Lyn Alden (00:03:02):
As we should expect, things that are able to compound and grow should outperform things that don’t. And so a company that has thousands or tens of thousands or hundreds of thousands of employees working every day to make that company better, should over the long run outperform just a hunk of metal or a barrel of oil. But basically, the thing that both stocks and bonds have in common is that they do very well in disinflationary regimes, basically stable monetary conditions, good long-term planning, and pricing power, whereas commodities are the best hedge in those more inflationary environments. And so there’s multiple ways to defend against inflation, but having commodities in a portfolio or commodity producers in a portfolio is one of the cleanest ways to do it.

Lyn Alden (00:03:43):
And you can either do it in terms of a permanent portfolio approach where you always have some slice of commodities that will be an underperformer much of the time, and then a dramatic outperformer in some of those times where equities and bonds don’t do well. Or if you’re more active, can tilt towards commodities around the time that you expect inflation, or you’re seeing signs of inflation starting to build. If you, for example, follow the CapEx cycle more closely and have a better grasp on inflation than maybe the average market participant.

Stig Brodersen (00:04:13):
So, Lyn, one of the typical arguments for buying gold is to have an asset outside of the financial system. I can’t help but wonder how does that translate into investments in commodities? Many of our listeners, due to what you said before, in terms of managing their portfolio, might want to own an asset that perhaps correlates with the price of a specific commodity, could be oil, but they’re not keen on holding the actual commodity. So how can investors, if possible, get the best of both worlds?

Lyn Alden (00:04:42):
So gold and commodities can almost be considered two different asset classes because although gold technically is a commodity, it has more characteristics of a currency. And what I mean by that is that most commodities have a low stock-to-flow ratio. Basically, the amount that we have stored in the world is in many cases lower than the amount that’s produced annually, or maybe it’s one or two times what’s produced annually depending on the specific commodity. There’s not really large inventories, usually, they’re very bulky, they don’t last a long time necessarily, and they require expensive storage facilities. And so we have rather low inventories at any given time.

Lyn Alden (00:05:19):
And so those are necessary inputs in the economy, and that’s why they are so closely tied with inflation, because if we have shortages in those, we pay more to get them, basically we squeeze other parts of the economy, whereas gold, because the vast majority of it’s not really needed for things. I mean, there is an industrial use for it. It’s usually a small percentage of the price of the good that it’s going into. And most of it is used for jewelry or it is outright monetary use or store of value purposes. So coins, bars, as well as jewelry that in many cases, especially in some countries like India, very much overlaps with the store of value aspect of it, so it’s another way of storing value.

Lyn Alden (00:05:55):
So gold, in some sense, it gives us that long-term protection against inflation. If you have fiat currencies going down in value, gold over the long-run has historically held up equal to, or actually better than official CPI, closer to money supply growth. And the advantage of it is because it has… So it has a high stock-to-flow ratio, so it’s not like disruptions really affect the gold market too much. And two, because you can store a lot of it for a long time in a small amount of space. It’s one of the rather few commodities that could be suitable for people having some at home. They can have gold coins at home.

Lyn Alden (00:06:30):
And the main advantage there is a lot of us are in developed markets and we’ve had this very long period of stability where something like having gold in your home sounds totally unnecessary and silly. We trust our financial institutions. Whereas for example, right now, when we’re seeing currency crises in different countries some of them have bank bail-ins when that happens. Some of them have hyperinflation happen, right? Not just going back to Weimar, but in some emerging markets today, you have either your outright hyperinflation or you have things that might as well be, right? There’s double-digit inflation, super high. Maybe it doesn’t meet the definition of quote-unquote hyperinflation, but it’s the destruction of currency.

Lyn Alden (00:07:09):
And then in those environments, usually you have, even if say, you’re in Lebanon and you’re storing dollars in the bank or Argentina, basically there’s a precedent where they come in and say, “Okay, we see that you have dollars. We’re going to go ahead and take those because we need them and we’ll give you our local failing currency in exchange.” And that’s something that basically anything that has counterparty risk, when you have a truly inflationary or really problematic financial environment, you can’t necessarily 100% trust your cash assets, even your stock assets, whereas having physical self-custody gold or, say, gold stored in a private Brinks vault or something like that is just another lever that those, say, authorities would have to go through to basically defraud you, to take your assets or forcibly convert your assets. And so in that way it serves as insurance.

Lyn Alden (00:08:00):
Whereas commodities, if you say, invest in oil features or oil stocks or copper stocks or things like that, they’re not giving you that defense against that confiscation type of approach. But instead, that’s more of a normal financial play within the confines of the financial system. So you have, say, copper stocks in your broker account, for example, and that’s just giving you a strong inflation hedge. So if you go through a more inflationary environment, a period of more commodity shortages, those should be good hedges for your portfolio. Not necessarily in the same disaster scenario that gold can protect against, but in that more direct inflationary environment. And as you’ve seen, for example, gold, because it has this high stock-to-flow ratio, it can behave oddly, right?

Lyn Alden (00:08:42):
So you can have 7% inflation and gold not do well, whereas the other commodities are actually in some ways better inflation hedges in the sense that almost by definition if you have high inflation, it means most of those are probably doing well.

Stig Brodersen (00:08:56):
I also think whenever it comes to, say, gold, it’s so different what people hear and how that’s perceived depending on where you live in the world, perhaps also depending on your age. I live in Denmark and every time I bring up, say, something like Bitcoin or gold people are like, “That makes no sense. Why would you do that? Danish krone, it’s a good currency. What’s wrong with that? How can anything go wrong?” And they would say, “Invest in stocks if you want to make more money.”

Stig Brodersen (00:09:25):
And then if you go to Asia, they would say, “Gold makes a lot of sense. That’s safe. Don’t speculate in stocks.” And I know I’m overgeneralizing here right now, but I just think it’s very interesting whenever we are having this discussion about gold and currencies, how that’s just thought of so differently, depending on where you are. And, yeah, I guess the experiences, not just of your generation, but also your parents’ generation.

Lyn Alden (00:09:52):
Yeah, it’s interesting because if you look at different stock markets around the world any of them have had 10, 20, 30 year periods of very poor returns compared to just even in dollar terms, let alone in gold terms. And so partly where you go in the world, that will dictate that how they perceive stocks. In the United States, where we’ve had one of the best performing stock markets, especially over the past, or going back a number of decades, people have this idea that stocks only go up and they go up at 10 to 15% a year, almost like clockwork or more than that in bull markets. And why not just invest in that?

Lyn Alden (00:10:26):
Whereas if you go to many other jurisdictions around the world, that’s not necessarily the case. And then as we talked about before, basically in disinflationary environments, stocks are among the best investments you can hold. And we’ve had some inflationary bursts over the past 40 years, but for the most part, we’ve been in this 40-year disinflationary period. And so a lot of recency bias really focuses on the power of stocks. And I think that’s one of those things to be mindful of going forward, is to try to avoid that recency bias. Now that we’ve gotten all the way down to zero interest rates in many places now that stock valuations are very high in many places, we shouldn’t necessarily expect the same amount of broad stock indices that we’ve come to expect over the past 40 years.

Lyn Alden (00:11:09):
And I think some markets, ironically, the markets that have done poorly, I think the people are more attuned to that and would navigate that better and people in markets or that invest in markets that have just gone up for 40 years, almost, especially the past 10 to 15.

Stig Brodersen (00:11:26):
Whenever we analyze data series, and I know you definitely know this, Lyn, because you do a lot of data analysis and you typically use American data and you do that for a number of different reasons. One of them is it’s just very practical because it’s there, it’s available and it’s so easy to work with, US data, compared to many other countries. But there’s a huge survival bias, you’re looking at US data. Well, there are survival bias because the US stock market did so well. But the US, this superpower, like all, have a lot of tailwinds going for it, how the US got out of World War I, World War II compared to, say, Europe, for example.

Stig Brodersen (00:12:00):
And so if you look at those stock markets that survived, you have three stock markets that survived over the past 100 years. It was the US, Australia, and the UK and the US did best of those three. Many of the other major stock markets, they were just obliterated. The Japanese stock market, the German stock market, the Russian stock market. So you have a lot of survival bias whenever you’re looking into that. So, Lyn, so whenever we are talking about commodities and I have this horrible habit where I’m saying, “Well, you should just buy this asset class.” And I tend not to be very specific and people are looking at me like, “So how do I do that?” Let me give you that question. So if you’re discussing, “Well, why not have an allocation to commodities?” How does that work in practice?

Lyn Alden (00:12:45):
So basically there’s different ways to do it. So my preferred way is to invest in commodity producers because I tend to be rather equity-focused. So even when I’m looking at commodities, my first instinct, and my best understanding is to look at the equities that are involved in commodities, which is mostly the commodity producers. You can also look at commodity transporters, things like that, the surrounding ecosystem. And so that’s one of the better ways to do it because even in, say, flat or mildly up commodity environments those companies are profitable, they’re paying dividends, so they can combine the commodity elements, basically the good inflation protection with the compounding of a company.

Lyn Alden (00:13:22):
Now they generally will have less compounding than a software stock or healthcare stock. So these are often not the best long-term performers, but they combine that commodity element with that ability to also just compound and pay capital over time. So that’s, I think one of the better ways to do it. Also, I mean, you can just hold them indefinitely they’re infinite duration securities, unlike, say, a contract with a specific date. Now, if you are active in features, obviously they are another great way to play commodities. And the advantage there is that, for example, let’s say, your thesis is that governments are going to hamper energy companies’ ability to produce more energy, right? For whatever reason, ESG reasons, whatever the case may be maybe say, “Well, part of my thesis is that commodity companies are going to have a problem. So I just want to buy the underlying commodity.”

Lyn Alden (00:14:09):
And so that’s actually one way to clear out some counterparty risk is to just directly get exposure to the commodity via features. And so I think in a portfolio, the way I handle it personally, is for most commodities, I go with the producers. For a handful of commodities where there’s good ETFs or funds that are not features based. So the problem with if you have an ETF-focused portfolio, a lot of those commodity ETFs use these rolling features and those are not the great long term and hold investments. So holding specific features can pay off really well, but if you hold a commodity ETF through a neutral to bear market, you can lose money on these rolling features contracts. And so I generally avoid those features-based ETFs.

Lyn Alden (00:14:52):
So I either split it up to buying commodity producers, like oil producers, copper producers, things like that. Or I go and I buy a gold ETF, a silver ETF, there’s even a uranium holding, it’s a closed-end fund, similar to an ETF. So there’s a handful of these commodities that you can get physical exposure to them, which is useful, and I combine that with the producers in many cases. And I personally mostly avoid the features, but they are a very good way to play if you’re active in that market.

Stig Brodersen (00:15:21):
Yeah. I think that’s an important thing to understand because most people might think, “Well,” if they’re buying, say, an oil feature, “it’ll be following the spot price.” And that’s just not the case because it’s tied up to those features. It’s more expensive and they might be thinking, “Well, I’m going to hold this for 10 years, because I believe in the oil price going up over the next 10 years.” And whatnot, and then you have rolling features that might be replaced once a month. And you’re like, “Where’s my return?” I think it’s important you brought that up, and also I would encourage listeners as they’re going through this to make sure to check that. What has the performance been on ETF compared to the spot price and then also read up on whether or not it’s future based or not?

Stig Brodersen (00:16:00):
When we are discussing equities, bonds, gold, whatnot, we often tend to discuss how much the asset classes are manipulated. Often, but not only by central banks. Who are the big players in commodities and are they being manipulated? And I also want to clarify, of course, whenever we say commodities, there are so many markets that can be defined as commodities. So perhaps we can start with that?

Lyn Alden (00:16:24):
So with commodities, what you generally find is that the higher the stock-to-flow ratio of the commodity, because there’s more of it available to rehypothecate and play with compared to commodities where, let’s say, you need a 100 million tons a year worldwide and they produce a 100 million tons a year and there’s not a lot of existing stock to play with. Right? It’s a very tight supply-demand balance. They might have, say, six months in inventory, it’s hard to move. And so basically something like the gold market is easier to manipulate than something like the copper market.

Lyn Alden (00:16:59):
Now for those larger commodities like, let’s say, copper or oil, the main way that you can manipulate them is if you have a cartel of producers, right? So something like OPEC can manipulate even those low stock-to-flow ratio commodities. But basically, it’s really hard to do because you have to have a quorum of the market. You have to have a meaningful percentage of global production, which is hard to do outside of the oil market. And so that’s been a long-known, purposeful thing in the oil market that’s not really present in a lot of other commodity markets. In large part because it’s such a key commodity, it’s the master commodity it’s even used as an input to get all the other commodities out of the ground. And so that’s the backbone commodity of modern civilization is these various fossil fuels.

Lyn Alden (00:17:45):
And so, one way tho manipulate it is to have that cartel, but then if you’re doing the more direct type of manipulation, generally it’s limited to commodities that have that high stock-to-flow ratio. And so for example, you can either have central bank manipulation or you can have commercial bank manipulation. And so commercial banks, there’s been a number that have been fined for manipulating gold and silver markets. You can do things like spoofing where you purposely put in limit orders and then pull them out, you’re manipulating the price. And then also because of…

Lyn Alden (00:18:18):
So, gold is very centralized, right? So over time in human history, it got centralized in banks and then it got centralized in central banks and so actually, there’s very large pools of it that are held by these major vaults in London and New York. And what you can do is you can basically issue more claims against it than you have the amount of gold that you could theoretically deliver now. And the problem there is that more people think they own gold than really own gold. It’s a game of musical chairs where, as long as things are working, they all get exposure to the gold price, there’s no major risk, but you could have a once every couple of decades event where you have such a dislocation in the market that, that could break.

Lyn Alden (00:19:01):
And the most famous example is the London Gold Pool failing, that was an intentional manipulation scheme to maintain the Bretton Woods System when it started to run into headwinds. But basically even today, you have that rehypothecation problem where there’s X amount of gold, but then there’s, say, five X amount of claims on that gold. And the size of that market can change over time. And it’s tied to the fact that one, you have a high stock-to-flow ratio and two, taking physical delivery is not easy. It’s not a trivial process. You don’t just get a UPS shipment in the mail. It’s this whole detailed, long-term delivery scheme.

Lyn Alden (00:19:39):
And so most players either just hold on allocated gold, so they have counterparty risk. And so there are manipulation that happens in these markets, but more so on, say, the gold, silver side and less so on, say, the copper the nickel, markets like that.

Stig Brodersen (00:19:57):
So, Lyn, let’s talk a bit about the weighting of commodities and gold in the well-balanced portfolio. I think a lot of our listeners are probably familiar with Ray Dalio’s All Weather Portfolio and he says 7.5 in commodities, 7.5 in gold. But that also had the underlying assumption that you don’t know what’s going to happen. You don’t want to have an opinion of the market. You just want to set it and forget it. So how do you think about weighting into commodities and gold and how do you think about it specifically in the environment that we’re in right now?

Lyn Alden (00:20:30):
So I think that’s a reasonable all weather allocation for someone who just wants a permanent portfolio. I think in this day and age, I would split the gold allocation to, say, gold and Bitcoin, right? Because now gold has for the first time in a very long time, some semblance of competition, basically Bitcoin is arguably a digital commodity with a higher stock-to-flow ratio than gold. Obviously, it’s been on an upwards trajectory as of late. And so, one, they have to manage that risk. And then on the commodity side, there’s a couple of ways to play it. So there’s another permanent portfolio known as the Dragon portfolio and what that one does, that has a 20% allocation to commodities, but it does so through commodities trend following.

Lyn Alden (00:21:09):
And so for people that aren’t familiar with trend following, it’s basically using an algorithmic, systematic approach to identify markets that have an uptrend to only own them while they have that uptrend. So a very simple way of thinking of it is you can say, “I want to own this asset, but only when it’s above its 200-day moving average.” Right? “And if it goes below a 200-day moving average I want to get out of it and go to cash for that segment of my portfolio.” And that’s a simple method, but it’s the most… Just for illustrative purposes. And commodities tend to work better than other asset classes for trend following because as we discussed, they’re very boom-bust in nature. They’re very binary. So most of the time they’re not working very well at all. And then other decades, they work. They’re the best thing out there by far. And so you basically have this thing where you’re not exposed to them until they start to do well, and then you have a pretty sizeable allocation.

Lyn Alden (00:22:03):
So I think how much you allocate to commodities in that all weather portfolio, I think will depend on end on whether or not you have any trend following component. If you have trend following, you can ratchet up that allocation to a higher number. Whereas if you don’t have that trend following, you want to be careful about how much you allocate to an asset class that over the very, very long run does not have great returns. And then if you specifically want that exposure because you specifically have a thesis that inflation’s going to do well, there’s really no upper limit other than just how diversified you want to be, how comfortable you feel with your thesis, what is your level of conviction with your thesis?

Lyn Alden (00:22:40):
I mean, there are funds out there that go 50, 60, 70% into commodity or investments when they have a very value and inflation and commodity-oriented theme. But that kind of concentration, I think, is best left to the experts or people that are… They’re the ones who super high conviction on what’s going to happen and they’ll get rewarded or punished for it thoroughly, whereas I think the average person I think having a slice in your portfolio makes sense.

Lyn Alden (00:23:08):
Another thing worth pointing out is that part of the reason that equities, in general, do poorly in inflationary environments is because when we look at indices, they’re generally weighted by market cap. And right before you get an inflationary environment, you’ve been through a long disinflationary environment. And so the companies that are on the top of the index are the ones that are most adapted to a disinflationary environment. So growth-oriented equities tend to do best in these more disinflationary environments. And so it’s like an extinction event’s happening and the most ill-suited animals are the ones you’re over-allocated to, and the animals that are going to survive it, let’s, say, commodity producers are part of the index they’re at unusually low allocations because they just went through a disinflationary decade.

Lyn Alden (00:23:57):
And so basically the risk of not having a commodity slice in your portfolio, and let’s say, you’re entirely invested in the S&P-500 and bonds right before an inflationary period happens is that the bonds are obviously bad with inflation. And then the equities, not only are you invested in equities, you’re invested in specifically, mostly the ones that benefit from that disinflationary period.

Lyn Alden (00:24:20):
So for example, in mid-2020 energy stocks hit their lowest ever percentage in the S&P-500, they got down to 2% of the S&P-500. So if you then go through an inflationary period if that 2% starts to do very well, it’s not going to hedge your other 98% equity exposure very well at all. Whereas if you had a, say, five to 10% allocation, and that goes up threefold, that can give you more hedging power, if the rest of that equity index starts to run into turbulence. And so I think that’s the way to think about it is that you don’t want to be underweight commodities at the end of a long disinflationary period, going into an inflationary period. And that can either be making sure you actively approach that or by having a larger permanent allocation that either does… Is just always there, or it does some sort of trend following.

Stig Brodersen (00:25:13):
So on your wonderful blog, one of the things that you said is that you discussed your turnover, you mentioned it was pretty low, but you also adjust periodical based on where opportunities exist. And one example you could point to would be something like bonds. You hear all about these bond allocations and how that should be and how that should be placed in a portfolio. And for a very, very long time bonds haven’t really been that attractive. Whenever you look at the yield, whenever you look at inflation and still bond price have rallied because of the cycle that we are in right now, as we thought it could get lower, it still did. So you could still make some very decent return in bonds depending on how you played it.

Stig Brodersen (00:25:50):
So with that said, I don’t know if you should talk specifically about bonds, but just about the major asset classes in general, would you ever have asset classes you would not own at all? Say, for instance, something like bonds or something like stocks simply because you think it’s just so much out of favor? Or do you always approach this as saying, “I just don’t know what’s going to happen. I just play the probabilities. So I should always have at least,” just coming up with a number, “10% in this asset class.”? Whatever that might be.

Lyn Alden (00:26:20):
So I’m somewhere in the middle, things that I don’t like at all, I generally dial them down to a very, very low percentage of the portfolio. There are some cases where I could go to zero. I mean, I think for young people, I don’t think you have to own bonds, for example. If you don’t need your capital for 30 plus years, I don’t think you need bonds, but it will partially depend on what country you live in and what equity markets you’re talking about. What are your other investments? What is your financial situation like?

Lyn Alden (00:26:47):
So right now, for example, I’m using bonds and cash as basically an expensive form of optionality, volatility reduction, rebalancing fuel, right? So I try, in some cases, I want to be underweight cash and bonds, but they’re my hedge against a liquidity crisis. If you have some sort of, say, March 2020 event where most correlations go to one, everything crashes, I want to have some fuel to rebalance into that. But the expensive part of that is I’m holding cash and bonds that are yielding zero to 2% while inflation’s running at 7%. And so that is like selling puts in your portfolio, a little hedge that loses money over time and then pays off once in a while. And so that’s how I approach that.

Lyn Alden (00:27:28):
And if someone doesn’t want to do that rebalancing aspect, there’s not a great reason to own bonds and stocks in this environment, especially compared to value stocks and compared to some of the commodity producers, in my opinion. If you’re looking at the very long run, rather than say, “What might do well over the next six months?” There are, so for example, I didn’t own any gold from, say, 2012 through 2017. And part of that was luck, basically gold had that huge run-up going into 2011, 2012. I was a younger and less experienced investor back then. But I was still had at that contrarian, value-oriented approach. And so I had gold that I had been holding since the late ’90s, and I decided to sell into that strength.

Lyn Alden (00:28:14):
I started to see commercials for gold, gold vending machines were popping up in some markets. People were talking about it’s going to go to 5,000. I was like, “I don’t really know how to value this, but it’s gone up a ton and everybody seems super bullish. So I’m going to go ahead and sell that and buy some more stocks.” And that worked better than I could have guessed. I mean, I accidentally got the top. And then over time, I kept analyzing the market, and eventually, in late 2018, I got back in, right. So there are environments where I might go to, say, zero gold or at least zero portfolio gold, gold ETFs and things like that.

Lyn Alden (00:28:55):
If you’re using it as insurance, we talked about that self-custody, physical aspect, there’s a case for just never selling it, just literally hold it in your basement and give it to your grandkids, whatever. But other than that, I think that there are times where it’s just not super useful to own commodities unless you are very specifically following a permanent portfolio where you are, even if you’re bearish or something you’re sticking to it algorithmically. But I don’t think everybody has to have commodities at all, all times if they don’t want to follow that permanent approach.

Stig Brodersen (00:29:30):
Lyn, the last time you were on the show, we talked about inflation and I’ve seen a lot of references where the growth in the M2 money supply has been used to discount the return on asset classes. Is that a prudent way to measure real returns of whatever asset class you’re looking at?

Lyn Alden (00:29:47):
I think it’s, for lack of better benchmarks, I think it’s one of the best benchmarks that’s still available. And one way to think about that is over the long run, because technology improves, right, we have this background, negative inflation, deflation that should occur. So for example, someone used to harvest food by hand, and then we invented the tractors. So one person can now do the work of 10 people. And then we have self-driving tractors. So one person can do the work of 100 people. And so the percentage of our economy that we have to focus on getting food for ourselves has gone down dramatically to 1% of us can take care of that whole thing and that’s solved.

Lyn Alden (00:30:31):
And so we have this background disinflation. So when you’re measuring CPI, right, so let’s say, on a normal environment, inflation’s 3%. It’s not really 3%. So let’s say, the background inflation is negative 2%. So really what you’re having is 5% monetary inflation on top of what should otherwise be negative inflation, technologically driven deflation. And so you generally have this gap between money supply growth and CPI. So, if you look over the long run in the United States money supply might be growing at, say, 7% on average, over the long run, whereas CPI might average 3% over the long run. And so you have that gap between the two. And a lot of that is, I mean, one, you have different ways of measuring it so people can argue about how accurate either of those metrics are, especially the CPI metric.

Lyn Alden (00:31:22):
But then also is that background semi-permanent technological deflation that’s happening. And so when you have, say, zero rates, the problem is if you are using a 10-year treasury yield as a discount rate for your equity analysis, you’ll come up with an almost infinite valuation. There’s almost nothing you shouldn’t pay to own stocks because if you just run the numbers, you’re like, “Well, there’s still a positive equity risk premium here. I’d rather own it than a treasury yielding one and a half percent.” And so you buy it.

Lyn Alden (00:31:53):
The problem is that you’re then vulnerable to a massive amount of volatility and downside, and you could have five, 10, 20 year periods where those equities don’t do better than treasuries because you can get into a bubble and roll over. And so I think permanently having a higher hurdle rate, a higher discount rate, a higher benchmark than whatever the lowest rates happen to be, especially in some countries they’re negative, they’re really negative rates. And so I think a proxy that you can use is a smoothed money apply growth rate. And you could even adjust it if you want for a money supply per capita, or you can leave it unadjusted. It doesn’t make a huge difference in most markets. And that’ll generally give you in, say, a normal market, that’ll give you a mid to high single-digit hurdle rate, which I think is appropriate for equities. And in a more inflationary environment, it gives you a somewhat higher hurdle rate that could be in the low to mid-double digits.

Lyn Alden (00:32:49):
I mean, obviously, in some markets, we have a true inflationary event, you can have massive money supply growth, then you’re just in full-on protection mode. That’s where things like gold and commodities shine. But in general, in most environments, I think the money supply growth is a much better hurdle rate than trying to use something like a long-duration bond because it’s like you’re filtering out the extremes in some ways. And so when you have these periods of rapid money supply growth without CPI growth, generally you get asset price inflation, right?

Lyn Alden (00:33:20):
So that money’s going somewhere and we’re constantly… If the money supply is growing at, say, 12% a year, as it has been over, say, the past year and rates are near zero, do I want to hold this asset that is going up in quantity by that much and not paying me for my dilution? Right? It’s like I’m holding a company that’s constantly diluting its shares, and yet it’s not paying a dividend and not growing or growing very slowly. Or do I want to go and buy a company that’s buying back its shares, it’s actually a deflationary asset and paying dividends? Right? And so I think that’s a useful way to think about it, because if you look over the long run, things like gold track broad money supply and growth, more closely than they track CPI over the long run.

Lyn Alden (00:34:06):
So for example, if you just said, “Okay, gold should have held up against CPI over the past 50 years.” You’d expect that it would’ve matched that, but it actually beat that. It’s actually closer to broad money supply growth per capita over the past 50 years because it’s benefited from both CPI, as well as the fact that we’re just printing so much more money, that when we compare that money to those assets, we get higher prices than we’d expect because you have asset price inflation.

Stig Brodersen (00:34:33):
Let’s continue on that thought and specifically talk about valuing gold. I read that you like to compare the price of gold to the growth of the broad money supply per capita. Why is that? And what does it tell us about the current valuation of gold?

Lyn Alden (00:34:49):
So there’s two ways to do it and they give you roughly similar numbers. And so one thing worth pointing out is that gold has an inflation rate of about one and a half percent per year, on average. And what I mean by that is the amount of new gold added to our existing supply, if you look over a 100-year chart, it averages between one to 2% a year, and it’s almost exactly at 1.5% on average. And that’s actually pretty close to population growth over that time. And so one way to think about it is that there’s basically the same amount of gold per person in the world as there was 50 years ago. There’s somewhat of a rounding error, but that’s roughly true. And it comes down to something like one ounce of gold per person in the world.

Lyn Alden (00:35:32):
And so depending on the data that you’re working with, I think the cleanest way to do it is that you can estimate the market capitalization of gold, right? So there’s entities at the World Gold Council that give their estimates for how much stored gold there is. And then you can go back and look at this long-term inflation rate, which again, we have pretty good data on and you can chart out the market capitalization of gold over time. And then you can compare that to, say, the US broad money supply over time, or you can compare it to global broad money supply over time, or OECD broad money supply over time. You can pick your benchmark.

Lyn Alden (00:36:08):
And I think comparing those two data points is useful because it gives you at least a situational awareness, is gold undervalued compared to that money supply growth? You’d expect over the long run as we talked about, that if say, if we double the amount of money units in the system and the amount of gold in the system is the same, of course, year by year, you can have anything because it’s just buyers and sellers and who knows what they’re going to pay for it. But over the long run, we’ve generally seen that gold keeps up with the money supply growth. And so if you see these unusually strong divergences it’s worth taking note of.

Lyn Alden (00:36:44):
And then you can come up with your own conclusion, maybe you can say, “Well, Bitcoin’s demonetizing gold.” Or you can say, “Gold’s just super undervalued and it’s going to catch up.” Right? So depending on if you’re a bull or bear, you can interpret that in different ways. But I think it’s at least useful to be aware of when it happens. In addition, there are times where it overshoots, right? So for example, we talked about gold going into a bubble in 2011, 2012 by those ways of measuring it, gold had gone up very quickly, and then it went up past where you’d expect it to be based on money supply growth. And so it gave you a sell signal or at least a… Not necessarily a sell signal, but an overvaluation signal that then people can, again, interpret how they want, right? Whatever other information they might be combining that with, but I think it’s a very good data point to know.

Lyn Alden (00:37:27):
And so during those bubble periods of 1980, and then again in 2011 and 2012, that gave you a warning signal that this might not be an undervalued investment anymore. Basically, it’s a very crowded trade, it’s arguably been driven up in value higher than it should have been. If you don’t want to work through the market cap of gold, another way to do it is you can just chart the gold price and instead of adjusting gold for its inflation rate over time, you can go back and look at the broad money supply per capita. So you’re factoring out roughly the same growth rate from the other side of the equation. And so either way you get the amount of gold per person staying the same.

Lyn Alden (00:38:07):
So you’re looking at broad money supply per capita relative to that gold, or you’re looking at the total pool of money and the total pool of gold, and you’re taking out the population component. And you’re just looking at those compared to each other. And you get roughly similar results just because it happens to be that the gold’s inflation rate and human population growth are rather similar numbers over time.

Stig Brodersen (00:38:29):
So whenever we talk about gold, very often, we hear, “Well it is a good inflation hedge.” Which it is. So a lot of people have this expectation that you could plot the price of gold and the price of inflation and they would more or less follow each other, but it’s not always the case. For instance, if we look back at the 1980s, we had high inflation and gold prices dropped sharply. We should instead look at gold compared to changes is in real interest rates. Why is that?

Lyn Alden (00:38:58):
So this goes back to what we talked about before, where gold is more of a currency than a commodity. And so if you were to chart commodities compared to inflation, you’d have a very strong correlation because commodity prices going up is almost the definition of inflation. I mean, it’s a very big component of inflationary environments, is the price of commodities going up, because those commodities are needed all the time, and there’s no big stockpiles of them. Whereas gold, because most people don’t need it on any given day, other than very select industries for a small percentage of the market it’s more like investors choosing to allocate to it instead of other things they could own.

Lyn Alden (00:39:34):
And so basically what you’re comparing it to is a long-duration treasury. If you’re the United States, for example, or if you’re a foreign central bank and you’re choosing what to have in your reserves. And so in 1980, basically we had just gone through the ’70s. Gold had an absolutely massive run-up. It was a very inflationary decade. And then they finally got a handle on inflation. They jacked up interest rates to be higher than the inflation rate. You have positive real rates. And then you started this 40-year cycle of disinflation. So inflation was still high in the ’80s, but it was coming down compared to where it was in the ’70s. And then more importantly, even though it was still high, your treasury yields were higher.

Lyn Alden (00:40:13):
So you were getting compensated in real terms to own a long-duration treasury. And that was true for many other countries as well with their stocks and bonds. And so in the ’70s, let’s say, inflation at any given point was, say, 7% while your bonds were yielding 5%, you were getting devalued. Whereas let’s say, you have 6% inflation in the ’80s, but your treasury is yielding 8%, you have a positive return. And so, because gold can be thought of as an infinite duration, zero yielding asset that has some degree of long-term inflation indexing. On the other hand, when you go through an environment, either because yields got so low or inflation got so high, then inflation is equal to or higher than bond yields.

Lyn Alden (00:40:57):
Suddenly that gold, that’s yielding zero, but that’s keeping up over time with broad money supply, that’s a scarce asset, looks a lot more attractive. Zero’s the threshold, but there’s a degree. So for example, if real yields are negative 5%, that’s more of an emergency than if the real yield is negative 1% because you’re getting devalued at a much faster rate. And of course the complication there is, how do you measure real yields? Because we can, for example, just look at 10-year treasury yield minus CPI year over year, that’s one way to do it.

Lyn Alden (00:41:29):
Historically, that’s the cleanest data set we have over the long run, but we also have tools like the TIPS market and inflation break evens that give us the investor expectation. Basically, what is the market currently telling us that it expects inflation to be over the next five years, for example? And that actually in the current environment is lower than your current CPI. And that’s more closely tied to what is happening with the price of gold. I mean, so it’s not the only variable that’s involved, but it’s certainly one of the key variables that basically if you had an environment of negative real yields, and especially when it’s getting worse when those real yields are getting even more negative, you tend to have more capital inflows into gold.

Lyn Alden (00:42:10):
And then it’s also, because it’s forward-looking, it’s more focused on those inflation expectations than what trailing year inflation looks like compared to current yields.

Stig Brodersen (00:42:22):
Whenever we talk about gold, we also talk about how to study history. And gold has historically been valued at 10 to 20 times the price of silver. You also had periods where you have great discrepancies. You have periods between Asia and Europe, where it was one to five, one place and one to 15, the other. So it is a fascinating story in itself, but it’s the very opposite of high-frequency trading. You literally have people traveling through continents to make that three to one, from one to five to one to 15 arbitrage, and yet, the principles of that stayed the same. And they could do that because of all the risk that was involved and also because of basically just the time they were in. But regardless, the ratios always seemed to revert to that one to 10 or one to 20, and you have detailed information from Greece, Rome, Japan, China, the Middle East and it always seems to go more or less back to that.

Stig Brodersen (00:43:26):
The US followed Alexander Hamilton’s advice and set the gold to silver ratio to 15 to one in 1792 with the Coinage Act. So having known all that it might be surprising if you look into the gold to silver ratio today. Silver is about 19 times as abundant as gold in the earth crusts, only has eight times the output, which of course is also a function of demand and supply here. But then you consider that gold is currently valued at around 80 times the price of silver. So this is my long-winded way of saying, could you please, Lyn, paint some color around the gold to the silver ratio? Why it’s so different today than it has historically been?

Lyn Alden (00:44:05):
Yeah, as you point out, we have pretty good data stretching back on multiple continents for thousands of years, and it varied, but that 10 to 20 ratio tended to be the norm. And silver is the commodity with the second-highest stock-to-flow ratio, right? So, gold is over 50 at the current time. So we have 50 years of annual production estimated to be stored up in our vaults. Silver is lower. There’s different estimates, they are somewhere between, say, 10 and 30 stock-to-flow ratio, probably around 20 or so.

Lyn Alden (00:44:36):
Whereas most commodities, a lot of them aren’t even above one, right? So there’s a big gap between gold, silver, and everything else, including things like platinum, even though platinum is super rare and other platinum group metals. Because they’re so heavily used in industry, they actually end up having low stock-to-flow ratios, despite being very rare elements. And so historically over most of that period, gold was the harder money in the sense that it’s rarer, higher stock-to-flow ratio, more desirable, more identifiable. But the big caveat was that it was not as divisible because even a small gold coin was a full week of labor for a worker.

Lyn Alden (00:45:12):
Whereas silver was the second-best commodity in most metrics as money, but it had more divisibility because the units just happened to be the right amount of value for daily transactions. And sometimes you’d have to go down to copper pieces when you really wanted the smaller transactions, but silver was the sweet spot in terms of being a monetary asset while also having reasonable divisibility. And so there’s different thoughts on why silver got partially demonetized over time. So when you started to have it be more set formally, the problem that maintaining a bimetallic standard is that you’d run into Gresham’s law. And so for example, the global price of gold and silver at the time, of the 1700s, 1800s was 15.5 to one.

Lyn Alden (00:45:56):
And so if the United States set it to 15 to one, basically it’s making silver be overvalued. And so what happens is, the global market can come and arbitrage that. And you basically whatever metal ends up being overvalued ends up going out of circulation. It gets pulled out of your country, it gets arbitraged or either hoarded in the country, or it gets arbitraged out of your country. And then what they did is they flipped it. They said, “Okay, no, no, no. We’re going to make it 16 to one.” And then the other metal got arbitraged out. And so even though it’s actually doesn’t seem that big of a thing over the course of years and years and years, these arbitrageurs just keep leaking whatever metal is overvalued away.

Lyn Alden (00:46:37):
So it’s actually pretty hard to maintain a bimetallic standard because there’s no exact ratio that’s quote-unquote, the correct ratio. It’s just based on market conditions. Now, there are some economists that theorize on why silver eventually encountered a far more weaker ratio over the past, say, 150 years. And so, I think that in my view, the most convincing argument is that when we created paper money, and especially modern telecommunication systems were invented, the phone, so you could deposit money in a bank and have that show up in another bank across the world, just because it’s all bank ledgers that are just agreeing on how these numbers are going to settle.

Lyn Alden (00:47:17):
You suddenly made gold far more divisible, right? Because you had gold-backed paper money. The money was more divisible than silver in terms of the units it could be broken up into. And so silver over time became less useful because gold fixed its one weakness, which was divisibility. And so you started to get basically evidence of demonetization of silver. And so that ratio started to flip. If you look at earlier parts in history, there were other times when other commodities were used as money. Things like feathers and shells and beads and certain types of stones.

Lyn Alden (00:47:51):
And the problem is that when they encountered harder money, another civilization would come with better technology and they’d have gold and silver and that culture could come and find more feathers and get more shells, and they had better technology to do it. They could basically break the stock-to-flow ratio of that other culture’s weaker money. And so you’ve always had this history of different commodity monies beating out other ones. And gold and silver have that survivor bias of, they’re the ones that beat everything else for thousands of years. And you can argue that eventually, gold beats silver with the invention of modern banking. And that the fiat currency beat gold because its other big shortcomings is that it’s, as we talked about, it’s easy to centralize and then rehypothecate and make multiple claims per ounce.

Lyn Alden (00:48:44):
And so now we’ve encountered that new environment. But I would say, that I wouldn’t necessarily rely on the gold to silver ratio going back to where it was before. That’s not to say it won’t, but there’s no law of nature that it has to. And I think there’s a compelling argument that things have changed enough, that ratio is now structurally different. But I still think that in the grand scheme of things, of thousands of years of history 100 or 150 years is still ironically not a huge sample size to work with.

Stig Brodersen (00:49:18):
It’s interesting you would say that, Lyn, because I feel the exact same way. Whenever you do study history, you would think, “Yeah, it makes sense why it would be around 15 or why some societies might be 10 or 20.” If you look at the situation today, it would make no sense why it would revert back to that ratio, it just wouldn’t, the way we structured the system here today. I just wanted to give a shout-out to a book called The Power of Gold. I can highly recommend it if people want to read it. If you want to, I could just teasingly say, that if you want to phrase yourself in 140 or 280 characters, this is not the book for you.

Stig Brodersen (00:49:50):
It might be on the more intellectual side that can be a bit dull to some. But if you’re really into the Coinage Act or what Marco Polo saw whenever he served under Kublai Khan and the silk and silver-backed standard, and how that worked. If you’re really into the history of money in the light of gold. So let’s continue talking even more about gold. People can probably tell that I start to get excited here. Many investors have historically argued for buying gold stocks rather than gold itself. And you could say it makes sense because the best gold stocks outperform physical gold over the long run because they’re short dollars and long gold and gold have historically performed better than the dollar.

Stig Brodersen (00:50:35):
On the other hand, many gold stocks underperform the market price of gold because they have a destructive capital allocation. Could you please paint some color around whether gold bullion or gold stocks are most appealing?

Lyn Alden (00:50:48):
Going back to our prior question of whether or not it’s good to have a permanent allocation to some of these commodities, I think that you can make a much stronger case to having a permanent gold allocation or let’s say, gold and Bitcoin, whereas it’s much harder to make an argument that you should have a permanent gold stock allocation. And that’s because, unlike gold, that over the long run keeps up with money supply growth and does what it’s supposed to do, gold stocks, as you pointed out, have this destructive capital element. And basically one is that mining is already a hard business.

Lyn Alden (00:51:20):
You don’t control the price of your own product. You have a lot of hard capital expenditures. You’re often working in jurisdictions around the world that are emerging markets, right? So you’re managing these different jurisdictional risks, at the extreme end, you face nationalization. Your countries can just take your mines from you, or they can change their tax policies. You’re dealing with usually more problematic infrastructure, less developed infrastructure and so it’s challenging business to be in. So there’s more things that can go wrong than can go right to start with. Two, if you have an inflationary period some of those gold miners, I mean, they use a lot of energy as an input, right? So all of their machines are using fossil fuels, the gigantic tires on their machines. You don’t even think about it, but the amount that they spend on tires for these huge dump trucks, the tires are the size of a car. Those are mostly made out of fossil fuels.

Lyn Alden (00:52:15):
And so when you get an inflationary period of energy prices going up, it can actually squeeze the margins of gold miners, especially if gold’s not yet keeping up with the price of energy, sometimes even if it is. And two, you have managerial mistakes. So during very highly valued gold environments, there’s usually a lot of euphoria in the space. There’s a lot of new capital coming in and managers tend to overpay when they do acquisitions. So they’ll take on debt and they’ll buy a company, a smaller mining company. And then the problem is that the price of gold goes down, as it did say, after 2010, 2011, it turns out you took on too much debt and you overpaid for this asset.

Lyn Alden (00:52:56):
And so now you’re channeling money into trying to pay off your debt. You might even have to sell your asset, divest it to raise capital. And now you’re selling at a much lower price because gold’s a lower price. And so you generally have this pro-cyclical, non-contrarian investment cycle that destroys capital. Now really, really good gold company CEOs are countercyclical, very disciplined with their expenditures, very selective with their acquisitions. They basically are very good at allocating capital and unlocking value. And so the best gold stocks over the long run outperform gold, whereas the majority of gold stocks, ironically underperform gold.

Lyn Alden (00:53:42):
Basically, imagine being an industry where most of you destroy capital. That’s really what happens in that space. And that’s generally true for a lot of commodity industries. Oil’s been somewhat an exception because of the OPEC and the cartel-like aspect of that industry that has smoothed that out compared to many other commodity industries. But basically, it’s just a very challenging environment. And so there’s a much weaker case for owning gold stocks long-term.

Lyn Alden (00:54:08):
There are some business models like royalty and streaming companies, they are financiers of gold miners. And so they have less operational risk. They usually have break even prices that are much, much lower than gold miners. And so they’re the exception where they’ve been able to compound capital in a way that most miners do not. And so I think gold and streaming companies can be a long-term hold, but for most gold and silver miners, you have to be very selective with them and only hold them in environments where you expect gold and silver to do pretty well, otherwise you’re just destroying capital. So I think that’s more of a… You don’t marry those positions.

Lyn Alden (00:54:49):
You might invest in them for one, two, three, maybe even five years, if you’re very bullish on it on this part of the decade. But I wouldn’t say, have a permanent allocation to gold miners in the way that I would consider a permanent allocation to gold itself.

Stig Brodersen (00:55:03):
So one thing I really like, well, one among many things I really lack about speaking with you, Lyn, and following your research is that you seem so balanced in your thoughts on hard money. It seems like these days; everything is so polarized. You have a lot of people who distrust the global financial system and they invest almost entirely in hard money, whether it’s gold, silver, or Bitcoin. And then you also have the quote-unquote more mainstream investor who has zero exposure to precious metals because, or Bitcoin for that matter, because they don’t feel that hard money has any place in a respectable portfolio. And it just seems like the number of people who embrace both worlds are just getting smaller by the day.

Stig Brodersen (00:55:50):
And so being an avid reader of your blog, I’m very curious to hear your thoughts on the next topic here, because I had the pleasure of reading Ray Dalio’s book, The Changing World Order, which is just a fabulous book in itself. And in the book, Dalio documents that throughout time in all countries, you had three types of money. So you had hard money, claims on hard money, and fiat money, in that order. You could even argue that over the past 80 years we had three different monetary systems and fiat money always reset and turns into hard money again.

Stig Brodersen (00:56:23):
And that’s because policymakers have an incentive to always run deficits typically either by increasing spending or lowering taxes. And so the next question is, I hate to put you on the spot here and yet I still do it. So with all of that said as the backdrop, what would the next reset to hard money look like?

Lyn Alden (00:56:45):
Yeah, it’s a really good question. And it’s something I think about a lot because I obviously want to have the best grasp on that question, both for, in terms of whether and which hard monies to invest in. And then two, how it can affect other investments. How does it affect my equities? How does it affect bank stocks? How does it affect payment stocks, PayPal, things like that? So it is an important question to be aware of. Historically, as you point out, fiat currencies eventually fail.

Lyn Alden (00:57:11):
Now, what makes this period unique is that this period, since the ’70s has been the most extensive attempt at fiat currencies. It’s the only time that the entire world was on fiat currency. We have better technology than we’ve ever had before, better organization. And so this is the most credible attempt we’ve ever made at fiat currencies. And even in this environment, you still have, in emerging markets, a lot of their currencies fail. And then they resort to hard currency, which ends up not being gold, but ends up being the dollar, which for them is a hard currency because they can’t print it. Right?

Lyn Alden (00:57:46):
So, even in this environment of 50 plus years of fiat currency, you still have that keep happening to countries over and over and over again where they resort to a harder money standard. Either people in those countries can protect themselves with gold, silver, real estate, things like that, as well as by owning those harder foreign currencies, they can get through that. As long as, like we’ve talked before, as long as you’re not invested in a bank where they risk getting confiscated from you for the sake of national solvency. And so this is something that we see even to today. It’s not even a theoretical framework, it just keeps happening.

Lyn Alden (00:58:22):
And so far, the survivor bias is that the major developed countries have been able to go over 50 years without the system breaking down. Now critics of the system point out that it’s gotten less stable over time. And I would agree with that. I think that I think the petrodollar system is less stable than it used to be. I think that Ray Dalio’s concept of a long-term debt cycle is accurate, meaning that when you eventually get zero rates and super high debt, you run out of room to keep kicking the can down the road the same way that you have been. And the problem now is that this is the first time within this 50 year fiat currency period that we’re going through a long-term debt cycle.

Lyn Alden (00:59:00):
Meaning that historically the answer to that is financial oppression, holding interest rates below the inflation rate for a sustained period of time. And I’ve shown charts on this, that basically over the past decade in most countries cash and TIBO rates have been below the inflation rates in the past year, in the past couple years, even long-duration bonds have in many cases been below the inflation rate. And specifically for 2021, it was such a big gap in many countries, in the United States, it was a 7% difference between CPI and T-bills, which is the biggest gap since 1951. So is the biggest gap in the fiat currency system.

Lyn Alden (00:59:36):
I think there are credible arguments that this fiat currency era will eventually become so unstable that it breaks in some way, right? So we already see around the margins some central banks like Russia are buying gold, they have a 20% gold allocation. I guess maybe they read that book Permanent Portfolio, so they have mostly Euro-denominated assets, but they also have a 20% gold allocation. So generally you see a sovereign bid for gold ever since the global financial crisis has stirred back interest. I think different serious market participants and sovereign participants started to maybe question the idea that this fiat currency regime might not last forever.

Lyn Alden (01:00:17):
We always have a tendency to think we’re the end of history. We’ve solved prior problems. This happens in commodity markets because people think during disinflationary decades, when commodities are cheap, they think, “We’ve solved the commodity problem. We’re never going to have high commodity prices again.” And then no investment money goes into it. And eventually, you get shortages and you get a higher commodity price environment. Same thing I think that we’re going through in terms of a lot of people, especially people that very strongly believe against gold, against Bitcoin in favor of the fiat currency system, that the idea we’ve solved history. We’ve figured out how to do it this time.

Lyn Alden (01:00:51):
I will take the under on that view. I think that probably we’re already seeing signs that it’s not working well. I think we’re going to revert back to some period of either standard to go back on a hard money standard or they don’t, but people can protect themselves by having those types of assets. So commodity producers, commodities, or self-custody types of hard monies. What the system looks like going forward, I still think it’s an open question, right? Because in some ways you can look back and say, “Well, gold already failed.” Maybe we will go back to it. Right? So it failed only in the sense that it was too centralized, right?

Lyn Alden (01:01:26):
So gold itself as an element didn’t fail, but basically, it didn’t have an ability to keep currencies tethered to itself and people didn’t have an ability to exchange for it and portably hold it. Bitcoin proponents would argue that the future is Bitcoin. I think that’s credible, but I think it’s still early, right? So it’s a very volatile… Right now it’s less than a trillion market cap, whereas gold has over a 10 trillion estimated market cap. Global assets are something like 700 trillion, Credit Suisse estimates that global net worth is 500 trillion. That includes assets minus liabilities where the asset side is much larger.

Lyn Alden (01:02:06):
And so I still think there’s a lot of open questions about how the system ends. And I think it’s something that, if you have a firm view on, the risk is that you’re wrong, but it’s also not something you can ignore entirely. I think it’s a question that we all have to study and look at history, but then also look at current geopolitics, current technologies, where the trends are going. And so, I think it’s an important question to watch. So I do think that hard monies are going to have their place in the future again, and they already do in many countries.

Stig Brodersen (01:02:40):
Ray Dalio has this great quote where he’s talking about that, the reason why he made so much money is because of what he knows, but what he knows he doesn’t know. And I can’t help but think of that quote, whenever we have this discussion. Because I don’t know what’s going to happen. I do know that the system we have now, isn’t going to be here forever because that’s just the nature of history for everything.

Stig Brodersen (01:03:02):
It’s so tricky figuring out what’s going to happen. Now, today we talked about gold. Are we going to be on the gold standard again? I don’t know. It’s just one of many possibilities. And whenever you do read up on it, and I’m sure you know, Lyn, but there’s just so many different types of gold standards that we’ve been on in different countries. So, Okay, so what do we refer to whenever we talk about the gold standard? So, that’s one major topic in itself. Bitcoin, I understand the intellectual argument, why it has all the capabilities that, say, fiat money doesn’t have, but it just becomes so much more complicated whenever you think about the incentives. Who has incentives to do this? You can make the argument, “Oh, you don’t have this issue.” The inflation issue you have right now, it’s deflationary by nature. It’s better money, ergo, let’s use it as a world currency.

Stig Brodersen (01:03:54):
That’s just not how the world works. At least that’s not how the world works now. That’s not how you define a reserve currency. That is not how countries sell transactions. So I think it’s very, very, very early to consider Bitcoin in that realm. Something I sometimes revert back to is SDR. The reason why I’m saying that is not necessarily because I think that’s a great system. It just seems to be a system that countries might be able to agree upon.

Lyn Alden (01:04:20):
Yeah. So in my article where I talked about the current, we can call it the petrodollar system, the system that’s been in place since the ’70s and why it’s failing, and where it’s going, I outline those possibilities. So I discussed an SDR basket, either a, say, a global SDR or regional SDRs, which for people that are listening and don’t know what that means, that’s essentially a basket of major or currencies that serves as a unit of account for global reserves or international trade. And that was actually proposed as the Bancorp, rather than the Bretton Woods system. But it was not voted on. It was basically wasn’t the one that won that system.

Lyn Alden (01:05:00):
And it’s one of the ones that would be more balanced in terms of managing trade balances and things like that. And the challenge there is that if fiat currency starts to fail, a basket made of fiat currencies would also fail. It would just fail at a smoother rate because if, say, there are five currencies if one fails quicker, it’s balanced by the other four, but because they’re all tied together in some ways we all have the same, roughly zero rate policy in developed markets and high inflation. I think that you generally would have them each pulling each other down, taking turns.

Lyn Alden (01:05:35):
I think if the system were to fail next year, gold has the claim, right? That’s the default assumption. There’s even, I think there was the Dutch Central Bank published a piece a couple of years ago saying that if for some reason the system failed dramatically, gold would likely be the fallback. And like we pointed out that even in non-gold standard, central banks still use gold as a reserve asset. They’re still actively in many cases, buying gold as a reserve asset, the United States is not. But I think so let’s say, if we’re having this conversation in 10 years, so when it comes to, say, Bitcoin, I’m like, “Well wake me up when it’s 5 trillion market cap and we’ll have that discussion.” Right.

Lyn Alden (01:06:17):
And one thing we’re watching is that the market is assessing how hard is the money, right. So it’s only 13 years old, right? So it’s like they’re testing all these different aspects of it. What happens if you make a lot of altcoins, can any of them take market share? We’re finding, okay, what if we try to hard fork it? Does that work? It’s just all these, what if, questions. And so over time, we’re testing it, we’re doing different things the mining hashrate’s moving out. We’re seeing how different countries either ban it or approve it. And as it gets more widely held and less volatile, it could grow in market cap. And then it becomes a more serious discussion. Is it something that major central banks are going to hold? And then if they do, and there’s a currency failure, can that end up being a global substrate for money, that competes with gold?

Lyn Alden (01:07:05):
And so I think that’s a reasonable, long-term outlook, but it’s you have to hit certain benchmarks before that becomes the one that would fall back now. So right now it would still be gold. And so I think that’s the way to think of it. That basically, even with the SDR, in some ways, whether or not you expect the SDR to win versus, say, gold or Bitcoin comes down to whether or not you expect global collaboration, right? So if you want to short the idea that countries are going to come together and decide on something, you would generally err towards gold and Bitcoin. Whereas if you do expect that they’re going to say, okay, “We need to do a Bretton Woods 2.0, we need to fix the system.” And you’re going to have US, China, Europe, major countries and currency regions come together and agree on something, then you could have an SDR, you could have an SDR with a gold component. You could have… There’s all sorts of things that could come together.

Lyn Alden (01:07:55):
And of course, in a modern form that would take the form of a digital SDR, right. So they would, they would incorporate probably central bank digital currency technology into the SDR to reinvigorate it from the version that initially existed since the late ’60s.

Stig Brodersen (01:08:12):
Yeah. I think it would be a default for a lot of people listening to this. They would say, “Well, the world’s governments can’t agree on anything.” And I’m not the one to say that they necessarily can. But what history has shown is that whenever you do see a reset, what typically has happened at that time, countries are so exhausted, they’re so exhausted at that point, Bretton Woods in ’44 would be one example, that they’re willing to come up with that agreement, not a great agreement, but something that just works because they just can’t do it anymore what they’ve done so far, so…

Stig Brodersen (01:08:43):
But Lyn, I know we can go on for hours talking about monetary policies. You’ve been very, very generous with your time. And I wanted to give you the opportunity to hand off to your wonderful blog and any other sources. And I can just say that I subscribe to Lyn’s blog. It’s just such a wonderful resource. So Lyn, please tell the audience more about it.

Lyn Alden (01:09:03):
Yeah. So, lynalden.com, I do public articles, long-form pieces that dive into a subject usually. I also have a free newsletter that comes out every six weeks, that usually talks about more topical subjects. I have a low-cost research service if people are interested. I’m also active on Twitter @LynAldenContact. Another book I could recommend, it’s not my book, it’s called Money Dethroned, and it covers this traveler from North Africa, kind of like Marco Polo, he traveled around multiple continents.

Lyn Alden (01:09:31):
And the person relies on some of his writings to just analyze commodity monies from around the world and why certain monies beat other monies and what happened when they interacted. And so I think we’re used to having to change our investments from time to time, right? Because we know that they’re volatile. We’re not used to having to change our money from time to time or even think about what is money. And I think that we’re in this environment where we have to think, and it’s probably going to be a question for the next 10 years, is what is money? And so I do think that it’s basically a subject matter that would be good to read up on.

Lyn Alden (01:10:07):
So the one you’ve recommended or that one or other ones in general. I think it’s going to be a topic that we want to know about. We want to know the history of money. We want to know what are the current proposals for what money’s going to look like going forward. Do you want to focus on money you think is going to win? Do you want to diversify your monies? I think that’s going to be… It’s already an important question. And I think it’s going to be increasingly an important question over the next decade. And it’s something I have feature articles I plan to write about. I’ve already written about it to some extent and something that just like I analyze different investments, I’ll be analyzing different monies.

Lyn Alden (01:10:44):
And basically, just like anything else, trying to fit into a portfolio and determine where do I want to hold my assets for different types of environments.

Stig Brodersen (01:10:52):
Lyn, it sounds like you already have the outline in place for the next interview. So with that said, Lyn, it’s been absolutely amazing speaking with you. I cannot wait until we can invite you back on and talk about what is money or whatever direction we’re going to go next time. Thank you so much for making time, once again, for The Investor’s Podcast.

Lyn Alden (01:11:10):
Thank you. Thanks for having me.

Outro (01:11:12):
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