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- [00:00]
Jomana Selehin
The 6040 mix of stocks and bonds in a portfolio model has been the default approach over the years and survived many critiques. But is it still relevant today? Join Vanguard's Jomana Selehin, head of Investment Strategy Group Europe and chief European economist at the break to hear her thoughts about this well known model and whether 60:40 even means the same thing to all investors.
- [00:25]
Daniel Major
You can look at gold being determined by a number of big picture macro variables historically, but in my opinion, picking the gold price move is often when those models are going to break and at the moment, they're all broken.
- [00:38]
Jack Howe
Hello and welcome to the Baron Streetwise podcast. I'm Jack Howe and the voice you just heard is Daniel Major. He covers material stocks, including gold miners for ubs. He says the gold price models are broken. Gold has gone nuts. Dan thinks it's an excellent time for mining stocks. We'll hear about his favorites. We'll also Talk with an RBC Capital strategist and and a BlackRock portfolio manager about why gold is beating everything lately. Is that good news or bad news? And is it likely to continue? That's all next. Listening in is our audio producer Alexis Moore. Hi Alexis.
- [01:21]
Alexis Moore
Hey Jack.
- [01:21]
Jack Howe
Do you own any gold?
- [01:23]
Alexis Moore
Yes, I have a very tiny, tiny gold chain.
- [01:26]
Jack Howe
That means you're killing it right now. You're up 23% so far this year on the gold content of that necklace. Gold is recently going for $3,233 per troy ounce. What's a troy ounce? You didn't ask? I'll be delighted to explain it to you in a few minutes. Gold is really the envy of stock and bond investors and bitcoin holders right now. And you can be one of these cash flow purists who poo poos gold like maybe I have a couple of times or three or four on this podcast. This is more than just a quick thing, this rise in gold. If you look at the past 20 years, there's an exchange traded fund called Spider Gold Shares. You've made 598% in that over 20 years. That's 8 points better than you would have done in the Spider S&P 500 fund. And that is loony. Gold is an unthinking metal, right? It's not supposed to outperform over decades the most clever businesses in America. If that was expected to be the case, then shareholders would say to those businesses, stop everything that you're doing. Sell everything. Just buy gold and hoard it. You'd be better off. That of course, isn't the case. So Something is wacky with the gold price and it's been wacky for a long time. All right, so what's happening here with normal goods? If we were talking about gasoline or Nike sneakers or Nvidia chips, we would talk about supply versus demand. But gold is different because it's immutable. It's what they call noble. It doesn't change. Pretty much all the gold that has ever been produced is still around somewhere. So supply isn't really much of a factor. It's just about demand. And demand has been pretty ravenous since around 2022. The US and dozens of its allies put these sweeping sanctions on Russia, including its biggest banks. China didn't like that and so it went on a bullion buying spree. That's one of the things that has pushed the price of gold higher. China's buying is cool, but other central banks have stepped in. This is really part of a decades long trend of diversifying away from the dollar in foreign reserves. If you go back to 2000, the dollar was about 70% of foreign reserves. In the first quarter of this year it was down to 57%. JP Morgan, they're the world's biggest bullion dealer. They say what's going on now is a debasement trade. Investors are nervous about geopolitics, about President Trump's tariffs and about blowout U.S. deficits. And we're not just talking about central bankers that are buying. Individuals are buying a lot. They're buying gold bars and coins. They hadn't really been buying into gold ETFs. Those were bucking the trend, but that reversed around last summer. And now inflows for gold ETFs have turned solidly positive and they've recently jumped in China. There's gold ETFs there. So if you put it all together, there's an estimated $4 trillion now worth of gold that is held by central banks and 5 trillion held by private investors. And if you take that as a percentage of the 260 trillion or so in worldwide financial assets that stocks, bonds, cash alternatives, it works out to a global gold portfolio allocation of about 3.5%. And that's a record high. Alexis, I want to talk about inflation hedging and stock market hedging, but I also have some historical and chemical fun facts. Well, I've got facts, I don't guarantee fun. Which would you like first? I'll give you one now and maybe one later. You want the history or you want the chemistry?
- [05:32]
Alexis Moore
I want the history first.
- [05:33]
Jack Howe
Excellent choice. These are A little random. The first gold coins of reliable weight and purity. They featured a lion and a bull stamped on the face. They were minted at the order of King Croesus of Lydia, which is now part of Turkey. And that was 550 years BC. But gold had already been used as a store of wealth or show of wealth for thousands of years before that. Ancient Egyptians called gold the flesh of the gods. Did you know, Alexis, that in the Old Testament it says that under King Solomon, gold in Jerusalem was as common as stone? Now look, I'm not going to take issue with the word of God here. My Sunday school teacher might be listening. But let's just say that we will allow for some literary license here, because stones. The most common element in stones is silicon, and that is 28%, roughly of the Earth's crust. Silicon is very common. Stones are very common. Gold is 0.00000004% of the Earth's crust. There is not a lot of it. So maybe that was hyperbole.
- [06:48]
Alexis Moore
Be careful.
- [06:49]
Jack Howe
I feel like I'm in trouble.
- [06:50]
Alexis Moore
Your Sunday school teacher is around the corner.
- [06:53]
Jack Howe
I want to backtrack immediately. I've got two more facts. We know how much Egypt liked their gold. There was a king in Mali in West Africa who took a pilgrimage to Mecca in 1324. His name was Mansa Musa the First. And he is said to have stopped on the way in Cairo and spent so much gold there that he crashed the local price of gold by 20% and it took 12 years to recover.
- [07:22]
Alexis Moore
It's kind of baller.
- [07:23]
Russ Kostrich
Kind of baller.
- [07:26]
Jack Howe
Yes, exactly. Last one. Montezuma. That's the Aztec king who's gold. Lord Cortez from Spain. In his language, one that's still spoken in parts of Central Mexico, the word for gold is Teo cuitlatl, which literally translates to God excrement. I wonder if that's where they get holy. Well, you know, forget it. We'll dive into that another time.
- [07:56]
Alexis Moore
Just sacrilege all over this episode.
- [07:59]
Jack Howe
That one was little G. God, Little G. That was not big G. That was not big G. We talk about golden eras and gold medals and the golden rule, the historical association between gold and wealth or excellence. And is so deep that it might seem that the metal has a mystical hold on humanity. But it's not the least bit mystical. It's a matter of chemical inevitability. That's a teaser for my chemistry. Fun facts which we'll get to later. Okay, so what's next for the gold price? It's pretty easy to make a case that it's moving higher. B of A securities says expect more buying from central banks. It thinks insurance companies in China could start buying more gold. There's also that momentum for gold ETFs. Plenty of investment banks are making a case for $3,500 per troy ounce by next year. But I wouldn't expect gold to keep outperforming the stock market. That 20 year period I cited earlier is kind of an arbitrary starting point. If you want a better one, you can go back to 1975. It's a long story that I won't get into. But Franklin Roosevelt all but outlawed private purchases of gold in 1933. And in 71 nix delink the dollar from gold. And toward the end of 74, Ford made it once again legal to buy gold. So if you start in 1975 and you go through the end of last year, you find that gold turned a dollar invested into about $16. The US stock market turned it into $348. That's more of what I'd expect for stocks versus gold. I also don't think that investors should count on gold to be a particularly precise hedge and against either inflation or stock market declines. Here's Russ Kostrich. He's a portfolio manager at BlackRock.
- [09:50]
Russ Kostrich
It's not a great near term inflation hedge and for anyone kind of scratching their heads there, think back on 22. You have the biggest inflation in decades and gold struggled for much of the year. And the reason was not all the time, but often if rates are going up and they're going up in a way that's faster than inflation so that real rates are going up. Gold doesn't do well because it's an asset class that has no cash flow.
- [10:17]
Jack Howe
In 2022, US inflation peaked at a 40 year high of over 9% and the gold price went essentially nowhere. As Russ says, high inflation can prompt a sharp rise in interest rates.
- [10:29]
Russ Kostrich
And if people can clip a 5% coupon on a T bill, often they prefer to do that than have either a lump of metal or an ETF that doesn't produce cash flow. What gold does do a good job in a portfolio. It's longer term. It does a good job as a risk mitigant.
- [10:48]
Jack Howe
Risk mitigant is a good term for it, although that doesn't mean that gold precisely offsets stock market declines. Remember Tariff Liberation Day earlier this month? That sent U.S. stocks down close to 11% over three days. It pulled down the price of gold too, almost 5%. Here's RBC Capital commodity strategist Chris Looney.
- [11:11]
Russ Kostrich
The truth is, this is not an uncommon scenario when there's such significant market dislocations where investors will sell out of gold, oftentimes when it's quite profitable, which right now, given we're at all time highs, all of those positions are profitable. And so when investors were losing elsewhere in their portfolio, gold was sold as well to cover those losses.
- [11:33]
Jack Howe
Let's take a quick break. We have a lot to get to. Still, the basics about buying gold bars and coins and ETFs, the outlook for mining stocks, chemistry, fun facts. It's all almost too much to bear. Try to contain yourself. We'll be right back.
- [11:55]
Jomana Selehin
Vanguard's Jomana Selehin, head of Investment Strategy Group Europe and chief European economist, believes the 60:40 shouldn't be thought of in such a literal way.
- [12:04]
Alexis Moore
I think it's important to just say, what is 60 40? Because it actually means different things to different people. For some people, they actually use it as a shorthand for a broad index portfolio. It's not necessarily 60 40. You might think it's a target allocation. It could be 100%, could be 80% equity and the rest in bonds. This episode is sponsored by Morgan Stanley's Thoughts on the Market. Today's financial markets move fast. Morgan Stanley moves faster with their daily podcast, Thoughts on the Market. Thoughts on the Market covers daily trends across the global investment landscape with actionable insights from Morgan Stanley's leading economists and strategists. And with most episodes under five minutes long, staying informed has never been easier. Listen and subscribe to Thoughts on the Market wherever you get your podcasts.
- [12:59]
Jack Howe
Welcome back. Earlier, I called gold's place in monetary history a chemical inevitability. Here's what I mean. You need money. It's handy for trading and for saving and a lot else. And if you want to make money out of something, you have 118 known chemical elements to choose among, and so you can use a process of elimination to decide which is best for the job. I'm not the first to do this. A Columbia University chemist named Sanat Kumar did this for National Public Radio years ago. Basically, you're not going to use a gas or a liquid for money. That would be cumbersome. So avoid anything that's a gas or liquid at room temperature. And if you're familiar with the periodic table of elements, you really have to stay away from columns one and two. Those are highly reactive. You ever see lithium burn? It's a fireball. It's blinding. Money should also be rare. You're not going to use zinc, that's so common. It's what pennies are made from. But you don't want it to be too rare. Money should obviously not be poisonous like arsenic or radioactive like radium. You wouldn't believe how many elements those two things rule out. There are only a handful left, and some weren't discovered until recent centuries. Some have melting points that were too high for early furnaces. Those wouldn't have been much use to the ancient Egyptians. What's left? There are two, actually. Silver and gold. Silver's pretty good, but it tarnishes. Gold is much rarer and it doesn't lose its luster. And of course, no one's going to make new gold and blow out the supply. You can't make gold. There is something called nuclear transmutation by getting into the weeds. Music, please. Basically, you have an element with a nucleus and a bunch of protons in it. Gold has 79 protons. That's its whole thing. Mercury and platinum are next door neighbors with 80 and 78. So if you can find a way to shake a proton loose from mercury or jam one into platinum, you end up with 79. And that's gold, Jerry.
- [15:13]
Daniel Major
Gold.
- [15:14]
Jack Howe
Scientists actually did that more than 80 years ago using mercury and a particle accelerator. But they only got a teeny tiny bit of gold, and it was radioactive. Let me just touch briefly on prices and units before we move on to the stocks. I know some of you were shaking your fist at the error earlier and saying, what about copper? He forgot that copper can be money. It can. I mean, it's pretty common, which is why we used to use it for pennies, but it also got too expensive for pennies.
- [15:46]
Alexis Moore
Jack, I know we're not having a political conversation per se, but what do.
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Daniel Major
You think about the penny?
- [15:52]
Jack Howe
I'm. I'm against them. And I say that people who are for them should be forced to carry them in their mouths.
- [15:59]
Alexis Moore
Whoa.
- [16:01]
Jack Howe
I don't really feel that way. So stand down, penny fans. All right, so copper is too expensive for pennies. If you look at the 95% copper content of a free 1982 penny, that copper today is worth 2.7 cents. If you had that same amount as there was copper in pennies of silver, that would cost $3.35, and for gold, it would cost $307. But those metals actually trade in different units. Copper trades in pounds was recently up 16% for the year at $4.61 per pound. Silver and Gold are typically quoted in troy ounces, and those are, well, they're a pain in the neck. It's this antiquated measure of hazy origin and the reason that we need it. I'm just kidding. We don't need it at all, but we use it. A troy ounce is 9.7% heavier than a regular ounce. Okay, so a troy ounce of silver was recently $32.31. That's up 12% this year. You know those big gold bricks that you see that central banks swap? Those are called good delivery bars and they weigh 400 troy ounces, give or take. And that makes them worth about $1.3 million. You know me, I've spoken before about my financial nudism approach of stripped down portfolios with just the bare essentials. I think investors can get by with no gold. Russ from Blackrock says most investors should have 2 to 4% of their portfolio in gold.
- [17:43]
Russ Kostrich
If you have, let's say a traditional 6040 portfolio, it's not at all crazy that you might have somewhere between, call it 2 and 4%, you know, funded from those other asset classes in gold.
- [17:54]
Jack Howe
I don't think you'll go wrong with an allocation like that. There's lots of gold. For smaller players. You've got Canadian Maple leaf coins, those are 24 carats. South African Krugerrands, those are 22 carats. They're alloyed with copper for durability. You've got gold American Eagles, Those are also 22 carats. They've got some silver and copper. If you see the term proof coins, those are coins that cost a little extra for their high polish and their artistry and their limited runs. They may or may not become collectibles. If you're just buying for the metal value, you want the coins called bullion. Avoid infomercials and stick with high volume dealers. But even so, markups of 2% to 4% are common. You have to factor in the cost of storage and insurance too. ETFs are a much cheaper route. For example, iShares Gold Trust, that costs just a quarter percent a year, not counting commissions. There's an even cheaper version that's smaller and meant for long term holders as opposed to traders. It's called Ishares Gold Trust Micro and that costs 0.09% a year. If you're looking for an inflation hedge, you can find something that better reflects price increases in ordinary goods and services. Most people don't buy gold in a typical week, but they might buy industrial metals or energy or grains. There Are broad commodity funds that hold all of these things. I think stocks are good for beating inflation over long time periods. If you're an index investor, keep in mind that Your S&P 500 fund includes a gold miner, Newmont Mining. Speaking of which, UBS analyst Dan Major recently upgraded his rating on Newmont Mining and Barrick Gold from neutral to buy. I spoke with Dan recently. Let's hear part of that conversation now. I was reading some of your notes and you talk about how for a while the mining stocks had underperformed the price of gold by a good amount. What causes something like that to happen?
- [20:04]
Daniel Major
Yeah, sure. I mean, I think many investors wish the price of gold stocks just followed the price of gold. But unfortunately, gold companies are quite complex. And I think the challenge for strategically the gold sector is gold companies want to be big and want to be relevant and liquid enough to attract generalist investors. But by doing so, the larger you become come, the more challenging it is to sustain production and grow production. And in recent years, I think one of the drivers of the underperformance of the gold stocks against the gold price has been consistent inability to achieve guidance and deliver value accretive growth as well as the challenges of executing value accretive M and A. And if we look at the cost progression from some of the largest producers, Much of the upside in the gold price has been offset by increases in unit costs or dilution in ounces produced over a larger number of shares through M and A. Those have been some of the challenges that have driven some of that underperformance up until kind of reasonably recently.
- [21:06]
Jack Howe
Can you give me a sense of the costs of mining an ounce of gold right now? I guess it's varied, you know, company by company. And that's probably has to do with some of the differentiation of which companies you like. But what are some companies out there paying to produce an ounce right now?
- [21:21]
Daniel Major
Sure. So I guess on the lower end of the spectrum you would have something out of the large gold majors, something like agnico Eagles, around $1,250, $1,300 per ounce. And then some of the higher cost producers closer to $2,000 per ounce. So I'd say the range is probably from the low teens to the low 2000s.
- [21:41]
Jack Howe
So at $3,000 per ounce or thereabouts, these companies are making great money right now. Have the estimates that you've seen on Wall street from all of the different banks, have they adjusted enough yet or are you expecting some big adjustments to come?
- [21:56]
Daniel Major
That's a Great point. You know, if you take the average production cost would probably be something close to $1,500 per ounce. Obviously the price north of 3,000, that's a 50% cash margin for the average producer. I think in the discussion on the drivers of underperformance of the gold stocks against the gold price, there's this discussion and debate around has the rising price environment been erod cost inflation and by poor execution against guidance or is it a valuation multiple derating of the equities that's driven this underperformance? And the answer based on our analysis principally focusing on the GDX Gold etf, largest kind of large cap etf, it's been much more evaluation D rating than a inability for the companies to deliver higher earnings. Consensus earnings have started to move higher again. We upgraded our gold price forecasts last week and put through pretty meaningful additional net income and EBITDA upgrades to our gold companies. I would expect the consensus to be doing the same. So this is what's attractive about the gold space right now. It's trading on a discounted multiple in comparison to its history. I think the companies are probably more realistic in the guidance they've set to the market and I think we're going to see further upward revisions to consensus earnings.
- [23:14]
Jack Howe
Well, you've answered a question that I hadn't asked you. Which is the investor looking at gold right now has the choice between just buying gold or buying mining shares. How should they think about the relative value of those? And sounds like the miners are particularly attractive right now still, even though they've been sort of closing that gap a little bit.
- [23:31]
Daniel Major
Yes, that would be our take. I mean we're cognizant and we acknowledge that in recent years there have been a number of companies that have underwhelmed against the targets they've provided to the market and that's perhaps weighing on sentiment towards the collective of gold stocks. But I think provided there aren't consistent high profile issues in achieving results against guidance, the combination of that positive earnings momentum and a low multiple makes them very attractively priced at this point.
- [23:58]
Jack Howe
One last question before I ask you for a couple of the stocks, is it your sense in speaking with management teams that they're very aware of that and they are addressing that, that they sort of see that companies in their group have underperformed versus targets in recent years and they're changing their practices or what have you in order to become more reliable?
- [24:18]
Daniel Major
That's certainly the feedback we've been giving to the management teams. Yes. And I think it's not only the underperformance that's been notable, but it's also the outperformance. You know, those companies that have been successful in achieving their targets have been rewarded by the market. The market is willing to put a higher multiple on a reliable performer and discount the multiple for those that are not. And I firmly believe the opportunity set within the companies as the bull market evolves is pivoting the preference to some of the companies that are trading on discounted multiples because of those issues, but are more likely to be rewarded by the market if they are reliable in executing against those.
- [24:58]
Jack Howe
Ah, so companies not just that are good, but that are getting better. What are some ones that investors ought to favor right now? Give us some companies.
- [25:07]
Daniel Major
Sure. So I'll name three companies with slightly different profiles. So we recently upgraded both Barrick Gold and Newmont from neutral to buy and both very much fall into that category of having a challenging recent track record. In the case of Newmont, it's a combination of M and A and disappointing execution against guidance. Barrick, a number of regional issues, in particular the closure of one of their assets in Mali, that's weighed on their execution against guidance. But within the large cap universe, I think both of those stocks expectations have been adequately reset. We think the guidance of 2025 should be achievable. And Newmont has attractive cash returns. They've recently divested over $3 billion of assets that we expect most of that to be returned through share buybacks. And Barrick has a medium term 30% production growth profile that I don't think is priced into the near term multiple. And the free cash flow generation that the stock is exhibiting relative to its peers.
- [26:10]
Jack Howe
And you said is there a third?
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Daniel Major
Yeah. So the third within the European universe? Well, it's Canadian, European listed Endeavour Mining. Again, higher jurisdictional risk was assets located in West Africa. But you know, historically the stocks had a pretty good track record. Last year was a little bit more challenging in terms of execution against guidance. But yeah, we think that they've adequately reset those expectations. It's close to 20% free cash flow yield at spot commodity prices that we expect to drive strong debt reduction and cash returns and drive a multiple rerating.
- [26:45]
Jack Howe
Thank you, Dan. Newmont Mining was recently down 26% over the past three years even though gold has gained 64%. And that leaves Newmont at just 13 times earnings. Barrick is down 10%, trades at about 10 times earnings. Endeavor is up 34% and goes for nine times earnings. That's surprising to me. Dan mentioned what he called Endeavor's higher jurisdictional risk. The company is focused on West Africa, especially a country called Burkina Faso. They had a coup d' etat in 2022. You would think that that stock would be doing worse with all the political upheaval. But coups are nothing new for Burkina Faso. It has had eight of them since 1966, along with five attempts and one street ousting of a president who tried to change the constitution to remain in power. Alexis, do you think we've answered the questions that folks had on gold? It's running up a lot. There are a bunch of reasons, but it might be part of a debasement trade. You don't have to put it in debasement, you can just buy ETFs. I don't think you super duper need gold in your portfolio, but I don't think you'll go too wrong with 2% to 4% if that's what you're into. Try to keep cost low. Gold mining stocks might be a better deal than the metal. They do seem volatile though. I definitely don't want folks to flee stocks and pile into gold because they're scared. Bonds are a better hedge for stock risk. Patience helps too. I want to thank Dan and Russ and Chris and Mansa Musa, the first of Mali too many to mention. And thank all of you for listening. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcast, Spotify wherever you listen. If you have a question that you'd like played and answered on the podcast, send it in. We might use it. You can tape it on your phone using the Voice Memo app. Send it to Jack how that's H o u g h barrons.com See you next week.
- [28:54]
Jomana Selehin
The beacon of the 60:40 is achieving a balance between the ups and downs in the market so investors can stay the course. That balancing act is still relevant for portfolios, but adhering to a strict allocation may not serve all investors. Here again is Vanguard's Jomana Salehin to explain.
- [29:09]
Alexis Moore
What we're talking about today is thinking about personalization. Thinking about where is the next frontier on balanced investing. It's talking about having capabilities to tilt your portfolio so that you can take advantage of your situation and the market situation. There may be some medium term changes out there on the horizon where you could actually benefit by tilting your portfolio.
- [29:34]
Jomana Selehin
Get more insights from Vanguard on how you can navigate an uncertain market@vanguard.com all.
- [29:40]
Jack Howe
Investing is subject to risk, including the possible loss of the money you invest diversification does not ensure a profit or protect against a loss. Custom Content from WSJ is a unit of the Wall Street Journal Advertising Department. The Wall Street Journal News Organization was not involved in the creation of this content.