Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision in global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome, Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
The history of the world is a history of gold. It's a quote attributed to billionaire investor and noted gold bug, Eric Sprott. Gold has served as a commodity and valuation instrument for thousands of years, starting in the Middle East and quickly spreading around the globe. In fact, odds are no matter where you're listening to us, Intercontinental Exchange is actively trading gold futures contracts. The contracts, just part of an integrated world of how investors gain exposure to the metal, trade 22 hours a day across all markets from London to Singapore and all points in between. We dive deep here, Inside the ICE House, but not deep enough to cover the blow by blow of the impact of gold on modern civilization. So let's just peg a year and jump ahead to, I don't know, 1792. That's when the New York Stock Exchange was founded and Congress passed the Coinage Act that made the dollar valued against gold and silver, our national currency.
Josh King:
A few decades later, the act fixed the price of gold at $20.67 per ounce, making the metal our currency benchmark for the next century and a half. According to ICE Benchmark Administration, the London Bullion Market Association Gold Price is currently hovering just below $1,500 an ounce, a number still off its highs in the early 2010s, but over four times where it stood when the Swiss franc, the last major currency to have been pegged to the value of gold, went off the standard in 2000. The transformation of how gold is traded was the topic of our 55th episode, which we recorded at the ICE Benchmark Administration's offices in London, where at precisely 10:30 AM and 3:00 PM, IBA holds a fully transparent auction to establish the global benchmark price for gold. Most gold is still traded over the counter, but this year also marks the anniversary of another important gold product.
Josh King:
In November, 2004, 15 years ago, State Street Global Advisors, the investment management arm of State Street, that's NYSE ticker symbol, STT, and the World Gold Council listed an ETF here at the NYSE that transformed how investors could gain gold exposure. Today, that gold-backed ETF shares trades as SPDR Gold Shares, that's NYSE Arca, ticker symbol, GLD, one of the largest holders of gold in the world. Our guests on the show today, George Milling-Stanley, chief gold strategist at State Street Global Advisors, and Joe Cavatoni, the World Gold Council's head of US. They're ringing the closing bell as part of GLD's big birthday. Our conversation with George and Joe on the state of the gold market and the impact of what a gold ETF had on investments and trading right after this.
Speaker 3:
And now a word from Ron Delia, CEO of Amcor, NYSE ticker, AMCR.
Ron Delia:
Today is a really big day for Amcor. We've been around for 160 years. After so much time takes the passion and dedication of our people around the world, and it takes resilience, and we have lots of that at Amcor. Well, our aspiration is to be the leading global packaging company, and that means winning for our customers, our people, our investors, and the environment. We have a big pledge around sustainability. We really hope to change the world as we look forward. Amcor, now listed on the New York Stock Exchange.
Josh King:
Our guests today hail from the two organizations behind the SPDR Gold Shares ETF. Joseph Cavatoni joined the World Gold Council in September, 2016. As the World Gold Council's head of US, Joe is responsible for managing all market facing activities for the SPDR Gold Trust as well as leading the team to bring additional gold back exchange traded products to market. Before that, he was a managing director at BlackRock responsible for iShares capital markets Americas, and was a member of the firm's executive committee. Also with us is State Street Global Advisor's chief gold strategist, George Milling-Stanley, who's been studying the gold markets since 1972, first as a reporter for the Financial Times before embarking on a career that took him into the world of trading. George was with the World Gold Council for 15 years and was part of the team that developed gold-backed ETFs. Before joining State Street in November, 2014, George ran the independent consultancy, George Milling-Stanley on Gold, LLC. Gentlemen, welcome to the ICE House and the New York Stock Exchange.
George M.:
Thank you for inviting us.
Joe Cavatoni:
Great to be here.
Josh King:
Joe, you were on the bell podium last year with the World Gold Council, but George, this will be your first visit to the bell podium?
George M.:
No, I think we did one for about the 10th anniversary, if I remember rightly. I did miss the very first one in November, 2004, but that was really because I was out hustling up business at the time, and unfortunately couldn't spare the time to be here for the celebrations. So I'm really happy to be here today to ring the closing bell with Joe.
Josh King:
Our listeners should be familiar with State Street Global Advisors, but Joe, can you tell us about the World Gold Council and what it represents and what its mission is?
Joe Cavatoni:
Sure. The World Gold Council, as a matter of fact, is actually an organization that's been around since 1987. Through the years, the over 30 years of existence, we've focused on policy, standards, and developing the gold market to improve its transparency and understanding of how it works worldwide, but also making sure that investors and consumers are educated on all aspects of what needs to happen.
Joe Cavatoni:
So whether it's in the emerging markets or China, India, for example, where nearly 50% of the world's demand for gold is active today, or it's in the US, or maybe even the Middle East or Europe, we're spending the time talking to consumers of all walks of life, making sure that they understand the basic fundamentals of the gold market, have access to data, information, the analytics to help them make a decision on exactly how gold could fit into their world, whether it's through consumer or consumables itself, whether it's jewelry or technology, or more importantly and more increasingly, as a strategic holding in their investment portfolios. That's where the growth has really been blossoming, and that's where the ETF community has actually been at the tip of the spear in really democratizing and simplifying the access to the gold market.
Josh King:
We're going to go from the tip of the spear all the way down to the handle in our conversation, hitting some of those regions that you talked about and also some of those different aspects of gold. George, the vast majority of gold is still bought and sold over the OTC market. Can you give us this 10,000-foot view of the gold market, who the players are and where demand is driven from?
George M.:
Wow. Well, I think of the 6.5 billion people who live on the earth, I think we once estimated that three quarters of them own some gold at some point in their lives, whether it's a wedding ring or whether they own a gold ETF, for example. And it's just about anybody in the world is involved. If you think about it, almost every government, every central bank in the world owns some gold in its reserves, because it's a great diversifying factor, a great stability factor. And of course, an awful lot of investors around the world own gold as well. So it's a huge, very, very deep and liquid market. GLD is trading somewhere between 1.5 And $2 billion worth of stock a day on the NYSE, and that represents about 1% of the trade in the whole global gold market, daily average figure is somewhere between 100 and $200 billion. It's a very, very deep and liquid market traded, as you say, just about every hour of the day or night.
Josh King:
I mean, the three of us were joking a little bit offline before we started to record that any one of us who bought a first generation iPhone back in 2007 perhaps had a gram of gold in our pocket.
George M.:
Quite possibly. It's probably a little bit less than that with the devices we're buying these days because of thrifting and other measures that reduce the amount of gold. But if you want a 100% reliable electrical connector, whether it's in the restraint system in your car, whether you work for NASA, for defense or aerospace, whatever it may be, you're going to choose the metal that is probably the second best conductor of electricity behind copper, but copper corrodes, copper will degrade, and gold simply doesn't do that. It's the most efficient conductor of electricity in the long run.
Josh King:
In the introduction, I touched on the countries that had abandoned the gold standard, an act that began in great Britain, 1931, but took on a new urgency with this act.
Nixon:
The strength of a nation's currency is based on the strength of that nation's economy, and the American economy is by far the strongest in the world. Accordingly, I have directed the secretary of the treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States.
Josh King:
George, you and I were just kids at the time. That was president Nixon announcing the end of the international convertibility of gold in 1971. Nixon poses this rhetorical question, "What does it mean for you?" What did it mean for you at the time?
George M.:
What did it mean for me? Well, let me put it this way. On the first anniversary of that statement in 1971, so in the summer of 1972, I was a young reporter on a financial magazine in London before I even joined the Financial Times at this point. And the editor of my magazine came to the door of my office and said, "George, it's been 12 months since President Nixon closed the gold window. What do you think of that?" And I looked up at him and said, "I haven't the faintest idea of what it means. I don't know what you're talking about." And he said, "Neither do I, but if you and I don't understand it, that means our readers don't. Go find out about the gold market and write me a story." And here we are, 47 years later, still chasing the same story.
Josh King:
And so much has happened between then and now. But here in the United States, there was this follow-on event, 1975, when for the first time in decades, gold was available as an investment. How did that affect the market?
George M.:
Enormously. There was a huge pent-up demand because the markets were confident that President Nixon would indeed allow us citizens to own gold as an investment, again, after 40 years when they couldn't, with effect from January 1, 1975. And we had this huge balloon in the gold market, if you like. The price when Nixon closed the gold window was around about $42 an ounce. Gold over the next decade went up to $850 an ounce, a 20-fold increase. Some of that was genuine demand coming into the market. Some of it was the change in the regulatory structure, allowing Americans to invest, but there was also an element of bubble certainly toward the end of that with the price sometimes going up 50 or $100 in a day.
George M.:
And if you think about it, we had huge inflation in this country and even worse in the UK where I was living. We had Iran and Iraq rattling, the say it was at one another. Crude oil hit an unprecedented high of $40 a barrel, which seems ridiculous today. We had significant inflation, all sorts of problems in the world, and it made an enormous amount of sense for people to turn to gold because of its protective capabilities.
Josh King:
So continuing on your own personal journey, George, what was it about the metal, about what you were learning from that first assignment your boss gave before you were at the FT and then your reporting on gold at the FT that made you decide to leave journalism behind and go fully into the gold business?
George M.:
Well, I'd spent basically 13, 14 years as a journalist in various different capacities in newspapers, but writing primarily about gold and the mining industry and so on. And I figured I'd gone about as far as I could with the top newspaper in the world, in my view. I'm 42 years old. It seemed to me it'd be a good idea to look around and see what other opportunities there might be. I wound up getting a job with a gold mining company. Unfortunately, one that's no longer in existence, but I thoroughly enjoyed that job, running something we called gold market intelligence. There was a lot of gold market in there. I'm not sure how much intelligence, but it was a nice title to have. I did that for five years, and then the opportunity came to move to the United States and to trade gold for Lehman. That seemed to me a really good idea. I was-
Josh King:
About what year was this?
George M.:
This was 1989. I was between jobs. I was wondering what to do. It just seemed like a really good idea to try life on another continent. I've never regretted it, never looked back. I became a citizen as quickly as I could. So I've been a citizen for a long time now, and this country's given me a very good life and a good series of different jobs to make up the career. I've enjoyed every minute of it. It has been endlessly fascinating. I sometimes say that I think I knew a lot more about gold back when I was 25 years old and first writing about it than I do now. I certainly had a lot greater degree of certainty then. I've learned a little humility along the way, but I think I'm starting to piece together some of the things that lie behind what's going on in the gold market.
Josh King:
Just starting to piece these things.
George M.:
Just starting to piece things together. I still have plenty of time. I look forward to a long and happy career in gold to continue.
Josh King:
I mean, the ETF was created in response to the black Monday, the 1987 stock market crash that sent the Dow Jones Industrial Average down 508 points one day, a staggering 22.6% of the market at the time. I want to listen to the problem that you were trying to solve for, explained by the Wall Street Journals to Tanya Shumsky and Simon Constable on the 10th anniversary of the GLD listing.
Simon Constable:
Because in the past, you'd had to get a bar, and you'd had to assay it, and now it's purely, and you have to get it delivered, and had to get it sorted.
Tatyana Shumsky:
It was a 12-step process. It so difficult because you had to find a dealer, you had to figure... I mean, most people can't afford more than a fraction of a bar realistically. So either you had to put down an enormous amount of money, or you had to buy something small and pay a markup because it was smaller than what the standard is. It used to be a markup of about 10 bucks an ounce.
Simon Constable:
Which is a lot. And 10 years ago, 10 bucks an ounce was a larger proportion because it was a lot lower price.
Josh King:
So, George, how did the idea of a gold-backed ETF develop? And were there regulatory hurdles to be able to solve this problem of trying to get into the gold market?
George M.:
Yeah. I think that the issue we were facing is actually a little bit broader than Simon and Tatyana dealt with. They summed up part of it. But the main issue that we faced was we were looking at the gold market in the year 2000, where something like 80% of each year's demand was in the form of jewelry. Now I know jewelry is very different on 5th Avenue in New York and very bizarre in Mumbai, for example, or in Beijing. But nevertheless, we were very heavily dependent on one industry for the fortunes of the gold market. The remaining 20% was split evenly between industrial uses, mostly in electronics, and investment in small bars and coins. So we felt that we ought to do something to try to reduce gold's dependence just on the jewelry business. We're now looking at a market where jewelry regularly accounts for somewhere between a half and two thirds of final consumption, and investment is generally looking somewhere between 20% and one third. So we've actually revolutionized the market in that sense. So that was the problem that we really felt that needed to be addressed back in the day.
Josh King:
So as we are following your career, George, through the beginning of this conversation, we're steadily approaching this date, November 18th, 2004, that was the date that a Brinks truck, that's NYSE ticker symbol, BR, if you're keeping track, rolled up to the New York Stock Exchange's facade and began unloading gold bars right onto the trading floor to announce the listing of what was then called street tracks gold shares. What were your thoughts that morning as you were watching the first trades hit the tape?
George M.:
Unfortunately, I was on an airplane in Switzerland at the time, basically drumming up business for GLD, because we wanted to make sure that we hit the ground running with this product. We wanted to be sure it was a success right out of the gate. We didn't expect to get $1 billion in assets under management within the first three trading days. That took everybody by surprise, me included. But that's where I was. So I was not actually watching the tape. It was colleagues of mine that were in a position to do that, because I was out there making sure this thing was a success, and I'm very, very pleased with where GLD has gotten to today.
Josh King:
So you landed off that plane somewhere in Switzerland, you made a call back to New York, you heard this news. Did it blow your socks off?
George M.:
Yeah. Damn. How could you do this without me? We didn't know exactly which day it was going to be, but I wasn't that upset because I was enjoying what I was doing. I was talking about an asset class that I've believed in all my life. I'm talking about a product that I had a good deal to do with, and that I believe in completely, and that I understand. It's a great position to be in when you actually believe every word you say when you're trying to market something.
Joe Cavatoni:
Let me just add to that. 2004, I was trading equities out in Asia. That noise, that 1 billion in that short period of time got the attention of everybody worldwide. So not only did it rattle in a very favorable way, the gold market, it also kick-started the energy and the continual growth of the exchange-traded fund market. And it opened everyone's eyes to the fact that, A, the asset was accessible and B, the wrapper can work for a lot of different things. It was a really pivotal moment in the market.
Josh King:
You said you're in Asia, Joe. Bring us through your progression of experience with the gold market from that point forward.
Joe Cavatoni:
What caught my attention and what I started focusing on from a trading perspective was just that, Delta One trading, access to instruments that could give you exposures, wrapped by things like exchange-traded funds. And ultimately, it drove me in a direction of that type of solution for investors because it really works well. It simplifies the access to complex underlying assets, whether they're equities, bonds, or for this matter, a commodity. And I think the recording we heard with Tatyana talking was really explaining in detail the clumsiness that someone would have to go about. And what we didn't even hear about was the fact that once you do own that bar, how do you fold that into your general reporting package? Your information around analytics and impact and portfolio assessment gets very messy, but in the exchange-traded fund fits nicely on the shelf. So over time, I paid more attention to it. Over time, the access to the markets through exchange-traded funds caught my attention, took me to the world of iShares, took me to the world of BlackRock, and took me to the world of GLD, the World Gold Council.
Joe Cavatoni:
Because for me, this is probably one of the most often ignored or neglected corners of the market by the large asset managers, exception being State Street, and an area where there's huge amounts of opportunity to get people better educated and help them out. One of the big things that we've highlighted most recently is the fact that gold really stands out as a commodity. And when I started looking at the opportunity at the World Gold Council, I thought to myself, you know what? It's different amongst the groups of commodities that it gets lumped together with. The mining side is different than lumping it together with coal mining or other forms of mining. This is a unique industry, but it's not a hard industry to understand when you take the time to put your energy into it. And I think the world of 2004, when the door opened for gold through an exchange-traded fund, it was a great moment. Really turned gold into an accessible, easy asset to own.
George M.:
Before that, in the market research that we did in the lead up to launching GLD, people who didn't invest in gold, they were the ones we wanted to talk to. They told us overwhelmingly that gold was cumbersome, costly, and complicated, and they didn't know why they needed it, which was a bit a facer for us. We'd always thought gold was quite a good idea. But we said if we could overcome those problems, what would it have to look like? And this is when people basically started to tell us without using the letters, but they started to tell us essentially that the ETF form would make sense for gold. That was really when World Gold Council and State Street first got involved. World Gold Council, the experts on gold, State Street, the experts on ETFs. It was a marriage made in heaven.
Josh King:
So this was this turning point in 2004. Over the past 15 years, the stock market has recovered from back then, the dotcom bust, we went through the financial crisis, and now we are in the midst of the longest bull market in history. How has a gold commodity that trades like a stock fit into the larger economic story over that last 15 years?
George M.:
We basically decided to look at gold in the context of the global multi-asset portfolios that every investor owns these days. Nobody just has stocks and bonds. They have some real estate, they have some commodities, they maybe have some private equity, a whole bunch of different things. And we decided we would plug GLD specifically as a proxy for gold. We would plug GLD into that territory and just see how it performed. So we dated the research back to January 1 of 2005, the first full year of operation of GLD and brought it right up to date. We decided that we would plug 2% GLD into that portfolio, 5% and then 10%. And what we found in short was that the 10% level, that was the optimal level of gold, the biggest reduction in the volatility of the portfolio, the biggest reduction in risk, and the biggest increase in returns. So for the technically minded, the optimal Sharpe ratio for the portfolio was a 10% allocation to gold.
Josh King:
Joe, the World Gold Council released its 2019 third quarter report on gold demand trends. I want to listen to Yahoo Finance's Akiko Fujita and Dave Nadig, managing director of ETF.com, discuss the report with a little detail.
Akiko Fujita:
Delayed. Let's talk about what money's flowing in though, because we're talking about the physical metal first, right?
Dave Nadig:
Right. So we're talking, but GLD is the ticker, everybody knows here. That's the biggest gold ETF. There's a whole bunch of these funds. They all do the same thing. They take gold, they stick it in a vault somewhere. So gold, GLD, and IAU, which is the iShares version of that, they're the ones that have gotten the lion's share of this money we're talking about. It's about 11, $12 billion so far this year. That's a big chunk. Something like seven or 8% of all the ETF flows this year have been into gold after years of really flat to declining asset levels.
Josh King:
So the overall growth of assets under management in ETFs as a whole has been a regular topic that we've worked on on this podcast. But is this inflow specifically to gold ETFs, something different than the general trend?
Joe Cavatoni:
So what I think we're seeing as a trend with respect to the gold ETFs is a real move for strategic allocation to gold. In the past, when we've seen the run-up in the ETFs, there's a core holding that we know is stable and will be a part of the educated investor who has a balanced portfolio and knows the benefits of gold. In the run-up in the past, it may have been more tactical in terms of the behavior, whether it's an opportunity or a momentum transaction that's taking place, or a shorter-term dynamic. Where we are today with equity markets being as fraught as they are, the ability to assess market risk or that uncertainty of market risk is really causing many investors to spend the time with organizations like State Street, talking specifically about portfolio solutions, talking with us about the benefits of the asset class, and strategically allocating because they see the concerns around markets, but they also understand the dual nature of the asset and say, "If things continue or move in a direction of economic expansion, knowing gold is global, I'm going to see the benefits of it as well."
Joe Cavatoni:
So that's really what's happening. Now, the difference between run-ups in the past in terms of the AUM and where we are today, there is a very good balance, a healthy balance between the US market and Europe. In the past, maybe large institutional European clients may have purchased ETFs in the US. But what we're seeing now is that retail and institutional buying in Europe is growing and it's continuing in the US. So you're seeing a global adoption of exchange-traded funds that hold gold under them. In Asia, fledgling market, but China, onshore, for example. GLD cross-listed into Japan, Singapore, and Hong Kong, all on offer, getting traction, getting momentum. But then again, in that market, the adoption of ETFs at the retail level, still a growing and fostering market, but you're seeing this phenomenon globally.
Josh King:
George mentioned his brief period working for a mining company itself. Historically, investors seeking exposure to gold would be investing in the stocks of those companies. How is the market currently dividing up its gold exposure?
Joe Cavatoni:
Well, what people are doing between stocks and gold is understanding what the exposure is they're looking to achieve. If they're truly looking just for the bullion exposure, then the ETF, top of the list in terms of the selection and the choice. If they're looking for gold or mining or other commodities and management exposure, then they focus on the stocks themselves. Both give you a very good exposure to the gold market, but they are definitely distinctly different. The other thing that I'd say is that when it comes to the gold market for mining stocks, some investors might feel more comfortable just playing out, owning equities, as opposed to trying to understand owning a commodity that might also put them towards that product instead.
Josh King:
George, millennials and generation Z investors use ETFs in their strategies at a much higher rate than some of us older investors. Do we know who is investing in gold ETFs and how they compare to the typical investor?
George M.:
We can get some glimpses of that. Now, a lot of the glimpses that we get are rather out of date. 13F filings with the SEC, for example, come out some time after the period that they cover and they are rather opaque, but we can certainly learn some lessons from that. We can also learn lessons anecdotally from talking to investors and talking to advisors. And that essentially is what my full-time job is, is talking to investors around the country and to the people who advise them. So we can learn a good deal about who owns GLD, who's interested in buying it.
George M.:
We're certainly seeing definitely interest from more and more younger investors all the time. Whether that's because they have more money to spend, or whether they're wising up to these newer products, I don't know the answer to that. But there's no question there's been talk of millennials or even generation Z thinking that perhaps cryptocurrencies might be an alternative, but I've not actually met any of those investors who believe that. I think this is something I've read about in the media, but I haven't actually encountered it on the ground yet. And until I encounter it on the ground face to face, I'm not going to believe the story.
Joe Cavatoni:
So just to add to what George has said, one other angle that we have insight into is where gold ETFs are being offered. So just over a year ago, we brought a low fee version of gold-
Josh King:
Micro or the mini?
Joe Cavatoni:
The mini-shares. GLDM, the SPDR Gold MiniShares, and that's specifically targeted at platforms. So we do know that there is increased demand. Now what you'll find is on all of those platforms, you're going to find a gold offering. Many instances, it's GLD, GLDM, or some of the other products that have been mentioned through Dave Nadig's little broadcast that he had. Ultimately, it's there for the offering and people are consuming it. Now, as it relates to the millennials, one thing that... We've just released our consumer research survey. Over 18,000 people surveyed.
Joe Cavatoni:
What we're finding is that most people across the entire age spectrum see gold as a safe haven asset, truly as a safe haven asset, as opposed to when they look at a speculative asset that might come in the form of a cryptocurrency or something else. So it's there in their mindset. They know it's a safe haven. So now it's a question of, are we offering gold, all the places where they traffic and where they trend and where they buy? And right now, we are. We're getting a good chunk of the exposure through the exchange-traded fund. But like George has said, we'll listen more and we'll see where the demand can come from.
Josh King:
Now, George has said he has not yet met the millennial investor who prefers crypto to gold. This is a equal opportunity podcast. I think I have. His name is Barry Silbert. He was a guest here, Inside the ICE House, a few months ago, the head of Grayscale Investments who's behind a series of commercials asking people to go in a different direction than gold. And I want to take that on low. I want to hear his spot.
Barry Silbert:
Interesting. Now, if you have held off from buying cryptocurrencies, Grayscale Investments is launching a new national ad campaign that encourages you to buy Bitcoin and to drop gold. Take a look at the ad.
Speaker 13:
In a digital world, gold shouldn't weigh down your portfolio. You see where things are going. Digital currencies like Bitcoin are the future.
Barry Silbert:
Look at that with the dramatic music and everything.
Josh King:
"Digital currencies like Bitcoin are the future." George, I listened to you on ETF Expert Corner back in August and you dismissed the comparisons of crypto and gold. Has anything changed since then?
George M.:
Not in my world. No. Cryptocurrencies as a complex, that whole lot of them, lost 80% of their value in calendar year 2018. That to my mind is terrifying for somebody who likes to have stable volatility, reducing assets in his portfolio. And I think that's the great mass of investors. The fact that the cryptos recouped most of those losses in the first few weeks of 2019 doesn't make me feel any better. All that does is increase the volatility with which cryptocurrencies are trading. There are some people who believe that gold is a volatile asset. It's actually not over the long run, but believe me, cryptocurrencies are a heck of a lot more volatile than gold and I do not want them in my portfolio, and I still have yet to... Maybe you could introduce me to the guy that you just quoted.
Josh King:
Joe.
Joe Cavatoni:
I tend to look at the numbers. It's as simple as that. Our website offers an absolute wealth of information on the gold market, goldhub.com. I would encourage everybody to take a look at what it has to offer because that's the key. The key is an ability for an educated investor to make a decision on the asset that becomes part of a portfolio, understanding volatility, understanding return profiles, and having a confidence level to predict the direction, or at least a comfort in the ability to predict the direction of where the asset's going to track and how it will impact your portfolio over time. So Goldhub will give you all of that information. If you choose to go to the SPDR website, you'll get that information in the form of what GLD has to offer for you. So looking at gold or the ETF, you're going to get what you need to get.
Joe Cavatoni:
But what I think is important to highlight as well is that when the Chinese government makes a comment that they're intrigued and excited about the blockchain, it moves an asset by 30%. Now, tell me how that is a safe haven asset. I'm not convinced nor am I here to tell you it's not a good investment. What I am confused by is why we're always comparing it. I'm actually here to encourage people to say, "I'm not telling you against bonds, I'm not telling you against equities, I'm not telling you against cryptocurrencies. I'm telling you the benefits of gold." Look at gold as a standalone asset class, because that's what it is. It's better than other forms of commodities. It's interesting when you look at it as a bucket of currencies, and it's a really interesting diversifier. So not here to tear down anybody to build us up, we're here to tell you the benefits of what we have to offer, and that's actually what gold's all about, the benefits and what it can offer.
Josh King:
After the break, Joe Cavatoni, George Milling-Stanley, and I turn our attention to the future with the gold outlook for 2020 and the newest gold ETF from State Street Global Advisors and the World Gold Council. That's right after this.
Speaker 3:
And now a word from Calvin Choi, CEO of AMTD, NYSE ticker, HKIB.
Calvin Choi:
We are the first Hong Kong independent investment bank to list here. It's so unique coming here to list because we want to embrace internationalization. We want to go global. This is a global change. We want to embrace global connectivity. A is adventure, M is actually mission, T is actually teamwork, D is destination. NYSE is our destination. AMTD now lists on the New York Stock Exchange.
Josh King:
Welcome back. Before the break, I was discussing the advent of the SPDR Gold Shares with George Milling-Stanley, chief gold strategist at State Street Global Advisors, and Joe Cavatoni, the World Gold Council's head of US. As we were sitting here in the break, Joe, you were talking about your experience going deep into the gold mine in Tibet and, George, you've had these experiences as well over the decades. Just for our listeners, talk about the work and the production and the logistics of actually extracting this metal from the ground.
Joe Cavatoni:
So I had the privilege of being invited to the world's highest mine by the China Gold Corporation. So it was two summers ago. I was flown from Beijing to Tibet. And we took the rather long but interesting journey to nearly 5,000 meters, if not more, where we were introduced to the community and to the mine itself. And I'd say there were two things that really struck me when I had the opportunity to see this, aside from the fact that it was agonizingly high and it was really attacks on my physical condition. The first thing was how vast and impressive the operation was. And then secondly, how well that operation had considered what's very much talked about here today, ESG. There was a direct link between the community of local tribesman and the organization to develop out a cohesive working relationship between those that were able to offer services to the mine and while the mine coexisted in their community.
Joe Cavatoni:
It was absolutely fantastic because here I am in the far reaches of the world, at the highest mine in the world, seeing an operation that you would probably expect to see somewhere, closer to home, maybe in Utah, Colorado, and I'm seeing it in this far reaches of the world, yet every aspect of what we talk about as investment professionals worldwide, large efficient mine, very interesting connection to the community, and ESG front and center, and it really struck me. Now, the mine itself, I had never been down a mine. I had never been to a gold mine itself, but it was fascinating. Many people at work, shifts of people coming in. Just large, vast quantities of machine and men working together to extract the gold from the ground. It's very impressive, very impressive operations.
George M.:
I've got to say I've not had the opportunity to go to that mine, Joe, and I really envy you the experience and thank you for talking a little bit about it. In my career, I've probably been to mines on every continent apart from Antarctica and there aren't any there. So there'll be no point my going there. One of the things I've noticed in that almost 50-year career is the increasing focus on social responsibility on ESG aspects, and I'm glad that you mentioned those, Joe. I think the gold mining industry in particular has taken the lead among mining companies in trying to address these issues. Gold mining is a huge industrial operation.
George M.:
There is obviously waste, there's obviously potential pollution from a lot of these mines. But the way that the gold mining companies are focusing first and foremost on reducing the impact they have on the environment, reducing the damage that they do, and then when mines are over, focusing on recovery and reclamation, trying to restore landscape to its original or something close to its original form, that to my mind has been absolutely amazing. The other thing, it's a job that I would never want to do. I was allowed to hold one of those huge hydraulic drills, three miles below ground in a mine in South Africa a little while ago. And after 30 seconds, I decided that my job was going to be writing and talking about gold, not digging the stuff out of the ground.
Joe Cavatoni:
Can I just make one additional mention when we're on the topic of ESG? My colleague, Terry Hayman, out of our London office has spearheaded an initiative with 26 of the mining members that make up the World Gold Council's membership. Terry has led the initiative to release the responsible gold mining principles. And I think it's a fantastic body of work and it's being taken around the world so that people are understanding exactly what George has just described. He's just described the fact that the industry is taking its own leadership and its own initiative to be, again, I hate to use that same expression, but at that tip of the spear, to be responsible, to focus on ESG, to think about standards, to hold themselves to a criteria that's actually fantastic. I would encourage people to take a look at the responsible gold mining principles, because really easy to understand 10 simple principles focusing on things, including, for example, conflict-free standards. Really interesting body of work, and actually going to change the industry and also what investors understand about the industry.
Josh King:
So in terms of what investors understand about the industry, at the very beginning of the introduction, I referenced that quote from Eric Sprott, that billionaire investor, "The history of the world is a history of gold." Sprott is known as a gold bug. So as people hear more commentary about gold and whether people are labeled a gold bug or not, what defines a gold bug? And do you guys adhere to that label?
George M.:
Let me take that one first, Joe. I know that you probably got a response too. I get asked this question an enormous amount of the time, because I do talk about gold in every professional meeting that I go into. I have never had more than 20% of my personal wealth in the form of gold. I don't think that that qualifies me for membership in that elite club of people who can be called gold bugs. But on the same token, I've never had less than 5%. Since I bought a handful of gold coins back in 1972 as part of my research into that first story about gold, I've never had less than 5% of my personal portfolio in gold. Rebalance that quarterly because I like what it does. I like the fact that it reduces the volatility of my portfolio and increases the returns. It gives me a better Sharpe ratio, even just that 5%. So I'm very happy with it and I'm happy not to be called a gold bug, please.
Joe Cavatoni:
I would simply say I'm not a gold bug. I focused on a diverse asset base, did a lot of different things in my career. Only recently did I realize how interesting the market is around gold, but it again goes back to my opening remarks about the fact that it's different when you start looking at it from a mining perspective, and it's different when you start looking at it from where the demand comes from. It's unique in that way. Economic expansion, that actually can drive the price of gold up. Market risk and uncertainty, we know that drives the price of gold up because people flock to it as that safe haven asset. And when you start peeling it back, it's just an interesting additional element to an investment portfolio. Like George, I have an allocation of gold, but it's no more than 10%. I'd also say that I dig into bonds and analyze them the same way I analyze the gold market. I spoke at an event, I think it was about three months back, and we were talking about emerging markets.
Joe Cavatoni:
And I listened to everybody spend hours on end talking about how they're analyzing Indian equities, as a good example. And it was my turn to speak about the gold market and most people were confused as to why I was there. Then we started talking about the importance of gold in the emerging market. So 70% of demand comes from that part of the world. They started to listen and get a little more intrigued. And the clincher when you close out your remarks is to simply say, "Indian equities make up about 1.5% of the world's equity allocation maybe, and you're going to give it months on end in terms of an analysis. And here's an asset that's trading 160, $170 billion a day that's recognized in every country around the world, held by central banks and reserves, and you're going to tell me, you don't want to take any time to analyze it?" You tell me, am I a gold bug? Or am I just a sensible guy that's looking at this and saying, "This could be something interesting in my portfolio"?
Josh King:
You're both sensible guys looking at a lot of stuff that is happening on the near and far horizon. Looking ahead to 2020, there are so many global events that could potentially put pressure on the world's economy. I want to present a few and get your take on what the impact may be on the gold price and markets in general. First, here in the US, we're entering an election year with the sitting president facing impeachment and the Democrats offering a wide spectrum of candidates from Mike Bloomberg to Elizabeth Warren. The world could turn upside down a year from now or resiliently cling to the status quo. So maybe starting with you, George, because you were there when President Nixon got off the gold standard and then resigned and you've seen political turmoil affect the markets over the 50 years since. How do you see the next year affecting gold?
George M.:
I think what you've just done, Josh, is you've outlined a picture of continuing and probably increasing turbulence in financial markets and in the political spectrum against which financial markets operate. I think that the more turbulence there is in equities, in bonds, and in all of the other assets, the more gold comes into its own as a relatively less volatile asset that offers some protection against potential downside risks in other assets. Most of my career, we've looked to the bond market if you're worried about the potential for a downturn in the equity market.
George M.:
And after 10 straight years of going up, I'm worried about the potential for a downturn. Let's just leave it there. We always used to look to the bond market for some kind of protection against that possibility, but you can't do that anymore when bonds aren't yielding anything. I think it was Jim Grant who said once that zero yield will always beat negative yield. And if the bond market as a whole is essentially negative yield, and in real terms, a lot of bonds out there are in negative terms, then the fact that gold doesn't pay a coupon or a dividend is a much more important thing to think about.
Josh King:
So looking now to Asia, most of the focus on the US-China trade war has been on equities, but it also has a big impact on gold. And will there be a continued effect as these trade talks continue and maybe go to a preliminary deal or potentially a big deal going down the horizon?
Joe Cavatoni:
I think absolutely. You've highlighted a number of risk factors. George has just amplified the concerns that most investors are expressing in all of our dialogue, whether it's direct from the World Gold Council in partnership with State Street or direct at State Street. People don't have the ability to read the future, call the future. They don't have a crystal ball and what is guaranteed is uncertainty and volatility. And whether it comes on the back of a tweet, or an announcement, or an actual systemic market event, we know it's out there and we know it's going to repeat itself. So it's a great place to consider, or it's a great time and a great opportunity to consider gold as part of that portfolio. Now, just taking it one step a little further, I think where we would be encouraging people and what we continue to talk to people about is there is no set number for everyone.
Joe Cavatoni:
Everyone should do their homework and you should see what it does for your portfolio when you add it. George talked about it and I'm going to amplify it. Whether it's through tools that State Street offer in terms of their portfolio, analytics tools, or looking just more generally about understanding the direction of the gold market using our recently released gold valuation framework, you can make really well-educated decisions on how gold could look 10 or 12, 24, 36 months out. And you could look very intelligently with this tools from State Street as to what it could mean to your portfolio. So everything's at your disposal. Why not take the time to do it? If it's one day or one week, we're both sitting here willing to help, and I think that's the big message we want to deliver today, is take the time and understand what it could mean. It's worth your energy, in our opinion.
George M.:
I think that both of us, when we're considering an allocation or considering changing our allocation to gold, I think both of us, Joe, we subject gold to the same rigorous analysis that we would subject tech, or pharma, or whatever else we might be contemplating an investment in. Josh, a lot earlier, you asked a rather general question about what have been the impact of gold ETFs. I think we've circled around and come to an answer to that in a way. What Joe is just talking about I think is that since 2004, since the launch of GLD, gold has become much more of a mainstream asset than it ever was considered before.
George M.:
We, by launching the partnership between World Gold Council and State Street, by launching GLD, basically made gold available as an investible asset to a whole universe of investors who'd not considered it to be that before. And I think that that's why gold is now still... It's gradually increasing in people's perception as a mainstream asset. It's showing up in a lot of models, for example. It never did that before GLD was launched. It's much more part of the conversation. And the more we face turbulent times, the way that you just outlined, then the more gold comes into its own. The more we find gold coming into the conversation.
Josh King:
Pivoting to this product that Joe mentioned right before our break and as we talk about other ways in which people are adding gold to their portfolio, last year was the launch, as you mentioned earlier, of SPDR Gold MiniShares Trust, that's NYSE Arca, ticker symbol, GLDM. So what's the relationship between the council and State Street as the organizations continue to partner on developing these new products?
Joe Cavatoni:
The partnership is all about education, and solving problems, and offering opportunities. As simple as that. State Street are the world's leading provider of access to exposures worldwide through exchange-traded funds. Their products lead the market in terms of messaging on liquidity, ease of access, and exposures of choice. We listen to what they have to say to us about what their clients are telling us, and where there may be holes in the market in terms of inability to access a particular market or an exposure, an unserved need. So when we think about what's next for us on the shelf, if there's a product to do, then we listen and we will bring it.
Joe Cavatoni:
We know that we have a magnificent instrument in GLD, but it needed to be complimented with GLDM, and now the entire front that we need to cover in terms of client requirements are there. So GLDM is now trading just above 1.1 billion in assets under management. So while we didn't achieve that in three trading days, we achieved that in just over one year in a world of a competitive market where differentiation around gold ETFs is pretty challenging. But the right share price, the right management fee, and the right partnership with clients being covered by State Street has gotten us to what I consider a pretty dang good success in terms of a launch.
Josh King:
The mini-GLDM reflects the ratio of one share to one 100th the price of an ounce of gold. How are mini-shares attracting a new type of investor to the space?
George M.:
We were conscious that there was a movement across the whole ETF universe, not just gold ETFs. There was a movement toward lower share prices. So we offered, as you say, this initially at launch based on 100th of an ounce instead of GLD at one-10th of an ounce. So GLDM is a $14 share today. GLD is a $140 share. So that was one thing. We also were able to bring GLDM to market with a lower expense ratio of just 18 basis points compared to 40 basis points for GLD, and I think that that has definitely had an appeal. The thing that strikes me every day, when I look at the statistics, I see that GLDM has added assets under management this year of more than half a billion dollars to total more than 1 billion. At the same time, over the same period, GLD has added $5.5 billion because it's a much bigger product, added 5.5 billion to take it to 42 billion.
George M.:
There were people who said one is going to cannibalize the other. The new one is never going to work as people are going to like the liquidity behind GLD. There are people who focus on the liquidity that GLD brings and they will continue to buy GLD. There are other people who focus on the low expense ratio and the lower share price that GLDM brings. They'll buy that. I know some advisors who have put part of their investors' portfolios into GLD and part into GLDM. They're looking at GLD portion as perhaps something they might trade more often. They might use that to rebalance the portfolio because the trading costs are lower. They're looking at GLDM as the very long-term buy and hold core holding. And there is definitely space for the two products in this market. That's been proven by the statistics this year and that makes me very happy.
Josh King:
As we wrap up, we love pillars here, Inside the ICE House. George, I heard you describe the four pillars for why gold. What are they?
George M.:
A lot of people think that gold doesn't have a yield because it doesn't have a coupon or pay a dividend, but that's actually not true. If we date back to 1971, when Nixon closed the gold window, that's always the way I try to do my analysis, on a compound annual growth rate basis since 1971, gold has returned about 7.75%.
Josh King:
So return one of those?
George M.:
Return is definitely one, and that's not too shabby for something that's not supposed to have a yield. The second thing, gold does not correlate strongly with anything else you would find in the typical portfolio. So it's offering you a measure of diversification that I don't know of any other asset that could match that. The third thing, gold is a very deep and liquid market. A lot of people look just at the futures market on the commodity exchange. But as you said earlier, it is primarily traded over the counter, and the latest estimates from the trade association suggests that gold is trading on average somewhere between one and $200 billion a day. That's $35 trillion a year.
George M.:
So I don't think there's a problem as far as liquidity is concerned. That's my third pillar. It's very deep and liquid. And the fourth, gold can improve your Sharpe ratio. We have shown this, the research shows this. And because of compliance reasons, that research has to be updated every quarter, and it's the first thing that I look at when I get my new pile of collateral landing in my computer every quarter. Is the message of that study still the same? That 10% is the optimal allocation. And so far for about seven consecutive quarters, that has held good. I'm starting to believe it's robust analysis.
Josh King:
Starting to believe, but maybe a couple of decades more and we'll really be confident, George.
George M.:
I'd really like to see a little longer term on this kind of analysis. You're right.
Josh King:
So we'll leave it with that. The four pillars for why gold. Number one, return, number two, correlation, number three, the liquid market, and number four, mitigation of risk. Gentlemen, thank you so much for joining us, Inside the ICE House.
Joe Cavatoni:
Thank you.
George M.:
Thank you, Josh.
Josh King:
That's our conversation for this week. Our guests were George Milling-Stanley, chief gold strategist at State Street Global Advisors, and Joe Cavatoni, the World Gold Council's head of US. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us at ICE House Podcast. Our show is produced by Theresa DeLuca and Pete Asch with production assistance from Ken Abel and Steven Romanchin. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, expressed or implied as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some of the proceeding conversation may have the benefit for the purpose of room for clarity.
