Why Every Investor Should Hold Gold In Their Portfolio

During their recent episode, Tobias Carlisle and Mike Meixler discussed Why Every Investor Should Hold Gold In Their Portfolio. Here’s an excerpt from the episode:

Tobias: Let’s talk a little bit about gold, because I know you’ve got a holding in gold, and I had the Seawolf guys who were the guys from the big-short on a few weeks ago, and they have a big chunk of their portfolio in gold. Talk to me a little bit about how you see the opportunity there, and why you hold it.

Mike: Sure. I was a paper boy at 10. Was raised by a single mother. Back then, you had to actually put the paper in the front door and not chuck it in the yard, like they do– [crosstalk]

Tobias: Oh, wow.

Mike: But I would get tips, Christmas or Thanksgiving. When you get something like that– Can you see that?

Tobias: Yeah.

Mike: That’s a $20 bill from-

Tobias: Is it backed by gold?

Mike: -1922, and it’s payable in gold coin.

Tobias: Wow.

Mike: Of course, everybody has seen, we had up until the 1960s, the silver certificates. Didn’t Buffett talk about arbitraging silver at one point? We still had dollars that you could be payable to the bearer on demand in a silver dollar as late as the 1960s.

We haven’t really been off the gold standard for very long, really, just since the 1970s. There’s a great book, if you ever get a chance to read it, Murray Rothbard on the Great Depression. Rothbard was an Austrian economics professor and Mises and Hayek, but he talked about one of the reasons–

Everybody thinks we got out of the Great Depression because of Keynesian spending programs, but Rothbard thought that after World War I, going back to a $20 gold, was very deflationary. It was very hard money, very tight money. And so, of course, we had the boom in the roaring 1920s and the bust.

What people don’t realize is FDR in 1933 confiscated gold. And then, 11 months after confiscating it, it changed the price from $20 to $35. So, that was in effect a 75% devaluation of the dollar. So, if you had $100,000 in the bank, it’s now worth 25 grand. But that also was a big debt relief, because the debt was also payable in gold as well.

I was funny how I got interested in gold. I became aware that gold in the late 1990s, I was reading articles in the Wall Street Journal, that the miners were struggling with $350 gold, because the mining cost was like $500. Newmont was shutting down mines, and Agnico Eagle was shutting down mines and I just thought, “This is an interesting opportunity. You can buy gold for a lot cheaper than what it costs to actually produce gold.”

Tobias: Yeah.

Mike: So, we bought gold and then suffered for the next couple of years, because the price kept going down. What was especially bad about that time period is the dotcom stuff was just booming. But eventually, we had the bursting of that bubble, and then gold had a real run. I would say, today, you don’t want to have mission creep, but we still hold gold and it’s a top five position for us. Not because it’s below the mining cost. People say the mining cost may be $1,000 or $1,200 or $1,500 or depending on the mine, but it looks to me like just the debts in the United States.

Right now, Social Security, Medicare, the Military and interest on the debt exceed 100% of the tax revenue. And so, the politicians aren’t going to cut Social Security, they’re not going to cut Medicare, they’re not going to cut the Military. What did they do? They just cut interest rates. Why did they cut interest rates? I actually have stopped paying attention to all the Fed pronouncements of this state.

Tobias: There’s so many.

Mike: Yeah, there’s so many. It’s like, people trying to game the bond market, and what’s the Fed going to do? I think at this point, it’s almost useless to pay attention to that, because the Fed has a third secret mandate that they never talk about. They talk about inflation. They talk about full employment. But at this point their, main mission is to fund the machine, right?

Tobias: Yeah.

Mike: When you have the interest cost more than the military budget, they got to get that down, somehow. So, there was an interesting time period after World War II, where the debt to GDP was 130%, I think, and the Fed went into 10-years of, what they called, yield curve control, and that was by buying bonds, they pushed the rate down to 2.5% for an entire decade, and they let inflation rip at 6%.

Now, during that time period, gold didn’t do anything, because we were still on the gold standard and it was pegged at $35 an ounce. But I think if you eliminate the noise from the Fed and all the generations, it seems to me that they have to keep interest rates below the inflation rate for a long period of time. So, I think– [crosstalk]

Tobias: Yeah. Sorry, keep going.

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