Moneybeat: Gold as an investment

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN, GUEST: Good morning, Nick, good to be with you.

EICHER: OK, it’s about time to get back to listener questions, as we’ve done a few weeks of reflection—a year in review 2022 and previewing the year ahead—but before we do listener questions, I’d like to touch base on economic conditions, market conditions, whether there was a single big story of the week.

BAHNSEN: I don't think there was a significant economic or market story, because there's a lot of just more of the same. You had a massive move up in markets and risk assets on Friday around the unemployment report, and the unemployment report was strong. And so what happened is markets originally, were doing this thing of, oh, the news is good. So that must be bad in the sense that the Fed is likely to think things are too good and want to keep tightening more. And indeed, there were 223,000 jobs created in December, and it was about 205 expected. And if you believe the current wisdom narrative, it's that we really need to see just a ton of people losing their jobs for there to be good news. And as you know, that's not my belief at all. But what happened is not only was that 223, a little deceiving because they revised downward the month prior numbers by I think about 28,000. But wages had grown year over year, much less than expected on the month, they thought it'd be point four, it was only point three year over year, it was 4.6. And back in March, the year over year was 5.6. So the year over year, wage growth has been disintegrating. And this is supposedly important to markets because they think the Fed is really concerned about higher wages, because higher wages leads to consumers having more money to spend, which puts upward pressure on inflation. I don't believe any of that economically, it's all remnants of what's called the Phillips Curve from the 1970s. And I think it's very bad economics. But that's sort of irrelevant, because they believe it. And then once the markets kind of unpack the details of the jobs report on Friday, they rallied significantly. So that's probably the biggest story and the first kind of abridged week of the year, the markets were closed Friday, excuse me Monday, for New Year's Day, and even Tuesday was kind of a very low volume, low activity day. So we're not going to run into now. But the next big thing will be earnings season, we'll see the final numbers from q4. It'll be the first quarter of the year, where earnings were probably down year over year from the year prior. And yet for the whole year earnings were up about 5%. So that is what you call not a recession.

EICHER: Alright, question one comes from a state senator in the state of North Carolina—Senator Warren Daniel—this is an email. He wants to know: “What is the likelihood of the Russia-China alliance successfully replacing the petrodollar with the yuan in 2023 [the Chinese currency], and if that happened, what do you foresee as the consequences for the U.S. dollar and the U.S. economy?”

David, what do you say?

BAHNSEN: Well, because he said in 2023, the likelihood is zero. It is zero. There is no chance that the petrodollar is replaced in this calendar year. But this is a subject that's near and dear to my heart, but it has nothing to do with it happening overnight. There's a variety of factors and it's not just Russia, China. This can't happen without Saudi Arabia, as well, being willing to sell a significant amount of oil to adversaries of the United States, denominated in a currency other than the dollar. And so some greater Russia-China Alliance provides a backdrop that enables more non-dollar denominated activity and increases their leverage over time. But the notion that this is something that could happen this year is not on the table at all.

EICHER: And our second question—we get a lot of these—listeners who want to know whether they should include gold in their investment mix. Many of the questions are very specific to the individual, but at least one listener asked simply whether you recommend gold as an investment. So go ahead and tackle that one.

BAHNSEN: That question about gold's viability as an investment is usually rooted in some premises that I believe have been disproven over time. And so if the premise was gold does really well when things go bad. And another premise is that sometimes things go really bad. But the problem, of course, is that in 1980 to 2023, you're talking now about a 43 year period of time, gold is down by 30 or 40% just to inflation. And yes, there's been periods of low inflation in that period, there's been periods of high inflation in that period, mostly periods of moderate inflation. But one cannot view gold as a hedge against inflation and in a 43 year time period have it underperform that badly against just its own very modest metric of simply keeping up with inflation. That's it. You don't even make any money. You're just talking about maintaining a 1980's standard of living and gold would have to be something in the range of 30 to 40% higher right now to have done that. So the question is why and I believe that there was just a long period of time where the nature of how central banks used gold, and what it represented in the global markets. But right now, the fact of the matter is that people have advocated for gold because they advocate for something more like sound money. And I advocate for something more sound money. I want people's purchasing power to be more maintained. And yet we know that gold has not done that. And so one can be against the idea of gold as a solution—as I am—without believing that there aren't really the problems. I do believe central banks have run amok. I do believe there are some unwise policies that have created unsound solutions. And I do favor a rules-based approach to central banking. I don't want our interest rate policy is to be just on the whim of people that don't really have to be accountable to what standard they're using to administer monetary policy. But gold as an investment simply has written checks it cannot cash. It doesn't have an internal rate of return. There's not an earnings stream, and there isn't a interest payment. And so the fact of the matter is that you rely on certain speculative elements. It's not a heavily used industrial metal. It's not really even a heavily used cosmetic metal anymore. But even that would be a very unstable medium of currency. So it just simply hasn't delivered. And it isn't like, oh, it had one or two bad years and now I'm dumping on it. I'm talking about my entire lifetime. And certainly my entire adult lifetime. Now it's had big spikes up, right? There's moments of time where it's been up hundreds of percent, and then times where it's dropped a lot. But I have this argument with gold bugs and times, where I point out that if I told you 10, 11, 12 years ago that every central bank on Earth was going to print trillions of dollars, there'll be this quantitative easing, there'll be 0% interest rates for years at a time, that in fact, there would be about $16 trillion of global money trading at a negative yield—that's gone away now, but that was the case just your a few years ago—how do you think gold would do? And most would have said it could go up 300, 400%. It's down. It's down from where it was at its highs of about 2012 or so. And so that's the reason is just, at some point, you have to take the empirical information and figure out what it's telling you. And that's what we've done.

EICHER: All right, if you have a question for David Bahnsen, please get in touch at feedback@worldandeverything.com. I can summarize your question if you put it in writing in email. But it’s so much better to hear you asking your question, and so if you have a smartphone, I’d ask that you make use of the voice memo app and make a recording of yourself asking your question and you can email the file here. Same address: feedback@worldandeverything.com.

David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com.

Thank you for your questions, we’ll do more in coming weeks now that we’re past the holidays. And David I look forward to talking again next week.

BAHNSEN: Thank you for having me.

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