<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting now with Hlelo Giyose. He\u2019s chief investment officer (at) First Avenue Investment Management. Hlelo, appreciate the early morning time. We were chatting yesterday. You were saying that in most of the thinking, the talking around gold, we\u2019re kind of getting it wrong. There were two parts to it.<\/p>\n
The first is you were talking about stock-to-flow ratio. Let\u2019s dig into that first and why it is important and what it\u2019s telling us around the yellow metal.<\/p>\n
HLELO GIYOSE: Simon, thanks for having me so early in the morning. I want to say that I think that the current discourse on gold betrays comprehension in two ways. The first way is that I think people think that gold goes up or down.<\/p>\n
SIMON BROWN: Yes.<\/p>\n
HLELO GIYOSE: Gold doesn\u2019t go up or down. Gold just sits there. It\u2019s an ounce of gold. It\u2019s priced in ounces. It\u2019s everything around gold that goes up or down. The dollar goes down. If the dollar weakens, you pay more dollars per ounce.<\/p>\n
If \u2026 prices weaken, you pay more \u2026 price per ounce of gold. If equities go down, you pay more equities per ounce of gold. If the political risk goes down, you pay less political risk per ounce of gold \u2013 and so forth and so on.<\/p>\n
If bonds weaken, you pay more bonds per ounce of gold. Do you see where I\u2019m going with this?<\/p>\n
Read\/listen:
Gold, stock markets plunge as war in the Middle East escalates
Gold set for worst week in six years as war curbs rate-cut bets
Investors hunt for hedges as war shatters decades-old strategies
Don\u2019t harm yourself with emotional perspectives: Hlelo Giyose [July 2022]<\/p>\n
SIMON BROWN: Yes, gold is the set in a sense.<\/p>\n
HLELO GIYOSE: Gold is actually a risk-free rate. That is the correct true north. It\u2019s a risk-free rate against which all other assets are benchmarked. All other assets are like planets around the sun, and gold is a sun. So when you hear someone saying, \u201cgold is going up\u201d, it\u2019s like a child saying, the earth is the centre of the earth, and the sun rises in the east and sets in the west, it\u2019s actually the \u2026 that rises and sets.<\/p>\n
It\u2019s hard to explain this to people. Professionals shouldn\u2019t get this wrong. So if I\u2019m sitting in a car and a car next to me reverses, my car isn\u2019t moving. It\u2019s the one next to me that\u2019s moving. I\u2019m not going forward. The one next to me is going backward.<\/p>\n
Now the problem with not understanding that is that, if you don\u2019t identify that it\u2019s the other asset that\u2019s going backward, you\u2019ll never find opportunity in the other asset.<\/p>\n
Now the dollar has been weakening. So if you ask someone who says gold is expensive, say to them, no, there\u2019s something else that\u2019s cheap. What is it? They don\u2019t know that it\u2019s the dollar.<\/p>\n
Listen\/read:
\u2018The bigger risk is that gold goes higher, not lower\u2019
Panic, sell-off, and rally till the end<\/p>\n
If you ask someone, well, why don\u2019t you go and buy the dollar, they start saying, oh, you know, the Trump guy, America. You say okay, so you really don\u2019t understand how things work.<\/p>\n
When you look at South Africans today, probably very few of them have taken money offshore. They didn\u2019t realise that the reason the dollar is cheap is exactly because of what\u2019s going on in the world. That\u2019s a great time to buy.<\/p>\n
The second misunderstanding is [the idea] that gold is an investment. Now, an investment is something that yields earnings, yields income and goes up or down. That\u2019s the definition of an investment. Gold is not an investment. It just sits there. And as I said, it\u2019s priced per ounce.<\/p>\n
Store of value<\/p>\n
Now, why gold does not do anything is because it\u2019s a store of value that addresses weaknesses in other assets. Let me tell you, the weakness in soft commodities is that they\u2019re perishable. They spoil. The weakness in steel and iron and copper and nickel is that they oxidise, they rust. The weakness in equities is that they can go bankrupt \u2013 and treasuries.<\/p>\n
Weakness in anything that is manufactured is that you cannot unscramble it and get it back into its pure form, whereas you can unscramble gold and get it back from jewellery to be exactly what it was.<\/p>\n
And the reason why it\u2019s a store of value, therefore, is that there\u2019s not that much gold on the ground anymore, and all the gold that\u2019s been mined \u2013 about half of what is underground has been mined.<\/p>\n
The amount of gold that is mined every year is so little compared to what is above ground. It\u2019s 70 years\u2019 worth of gold that you need to mine every year to get to the same level that\u2019s above ground, whereas with wheat, with copper, with nickel, with platinum, it\u2019s sometimes a year, sometimes less. Those are consumables.<\/p>\n
Read:
PGM supply deficit not over
Gold is the new anchor for SA\u2019s mining sector
Copper heads for third weekly decline as inventories stack up<\/p>\n
Gold is storable and it can withstand almost everything when you store it \u2013 without spoiling, without oxidising, without diminishing in risk, whether in quality or value. That\u2019s the stock-to-flow ratio.<\/p>\n
When you look at it that way you get to see why they say you should always have a little bit of gold in the portfolio.<\/p>\n
Whatever it means to you, have some, because all these other assets, when they start moving in the wrong direction, go backward. Then gold is the only thing that can protect you against the weaknesses in them. That\u2019s the stock-to-flow ratio of 70 years, versus one year in wheat, versus six months in oil, versus three months in soybeans and so on and so forth.<\/p>\n
That\u2019s the real way to understand gold.<\/p>\n
SIMON BROWN: I like the point. Quoting yourself back to you, gold is that north star. It\u2019s almost the core of the portfolio and, to your point, everything kind of moves around it.<\/p>\n
I remember watching a presentation by Professor Adrian Saville years ago, and he had gold with zero growth over time. Essentially he was saying what you\u2019re saying \u2013 gold doesn\u2019t move, everything moves around it. It\u2019s that core.<\/p>\n
HLELO GIYOSE: There we go. It\u2019s dispiriting when you hear professionals say, \u2018Oh, gold went up and got stuck\u2019. I can understand a normal person saying that because it\u2019s like a child saying, look, the sun is moving around the earth. But to truly understand opportunities on the stock market \u2013 well, in the economy \u2013 you have to say what is going down and what is going up.<\/p>\n
When it\u2019s going up, housing is going up relative to gold. You might sell a house and buy gold. If the dollar is going down relative to gold, you might sell gold to buy the dollar. That\u2019s how you think of it.<\/p>\n
And what\u2019s interesting is companies, gold mining companies, no matter how hard they try \u2013 and they try, believe me, they try to produce gold \u2013 cannot produce it in enough quantity to satisfy the 70 years\u2019 worth of backlog where people want it.<\/p>\n
Read\/listen:
Iran conflict \u2018could delay local interest rate relief\u2019
The Trump effect: How tariffs will impact global economic growth<\/p>\n
Central banks want it to cover the monetary base. A lot of countries now are trying to cover the money they have printed with some element of gold. They can\u2019t get it\u2026<\/p>\n
So when you look at gold like gold yesterday, someone might say gold went down 5%. It didn\u2019t go down 5%. It\u2019s that all these other factors, the composite of those factors, strengthened by 5%.<\/p>\n
Now, did you buy that composite of factors? The answer is people didn\u2019t buy them. So you realise okay, people look at opportunity because they\u2019re mislabelling it. They misunderstand it therefore they miss opportunity in the reverse.<\/p>\n
SIMON BROWN: I like that. We need to shift our thinking. If gold is the fixed, everything moves relative to it. There are two parts to it. There\u2019s a dollar and there\u2019s a yellow bar. It\u2019s the dollar that\u2019s moved; the yellow bar is still a yellow bar.<\/p>\n
Hlelo Giyose, chief investment officer (at) First Avenue Investment Management, I appreciate the early morning time.<\/p>\n
Listen to the full MoneywebNOW podcast every weekday morning here.<\/p>\n
#Gold #doesnt<\/p>\n","protected":false},"excerpt":{"rendered":"
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