You can also listen to this podcast on iono.fm here.
SIMON BROWN: I’m chatting now with Hlelo Giyose. He’s 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’re kind of getting it wrong. There were two parts to it.
The first is you were talking about stock-to-flow ratio. Let’s dig into that first and why it is important and what it’s telling us around the yellow metal.
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.
SIMON BROWN: Yes.
HLELO GIYOSE: Gold doesn’t go up or down. Gold just sits there. It’s an ounce of gold. It’s priced in ounces. It’s everything around gold that goes up or down. The dollar goes down. If the dollar weakens, you pay more dollars per ounce.
If … prices weaken, you pay more … 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 – and so forth and so on.
If bonds weaken, you pay more bonds per ounce of gold. Do you see where I’m going with this?
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’t harm yourself with emotional perspectives: Hlelo Giyose [July 2022]
SIMON BROWN: Yes, gold is the set in a sense.
HLELO GIYOSE: Gold is actually a risk-free rate. That is the correct true north. It’s 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, “gold is going up”, it’s 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’s actually the … that rises and sets.
It’s hard to explain this to people. Professionals shouldn’t get this wrong. So if I’m sitting in a car and a car next to me reverses, my car isn’t moving. It’s the one next to me that’s moving. I’m not going forward. The one next to me is going backward.
Now the problem with not understanding that is that, if you don’t identify that it’s the other asset that’s going backward, you’ll never find opportunity in the other asset.
Now the dollar has been weakening. So if you ask someone who says gold is expensive, say to them, no, there’s something else that’s cheap. What is it? They don’t know that it’s the dollar.
Listen/read:
‘The bigger risk is that gold goes higher, not lower’
Panic, sell-off, and rally till the end
If you ask someone, well, why don’t you go and buy the dollar, they start saying, oh, you know, the Trump guy, America. You say okay, so you really don’t understand how things work.
When you look at South Africans today, probably very few of them have taken money offshore. They didn’t realise that the reason the dollar is cheap is exactly because of what’s going on in the world. That’s a great time to buy.
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’s the definition of an investment. Gold is not an investment. It just sits there. And as I said, it’s priced per ounce.
Store of value
Now, why gold does not do anything is because it’s a store of value that addresses weaknesses in other assets. Let me tell you, the weakness in soft commodities is that they’re 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 – and treasuries.
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.
And the reason why it’s a store of value, therefore, is that there’s not that much gold on the ground anymore, and all the gold that’s been mined – about half of what is underground has been mined.
The amount of gold that is mined every year is so little compared to what is above ground. It’s 70 years’ worth of gold that you need to mine every year to get to the same level that’s above ground, whereas with wheat, with copper, with nickel, with platinum, it’s sometimes a year, sometimes less. Those are consumables.
Read:
PGM supply deficit not over
Gold is the new anchor for SA’s mining sector
Copper heads for third weekly decline as inventories stack up
Gold is storable and it can withstand almost everything when you store it – without spoiling, without oxidising, without diminishing in risk, whether in quality or value. That’s the stock-to-flow ratio.
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.
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’s 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.
That’s the real way to understand gold.
SIMON BROWN: I like the point. Quoting yourself back to you, gold is that north star. It’s almost the core of the portfolio and, to your point, everything kind of moves around it.
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’re saying – gold doesn’t move, everything moves around it. It’s that core.
HLELO GIYOSE: There we go. It’s dispiriting when you hear professionals say, ‘Oh, gold went up and got stuck’. I can understand a normal person saying that because it’s like a child saying, look, the sun is moving around the earth. But to truly understand opportunities on the stock market – well, in the economy – you have to say what is going down and what is going up.
When it’s 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’s how you think of it.
And what’s interesting is companies, gold mining companies, no matter how hard they try – and they try, believe me, they try to produce gold – cannot produce it in enough quantity to satisfy the 70 years’ worth of backlog where people want it.
Read/listen:
Iran conflict ‘could delay local interest rate relief’
The Trump effect: How tariffs will impact global economic growth
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’t get it…
So when you look at gold like gold yesterday, someone might say gold went down 5%. It didn’t go down 5%. It’s that all these other factors, the composite of those factors, strengthened by 5%.
Now, did you buy that composite of factors? The answer is people didn’t buy them. So you realise okay, people look at opportunity because they’re mislabelling it. They misunderstand it therefore they miss opportunity in the reverse.
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’s a dollar and there’s a yellow bar. It’s the dollar that’s moved; the yellow bar is still a yellow bar.
Hlelo Giyose, chief investment officer (at) First Avenue Investment Management, I appreciate the early morning time.
Listen to the full MoneywebNOW podcast every weekday morning here.
#Gold #doesnt