronal mass ejections. It causes EMPs in the atmosphere and can wipe out electronics. I'm thinking, you know, well, okay, so worse, let's say you know, you get these massive EMPs and wipes out that kind of thing. Well, you probably want a little bit of gold, but you probably don't want a $2,000 beautiful gold buffalo. Or you probably want something, you know, and I really liked at one point, you know, what these called, these bags of gold, right? They're bags of silver. They're just called junk silver. And it's pre-1965 silver coins, which were, you know, 85% silver or so. And those are presumably spendable. So, so let's say, I mean, you're talking about 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 a year and you're in, you know, Puerto Rico and the hurricane comes through and you're without power for 60 days or 90 days. You want to have something that you pass as for currency when there is— the credit cards are not working. Right. So I would argue that, you know, maybe it makes sense to have a little bit of chaos currency around.

Right.

But and so insurance, I guess, you know, but I wouldn't put more than, you know, 5% of your portfolio into gold and silver, you know, except the beautiful part of it. I just— I like looking at it. Right. I'm never going to sell it because I just like it so much. It's just stunningly beautiful. It's a 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, you know? Yeah.

Well, hopefully, you know, these thoughts are helping you think, you know, differently about, you know, 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, you know, some of the data, I mean, the data doesn't lie. I mean, the, if you look at the inflation, and the performance of gold by decade, it's hard to make the argument. I mean, the correlation's probably pretty low, right?

Yeah.

As far as gold tracking inflation. And so 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.

Take care, all.