If You Own Gold or Silver, What Comes Next Won't Be Quiet | Clive Thompson

[00:00:00]as we find an asteroid full of gold, and I don't think there's much prospect of that. Gold is not going to go to zero.

[00:00:08]So, in that respect, it's the safest asset you can have in your in your portfolio.

[00:00:14]It's safer than a bank deposit, which could easily go to zero due to the counterparty risk.

[00:00:21]It's safer than some of the largest AI-related companies.

[00:00:27]Um let me give you an example. The fees that everyone is paying and it's only about 5% of those who use the AI who are actually paying fees, the fees aren't even covering the electricity costs. So, people are paying in $50 a year to the AI companies for the usage of AI, but the electricity costs are coming in way above that. And on top of that, they're incurring this year $800 billion of capital expenditure, which next year will be a trillion dollars of capital expenditure, the year after will be 1.2 trillion of capital expenditure, according to the predictions. So, first of all, the optimal asset allocation very much depends on your start date. So, if you start in 1970, the optimal asset allocation is different from your optimal in 1975, different from 1980, and different from 1990, 2020, and so on. So, depending on your start date, the optimal asset allocation will be different if you're looking forwards over time.

[00:01:31]And I've done hundreds [snorts] of tests, and I have a portfolio simulator on my website called clivethompson, which anyone can go to.

[00:01:38]It's free of charge, no registration, not even an email address needed. And you can put in any asset allocation you like to test this. You can put in any starting date you like to test this. But the conclusion is the following.

[00:01:52]Over virtually any period, i.e., any starting date until today, having some gold in your portfolio would have improved its return.

[00:02:03]It would have improved its sharp ratio compared with a traditional 60/40 portfolio.

[00:02:09]And it would have reduced the biggest loss. That's a peak to peak to trough cycle. It would have reduced the biggest loss from whatever it was to a smaller loss if you had gold.

[00:02:22]Now, the optimal amount of gold does sort of what vary according to your starting date.

[00:02:28]But I say I could What I can say is had you put in around 30% of gold at any time in history, it would have improved your portfolio compared with a 60/40.

[00:02:40]So, 60/40 with 60% equities, 40 bonds.

[00:02:43]If instead you'd had 60 equities, 30 gold, and 10 long-term bonds, you would have done better on all the metrics.

[00:02:54]Now, it doesn't mean to say that every single date in history 60 30 10 was better than some other ratio. But it But what it does mean is having some gold. So, for example, in the last 5 or 10 years, the best ratio would have been more more like I can tell you I've got it in front of me here.

[00:03:18]Um If you'd started now, if you started June 21, that's 5 years ago, your best ratio would have been 35 equities and 64 or 65 gold.

[00:03:32]If you go back 10 years before that, it would have been 65 equities and 35% gold, zero in both cases, zero bonds.

[00:03:40]But as I go back in time, let's say to 1991, the correct ratio would have been 48 equities, 23 bonds, and 28 gold. But overall, 30% gold would have been the perfect number if you couldn't choose your starting date.

[00:03:57]>> Extensive portfolio simulations covering multiple decades reveal a surprising conclusion. Traditional portfolios built around stocks and bonds frequently benefited from replacing part of their bond allocation with gold.

[00:04:11]In many historical periods, a structure containing approximately 30% gold outperformed the classic 60/40 model across several important measurements.

[00:04:21]Recent years have made this even more evident as rising inflation, Taiwan geopolitical tensions, and concerns about debt sustainability pushed investors toward hard assets. Although no allocation remains perfect forever, gold consistently demonstrated its ability to act as a stabilizer while still contributing meaningful long-term growth within a diversified investment framework.

[00:04:45]>> Well, I've looked at I've looked at all the three asset classes, gold, bonds, and equities. I've looked at every date range up until 2021. When I say up until 2021, there's not a lot of point in looking at beyond 2021 cuz beyond 2021, the the optimal would have been 100% gold, to be honest with you.

[00:05:07]But, up until 2021, so starting from 1970 or 1980 or 1990 or 2010 or 2020 or 2021, all of those dates you should have had gold in your portfolio with hindsight to improve your sharp ratio and other other things like your performance or your drawdown.

[00:05:27]We can optimize that by changing the asset class. So, on my website, you can put in any asset class you like. You can put in emerging market bonds. You can put in emerging equities. You can put in real estate, US real estate. You can put in UK real estate. You can put in UK index. You can put in probably about 25 to 30 different asset classes, including Bitcoin and silver is there as well. Uh so you can choose your asset classes, add your mix, add your percentages, and you can choose whether to rebalance monthly, quarterly, annually, or never.

[00:05:58]You can choose whether there's a fee comes out uh because real life portfolios have a fee including taxation if you like. Uh so I put in a fee of 1% or 1.5% uh which is taken uh in installments every 3 months. Uh so you can put in a fee uh when you do simulation, but you can simulate basically anything and it will tell you what your return is, what your sharp ratio is for any portfolio, what your biggest loss would have been, and it will show you month by month how your portfolio evolved, and it will compare it with any benchmark you choose. You can choose a benchmark of S&P or a benchmark of gold or benchmark of Bitcoin or whatever you like as a benchmark, and it will compare your performance with the benchmark. As we find an asteroid full of gold, and I don't think there's much prospect to that, gold is not going to go to zero.

[00:06:49]So in that respect, it's the safest asset you can have in your in your portfolio.

[00:06:56]It's safer than a bank deposit which can easily go to zero due to the counterparty risk.

[00:07:02]It's safer than some of the largest AI related companies.

[00:07:08]Um let me give you an example. The fees that everyone is paying uh and that is only about 5% of those who use the AI who are actually paying fees, the fees aren't even covering the electricity costs. So people are paying in 50 billion dollars a year to the AI companies for the usage of AI, but the electricity costs are coming in way above that. And on top of that, they're incurring this year 800 billion dollars of capital expenditure, which next year will be um a trillion dollars of capital expenditure. The The after will be 1.2 trillion of capital expenditure according to the predictions.

[00:07:45]>> Modern portfolio analysis has become far more sophisticated than simple stock and bond comparisons. Investors can now model combinations that include precious metals, real estate, international equities, emerging markets, cryptocurrencies, and alternative assets.

[00:08:00]Variables such as rebalancing frequency, management costs, taxation, and benchmark comparisons can dramatically affect outcomes over time.

[00:08:09]These simulations often reveal an important lesson. Diversification works best when assets respond differently to economic conditions. Gold, for example, frequently behaves differently than equities during market stress. By examining historical performance month by month, investors gain a clearer understanding of how portfolio decisions influence long-term returns and risk exposure.

[00:08:33]>> Compared with this revenue which is coming in from users of fifth let's call it 50 billion for simplicity, which is a tiny fraction of what they're spending.

[00:08:43]Now, capital expenditure, of course, is inverted commas supposed to be an investment which generates that revenue, but that revenue isn't covering the electricity cost at the moment. Uh so, every big AI company is going hell-for-leather to try and sell their services below what it really costs in order to maximize users, maximize usability. So, they're all working like crazy to train their models to produce better and better models. Uh they're going crazy to get the data centers running. They're buying the best Nvidia Nvidia chips.

[00:09:16]Um and all of this the the data centers, the training, the Nvidia chips, all of this must have a depreciation rate.

[00:09:26]What if they never get Let's say some of them never and I'm sure this will be the case. Some of them will never get to profitability.

[00:09:35]And the users go away.

[00:09:38]What's What if they left? What's it worth? Well, the answer is it's worth very little, and they might in fact be become insolvent, some of them.

[00:09:47]So, they could go Even these wonderful companies potentially could go to zero.

[00:09:52]Your gold price is not going to go to zero, but there's another factor which is quite important. Even if equities do rise as they continue rising, which I think they will, you constantly have to be on the ball with equities. You have to be thinking, "Where should I be parked now?

[00:10:09]Should I be in the AI sector? Should I be in the utilities? Should I be in the oil sector? Should I be in the medical sector? Should I be in America? Should I be in Europe? Should I be in emerging markets? Should I be in Asia?" You have to move it around. That Those are taxable events.

[00:10:26]If you have some gold in your portfolio, you don't have to move it around.

[00:10:31]You don't have to be thinking, "I'm selling it this year, buying it back next year."

[00:10:35]Because you risk is risk of it going to zero is not there.

[00:10:39]You could just keep it forever and ever and ever. And because you're keeping it forever and ever, your tax bill overall goes down because you're deferring your tax until some distant date in the future when you might well be dead before it ever has to be sold.

[00:10:55]>> Unlike corporate shares, gold carries no management team, earnings report, or bankruptcy risk. Companies can fail, industries can become obsolete, and even dominant technologies can lose relevance.

[00:11:08]Today's artificial intelligence boom illustrates this uncertainty. Massive investments are flowing into data centers, advanced chips, and infrastructure, while profitability remains uncertain for many participants.

[00:11:20]Gold operates under a different set of rules. It does not depend on quarterly earnings or consumer demand trends.

[00:11:27]While its price fluctuates, its value is rooted in scarcity and global acceptance.

[00:11:33]For many investors, that permanence provides a unique form of financial security unavailable elsewhere.

[00:11:39]>> The US debt is rising at a faster pace than GDP and the interest payments on that debt are rising at an even faster pace.

[00:11:50]And the reason they're interest payments are rising faster is we have a lot of debt which was taken out 5 7 8 10 years ago by the government when interest rates were effectively zero. They would have paid 1 or 1 and 1/2%. That debt is maturing and they're having to pay 4 and 1/2 for a 10-year bond now.

[00:12:07]So, they're paying maybe three or four times as much to roll over the maturing debt in terms of future interest. So, according to um any common sense, but also according to the Bureau of Labor Statistics own numbers, which you can look on their website and see their future uh forecast for where uh how how the US finances are going to go, the interest burden is going to spiral and keep spiraling upwards. It won't be very many years, probably no more than a decade, before the interest exceeds the totality of the tax collection.

[00:12:44]Now, we could play argue about when it happens, but at the you know, a couple of years ago we were looking at interest uh an interest cost of about 8% of the tax take uh is now um surpassed 14% of the tax take and it's going to go beyond 22% in the next couple of years, according to the Bureau of Labor Statistics own numbers. So, the interest burden is rising rapidly on a debt and that's partly because of the maturing debt, but also more importantly, because the debt is rising faster than GDP. So, the debt is rising, the total sum of debt is rising faster than they can collect taxes. Because if GDP goes up by 10%, they can collect maybe 10% more taxes, but if the debt rises by 20, and that these are exaggerated figures, then you you got that extra interest payment on that much higher debt level. So, this is getting out of control. Now, what what they can do to solve that problem temporarily, and this could be a permanent problem solving, what they can do is revalue gold that the Treasury holds. The Treasury is the government. The US government holds a lot of gold. They can revalue it to the market value.

[00:13:55]Or a much higher value. And I think the argument is strong that they should do it to a much higher value.

[00:14:01]Um I picked a bit of a number out of the air and said $15,000 would be a good number.

[00:14:05]Um the reason I chose $15,000 um was it's the number which allow them to repay a little bit of debt which is maturing and fund the current year's expenditure. In other words, we can end the year next year with less debt and with having paid all the expenses. But, let's just explain how they would do that and how it works.

[00:14:25]The mechanism is very straightforward, and it's a well-trodden route, so it can be done before has been done before in in 1934 in a slightly different way, but more or less the same thing.

[00:14:37]The first step would be for the Treasury to sell its gold to the Federal Reserve at whatever price they declare as the new floor for gold. Let's say $15,000 to that.

[00:14:50]>> A growing concern among economists is the rapid expansion of US government debt. As older low-interest bonds mature and are replaced with higher yield debt, interest expenses continue climbing.

[00:15:02]Some analysts argue that this trend could eventually place significant pressure on federal finances. One controversial proposal involves revaluing the government's gold reserves at a much higher market price. Advocates suggest such a move could strengthen Treasury finances and reduce borrowing needs. Critics remain skeptical, questioning its practical impact and long-term consequences.

[00:15:27]Regardless of the outcome, the discussion highlights how central gold remains in debates surrounding monetary stability and sovereign debt management.

[00:15:37]>> The Federal Reserve pays the Treasury for the gold at the market price, which is now $15,000 an ounce, let's say.

[00:15:45]That gives the government enough money to pay all the debt all the expenditure this year and next year and to reduce or rather redeem bonds which are maturing without having to take out new debt.

[00:15:58]The The Federal Reserve has now got the gold, the Treasury's got the money. The next thing the Treasury does is to buy back that gold from the Federal Reserve using what's called gold notes. Now, gold notes are not new. The Federal Reserve has already got a whole bunch of gold notes from the last time they went through this exercise. I last time they they Treasury bought the gold off the Federal Reserve. They gave the gold notes. But the beauty of gold notes is this.

[00:16:24]They're not part of the national debt.

[00:16:27]They don't bear any interest.

[00:16:30]And they are perpetual.

[00:16:33]So, what's So, if I if I if I borrow some money from you and I give you a bit of paper say I borrowed I borrowed the money from you, but it's not part I don't know anybody and it is not part of my debt.

[00:16:43]So, I'm feeling good. And then by the way, I don't have to pay you any interest. And by the way, I don't ever have to repay you.

[00:16:50]I'm sitting pretty. So, that's what the government should do. Now, the the Federal Reserve is is and can and always has treated these gold notes that it owns as money as an asset.

[00:17:03]So, you've got two sides of the coin.

[00:17:07]Even though it's a technically a liability of the government, it's not part of the national debt and it's and since it's never repayable, they don't have to only redeemable if the government decides to redeem it.

[00:17:18]Basically, it's like a banknote. It's a worthless bit of paper. It's irredeemable with no interest.

[00:17:25]And the government's got So, the money's When they've complete this exercise, the government's got its gold back in full.

[00:17:30]It's got the money.

[00:17:32]The Federal Reserve is still happy because it's got an asset, the gold notes. So, its books balance.

[00:17:40]And um we we've got a whole bunch of money now sitting in the Treasury which can be used to redeem the maturing debt as it comes up and to pay the ongoing expenses without having to borrow money for a year or so.

[00:17:54]Obviously, they might have to repeat this exercise in a year or two, but probably not because the consequence of doing this exercise is it will create a shortage of Treasury bonds.

[00:18:05]So, what happens when you have a shortage of Treasury bonds?

[00:18:08]The yields go down because everybody's still The buyers number buyers don't change.

[00:18:13]So, the buyers are still there, but number of Treasury bonds have gone down.

[00:18:16]So, what happens? The yield The prices go up. The yield goes down. And because the yield has gone down, the problem with borrowing money when they restart borrowing money in 2 years' time of having to pay higher interest rates isn't there because the interest rates are that much lower.

[00:18:33]>> The debate over gold ultimately centers on one question. How should investors preserve purchasing power in an increasingly uncertain world?

[00:18:42]Economic cycles come and go, technologies evolve, and governments continue accumulating debt.

[00:18:48]Throughout history, gold has maintained a unique role as a store of value during periods of financial stress. It may not always be the best performing asset, but its ability to diversify risk has repeatedly attracted both institutional and individual investors. As global markets navigate inflation concerns, fiscal challenges, and technological disruption, gold continues to stand out as an asset that many believe deserves a permanent place in a well-balanced portfolio.

[00:19:17]>> That's absolutely not going to happen.

[00:19:19]Um we've got lots and lots of evidence that it won't happen. Um the first uh and obvious bit of evidence is when they revalued gold upwards by 67% in 1933, 1934 big pardon.

[00:19:34]What impact did that have on prices?

[00:19:37]None whatsoever. Nothing. Didn't affect the dollar, didn't affect prices, didn't affect anything.

[00:19:42]Um likewise, we've had in the last couple of years a doubling of the gold price.

[00:19:48]Have Have Have Has Has the dollar halved? No. Has Has the uh Have retail prices doubled? No. So, the the rise in gold to uh double the price had no effect. So, why would a change in the gold price to triple the price have an effect? It probably wouldn't. I don't see why it would have an effect. Uh the the only uh and and it wouldn't change anything vis-à-vis the money supply. Of course, the government gets a whole bunch of money which it can spend, but at the end of the day, it was going to have to get that money anyway by increasing the debt.

[00:20:22]So, it It would have increased the debt, got the money, spent it anyway. So, all they're doing is spending exactly the same amount of money as they would have done. What we've changed slightly is the short-term money supply goes up a bit, and the long-term money supply uh long-term money supply, which is the government debt, goes down a bit. So, you just have a slight rebalance. But, it's really uh you know, these days government debt is as liquid as as cash in the bank. Um so, it really doesn't change anything about the total debt. It's not going to change the prices of anything.

[00:20:52]>> [music] [music]