Asset Trip with David McAlvany: The King of Gold on Inflation Hedging and Finding Value Buys

Yeah, that makes sense. So, when you think about your average investor, a lot of these alternatives and real assets (aside from maybe residential real estate) don't always occur to them as investment options. I'm curious how you see those assets fitting into a retail investor's portfolio.

So, if we back up in time, gold and silver were not treated as commodities. If you look at 5,000 years of recorded human history, gold and silver were more often treated as currencies than as a commodity play. So to have an interest in gold and silver was just to say, I've got this resource set aside and it's there for me when I need it. It wasn't really a speculation on an asset class as much as it was, "I have this resource either to buy another asset cheap or to help pay bills." It still plays that role to a large degree. We encourage our clients to look at their metals holdings like potential energy.

If you go back to your high school or college science classes, there's kinetic energy, or what's in motion, and then there's potential energy, stuff that can be used. That's the way I would look at gold and silver. It's potential energy, contrasted with your more traditional stock or bond portfolio, which is kinetic—it's energized, it's creating something, there's something that's being built, you know? I think for the average investor, [owning real assets] intuitively makes sense,. It's less complicated in terms of understanding what a business does. For instance, if you're a timber company, you grow a tree, you cut it down, you use it to build a house, all pretty straightforward. Or if you're in data storage, you have a piece of real estate that's been secured and has redundant energy coming in and you store other people's data. How often Liz, do you use your cell phone in a day?

Too often!

<laugh> Well, a lot. Whether it's sending a tweet or managing social media sites or calling your mom, dad, or brother, sister, these are all things that we do. And we take for granted that there are towers out there, bouncing the signal and taking the data and moving that data. So for us to be a part of that data infrastructure, it makes sense. I drive by a cell tower every day, and I think without that, I wouldn't be able to connect to my mom and dad in the Philippines. And that's kind of cool because I also own a part of that tower, and a part of my dividend income stream is from that tower. If you can present to me things like that, real things with cash flow, well, I'm interested. That's how we've constructed a portfolio of 40 or 50 different companies.

Real things have cash flow. You go back to the precious metals. They do not have cash flow, but they do serve this very important purpose. You want reserves in all areas of life and financial reserves in the form of actual cash are great, but you can also achieve the same thing with gold and silver. And frankly, in an environment where inflation is picking up, the dollars that you've got in the bank—well, your pockets are getting picked this year. Six percent of what you have in the bank could be gone at the end of the year because of the impact of inflation and loss of purchasing power. That's what I like about gold and silver as a store of value. Through longer periods of time, you get to have a cash equivalent, but without the inflation risk.

How do you recommend going about figuring out how to allocate your assets? How much of my portfolio should be in gold? How much of my portfolio should be in stocks, infrastructure, etc.?

As a family, we ran [the numbers] back in the 60s and 70s and recently looked at the same calculations. What makes the most sense? How much should you have in precious metals versus more growth-oriented assets? And the numbers really haven't changed much through time.

If you look at the 1960s and 70s, there's a lot of growth in the stock market from then to now, but there have also been some pretty significant downstrokes. You know, we had a one-day decline in 1987 of over 22%. If you're looking at the tech sector, which went into real trouble in the late 90s and early 2000s, [it was] down between 60% and 90%. If you're talking about NASDAQ-type companies, and more recently, the global financial crisis of 2008 and 2009, where if you were in very conservative stocks, you only lost 35%. If you were investing in international stocks, emerging markets, things like that, it was more like 60% to 80% declines. These are big hits.

So what we look at is not only what makes you the most money, but what keeps your investments safe with growth still being a mandate. And I go back to the numbers we ran in the 60s and the numbers we ran just a year or two ago, which take all of those major market declines into account. If your motivation is growth, let me put that out there as a qualifier, 75% stocks and 25% gold is a really good combination. And what you need to do is rebalance those portfolios once a year.

And what you find happens is when stocks are kind of on their keister, they've been in decline—maybe it's 20%, 30%, 40%, 50% down—gold tends to do very well. So what you're doing is you're selling gold and buying more stocks at a cheaper price, because you've got the resources to do that. So if growth is your mandate, 75/25 is really awesome. Particularly if you're willing to do that annual rebalance, it's actually the most critical piece. What that has you do is you're constantly buying value. I mean, it's a night and day difference in terms of performance because you're not playing the patience game, just hoping to get back to break even with your all-in bet in stocks.

What role do you see gold playing in a portfolio for someone who is either nearing retirement or in retirement?

It's super important because think about what the normal recommendation is as you're nearing retirement. The recommendation is to move more into bonds and less to stocks. And bonds are the one asset classes that are the most at risk in a rising inflation environment. So the recommendation for a retiree is to own more bonds than stocks, and yet in a rising inflationary environment, that's kind of like moving out of the frying pan and into the fire. There's more risk in bonds in that environment. And I think that's where we're at [with] global inflation. You know, the Germans—who are pretty tight-fisted when it comes to managing inflation—they're at 5.2% by one measure. The Pan-European measurement of German inflation is 6% this year, right in lockstep with ours of 6.2%. These are high inflation numbers for somebody who's living on a fixed income.

And so the gold play for the retiree, you can look at it two ways: One is that it appreciates in lockstep with inflation, so you're giving yourself an inflation hedge as a retiree. And if most of your assets are supposed to be moving towards bonds, you sure do need an inflation hedge. Absolutely necessary.

And I think there's another way of looking at gold, and this is maybe a boring way to look at it, but you could say an ounce of gold buys you roughly 300 loaves of bread, and you can bare-bones feed yourself on an ounce of gold a year. And that's not all your expenses. You may have rent, you may have healthcare costs and a whole bunch of other things. So, you know, you can't say great, I've got myself covered for the next 10 years with 10 ounces. But I think you could say, what are my expenses expected over the next 10, 15, 20 years? And do I have an ounce basis to work from in a worst-case scenario where I know that I'm not gonna be eating ramen noodles. In retirement, I've got myself covered. You can create your own sort of pension fund, if you will, with ounces. So looking at how much money you spend on a monthly basis, and just making sure you have that number of ounces.

Because gold used to be $35 an ounce. And as we've devalued our currency, it moved up to $300 an ounce. We devalued our currency more, and then it was up to about $400, $500, $600 an ounce. And we've continued that same thing, where we've devalued our currency, and just the cost of living is much higher. And yet anyone who had their savings in gold can spend those gold ounces. And it's as if they've been Teflon-coated from inflation. The devaluation of our currency over the last 20, 30, or 40 years...gold has kept up with that. And if you had that reserve of ounces, you know you're not gonna run out of money. And so that's another way of framing it in terms of the retiree.

It's so much easier now for so many more people to invest outside of the stock market, in things like precious metals, real estate, farmland, infrastructure, whatever. And I'm curious as someone who has been in this industry for decades now, how you've seen that landscape change and how that's changed the investing game for everyday people.

Because we've been doing this for 50 years, we've gotten to work with tens of thousands of clients. There's this comment sometimes that silver is called poor man's gold, because for 25 bucks or whatever, you can own an ounce. Whereas an ounce of gold is going to cost closer to two grand. So, the little guy can participate in silver, but he's not ever really been able to participate in gold unless you're buying jewelry. You might consider that a form of investment in gold, but generally, I don't because the premiums you pay on that are so high.

We created something called Vaulted, and it's an app. What we've done is basically given people the opportunity to own gold—it's allocated, it's deliverable, and it's stored at the Royal Canadian Mint in Ottawa, the same folks that produce it. Why did we work with them? Well, because there are very few people in the world who care about having conflict-free gold, and we do, and they do. Kilo bars are what you get to buy. You can buy any fraction of a bar. So if you wanna put $5 into gold, you can. If you wanna put $50 into gold from every pay period, you can. And you don't have to wait until [you have] $2,000 in savings to make a big splash. What we've basically done through Vaulted is democratize the access of gold for the little guy.

Yeah. There are so many people who have this money that they don't want to put in the stock market or anything where risk is involved because they're gonna need it eventually, but they hate seeing it just sit there in their savings account and lose value every single day.

We've seen a huge response from folks who own real estate because they just need a short-term holding—6 months, 12 months, or something like that. They sell a property, and they're gonna put it back into real estate. But the idea of having all that money at the bank, it's like, there's something else I could be doing. At Vaulted, we've seen a huge response from real estate investors and from those who've taken an interest in cryptocurrencies as well. They may want to come out of the crypto market temporarily. Where do you go? Gold is real wealth. That is what it has been for 5,000 years. You may have sources of creating riches, but making sure that you somehow funnel a few of those newly created dollars into real and enduring wealth, that's really key.

I'd love to talk about your own personal investments a little. What's your investing strategy and how do you allocate your assets accordingly?

First thing in my strategy comes from a conversation I listened in on with John Templeton, [who] started the mutual fund company back in the day. A mellow, quiet guy from Tennessee, southern drawl, super bright, and he had made a fortune. So this young man was asking him a question, what should I do? How do I emulate what you've done? And he said, "you should save at least 50% of your income." That was not the answer that the young man was expecting. He was expecting sort of stock tips and, you know, the equivalent back then of what's the next meme stock I should be looking at. Templeton was basically saying your wealth will be created by simple disciplines repeated over and over again.

If you can get used to living on a certain amount and get to the point where you're saving a high percentage of your income, you will be very, very wealthy. So my personal financial strategy starts with saving 50% of my income. Now I have capital to invest, and I have fresh capital to invest every year because I've chosen to live beneath the level of my income. That means making certain sacrifices, but there's a whole movement about this. You may be familiar with the FIRE movement where young people basically say, "I wanna retire at age 32 or 35." So this is not news to that cohort, but to a lot of folks, they're used to thinking, "oh, well, I'll, I'll save 5% or 10%, and then I'll invest that." Then they hope for big things to come from little amounts of money saved.

I think you can hope for big things if you're saving big amounts of money. You're gonna put a lot less stress and strain on the assets that you're investing; you don't have to shoot for the moon. You don't have to swing for the fences. You can be a much more conservative investor if you're more disciplined in your savings approach. So that's the most important thing.

Don't put your money to work in places that are overpriced. Be smart enough to search out value wherever it may be. If it's in metals, great. If it's in real estate, great. If it's in stocks and bonds, great, but don't feel obligated to fill your various buckets proportionally all the time. Look for value. This is something that's helped me in terms of personal strategy. And it's kept me from some major losses and it's also helped me with some really significant gains.

Speaking of advice, if you could go back and talk to your 18-year-old self about investing and change one thing about the way that you've invested thus far, what would it be?

Investing in your own education is a part of the process. It's not just putting money into the market or into a particular asset class, because you can do that in a dangerously blind way. My 18-year-old self would've been just enthusiastic about making money, and it would've been like, well, what's working? Let's put some money there. Let's see what happens. The danger would've been if I had made any money and I hadn't really understood how it happened. I don't know that it would be repeatable. It would've been just kind of dumb bull market luck. Everybody makes money in a bull market. How do you learn from that and grow? I think that's what I would encourage my 18-year-old self to look at. Be curious, whether it's listening to podcasts or [reading] blogs, reading books, find out who the experts are.

The other thing I would say to my 18-year-old self is to get started as soon as possible. Because when you learn about the power of the time value of money, when you learn about how important compounding is to your future wealth, time is what you don't have very much of. And it's why you should start now. Absolutely start. Now, if you just took a simple time value of money calculation, they call it the rule of 72, you would double your money on a 7% return every 10 years. How many 10 year periods do you have left in your life? You're gonna double and then you're gonna double again and then you're gonna double it again. What you're starting with is absolutely critical.

I'm not a finance guy by the way, I'm a philosophy guy. I think one of the reasons why I feel passionate about this is because while I loved reading Nietzsche and Wittgenstein and Plato and Aristotle, and it was enriching to my soul, it was not enriching to my pocketbook. <laugh> I wish I had paid attention and started saving more, sooner, and taking the investment process more seriously. It took me probably another seven years before I started paying attention. I was probably 25, which is not too late. But I wish I'd started another seven years earlier, because in my lifetime it would've gotten almost another double on the assets that I have.

Do you happen to remember, when you were 25, what your first investment was?

This won't come as a surprise. I was investing in two different things around the year 2000. Technology stocks were obviously kind of the rage, and I worked with a guy who knew more than I did. As it turned out, he didn't know much more than I did, which was dangerous. <laugh> But I knew he knew more than I did. So I took his advice on which technology companies to buy, and that ended up costing me about 70% of that particular investment. So a significant loss, straight out of the gates, investing in technology. I didn't know the context that I was in. I didn't understand that the market had been growing for 20 years and we were at the end of a cycle, not at the beginning of a cycle. So I got taught a very valuable lesson by not paying attention to context. Where are you at in the cycle? You need to answer that question.

But I did something else at the same time. I bought a bag of old dimes. These are, you know, silver coins that we minted until 1965. I paid about $3,000 for the bag, and I actually bought two of those bags. So that was my other original investment, [around] $6,000. And I didn't know what I was doing in either case, but through good fortune and timing, I was at the beginning of a cycle with silver. It was under $5 an ounce, today it's $22. It's been as high as $50. So that $3,000 bag is more like $16,000 today. Meanwhile, I already took my loss and moved on from the technology shares. Maybe I should have rebalanced, like I told you earlier, and taken some of the gains from the silver and moved back into technology shares that might have served me well over the next 20 years.

I mean, it's better to start young and maybe go in a little bit blind and get those lessons early on than to put it off until you feel ready.

I think that's actually a part of the tuition that you pay. You know, they call it the school of hard knocks. Look at the losses not as something to be embarrassed by, but as literally a tuition payment. Like, what happened here? What was I thinking? I actually have a whole journal on this. My personal financial journal is kind of unpacking, dissecting, doing something of a postmortem on the things that I've done wrong. I wanna know what I was thinking. What were my assumptions? Can I avoid making those mistakes? It changes your financial trajectory in a pretty significant way. It requires being honest and not having a super fragile ego to be able to look and say, oops, that was me. That was really dumb.

Definitely. Experience is the greatest teacher. Speaking of wins and losses, that was gonna be my next question. It sounds like you already covered it but what is your biggest investing win and your biggest investing loss?

Let's start with the win. The win is not the asset class. It's the fact that I've been saving 50% of my income since I was 25. And as my income has increased, so has my savings, and there's been no better source of wealth creation than that. There is no amount of investing and speculating that has been able to keep up with my savings rate. And you might think, well, that doesn't really answer the question. But I think the greatest win has been 20 years of discipline applied.

My greatest loss was in the gold space. You see, we've got a lot of history with gold, but sometimes we need to recognize when things change. When my dad got into the gold business 50 years ago, 70% of the world's global mine supply came from South Africa. So if you were going to be in the gold space, you kind of needed to understand South African geopolitics. We spent a lot of time as a family traveling down there. I've been to different mines, and I guess I assumed a lot about the past that didn't necessarily apply in the future for one particular company, very deep mines. Because of their high cost of production, they had a tremendous amount of leverage to a move in the metal itself, but they were not the company that they once were.

I knew them from childhood conversations with my dad, and they'd been around for 30, 40, 50 years, and you think, well, that's gotta represent stability. No, they had actually gutted their assets, and I didn't know enough in terms of being able to look at a balance sheet, an income statement, and read financials to realize that the only thing they had going for them was an increase in the price of gold. Operationally, they were circling the drain. I deserve that loss. It was not carefully considered, it was an extrapolation of what the past had represented for the company and how well they had done under a certain set of circumstances. And lo and behold, they're running out of gold down at the bottom of that hole in the ground. There wasn't much left, and yet you were still paying a high price for what might be there instead of what was actually there. So big loss, that company is no more.

It just reminded me, you can't extrapolate from the past. Things change. And so just because you've invested successfully in one area before doesn't mean you can take anything for granted. It's a constant labor to invest well.

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