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Cushkin.

Remember the summer?

Those warm, happy days?

So recent and yet so long ago?

Now that the nights are drawing in.

At the tail end of the summer, first weekend in September, we had the FT Weekend Festival in London on the grounds of lovely Kenwood House.

And some guy called Robert Armstrong travelled all the way from far away New York to join us for a recording of this very podcast.

Where am I going with this?

You're asking yourself.

I know where you're going, you mean old person.

In the long, short, that part of the show where we go long a thing we love, or short a thing we hate, Rob was short gold.

It's going down, he confidently predicted.

Listeners, have a little guess how much gold has gone up since that day.

That's correct.

It's up by 12%.

The shiny stuff is now close to $4,000 an ounce.

Today on the show, we're asking, how did Rob get its own?

I would like to introduce...

And

what the hell is up with gold?

This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin.

I'm Katie Martin, a markets columnist and professional rob troll at the FT in London.

And I'm joined down the line from New York City by Mr.

Wright Robert Armstrong.

Dude.

Okay, I'm not a total rookie at this game.

And those who were with us on that beautiful day in London will remember

that it was a long-term call.

I specifically framed it in terms of disappointing long-term returns.

And so I still have a chance to be right, even though I have been wrong for like a month.

That's nothing on this show.

I mean, I think it just continues to be, in a way,

the biggest story

other than AI in finance.

You know, it's just so rare

to see this particular asset go up this much at a time when there are not any crises elsewhere in markets.

The normal reasons why gold tends to go up just don't apply here, which is very weird.

But first of all, where are we at?

So we're very, very, very close to $4,000 an ounce for the first time ever.

It might well have hit $4,000 by the time this show goes out in a couple of hours.

It's the biggest rally since the 1970s.

A fine decade, as Rob and I will attest.

It's up more than 50% this year.

September was the biggest month for the gold price since 2011.

People, they are calling it gold-plated FOMO.

It's all going on.

It's like a huge, a huge rally.

And it's not just up a lot in like nominal terms.

It's up a lot in inflation-adjusted terms.

We are at an inflation-adjusted high.

It is true.

However you cut it, this is a monster, monster, monster year for gold.

And I don't remember that many people banging on about it at the start of the year.

It's kind of just come out of nowhere.

There is one fundamental factor

that is traditionally associated with gold and that is working

for it right now, is that the real rate of interest has been falling as Fed cuts have appeared on the horizon and even reached us.

So the 10-year

inflation-protected treasury yield, which is a kind of proxy for real rates, is down from 2.2% to 1.8% since June.

So that helps.

And again, for our listeners who don't think about gold all the time, and good for you, the reason is gold doesn't yield anything.

So when the yield on money, real yield on money goes down, the opportunity cost for owning gold declines.

And for a long time, people were amazed that real yields were up and gold was up at the same time.

But now we have this traditional relationship, real yields down, gold up back in place.

So that helps.

If bonds aren't paying you that much once you take inflation into account, then you may as well own a pet rock and hope that the price of the pet rock goes up and you make money out of it.

You know, this is a good time, now that you use your pet rock joke that you use every time, to note that you've been as wrong about gold as I have, Katie.

And I would expect

a little bit of contrition and a little bit of humbleness from you on this topic.

Always.

Because

the pet rock crowd has been wrong.

And I'm coming around.

I think I've described myself on this show as gold curious.

And while I stick to my call that gold is an unsustainable high

right now,

I have come around to the view that there is a place for this stuff in a diversified portfolio.

A view I did not point out.

You're turning your documented wrongness into my wrongness that you're just clearly making up in a little switcheroo.

And I'm sticking to my so far massively unsuccessful call about gold right now.

I think the gold-plated FOMO point is correct.

If you look at the chart,

the price has gone up in a sort of X, it's like a straight line up now.

And the last two times it did that, right, or a little bit after the global financial crisis when nobody wanted to own everything else, and in the 1970s when everyone was stealing your car,

both of those, at both of those times, the big spike in gold was followed by a long period of poor returns.

And so it does feel a little bubbly, but I think the world's attitude towards gold has changed.

But tactical, short, long-term, long, I guess is what I'm saying.

Okay, fine.

That does make sense.

The funny thing about gold compared to other sort of mainstream assets is that, you know, it's a bit of a sort of Rorschach test, right?

You can kind of see in it what you want.

And so some people think that it goes up when investors are worried about inflation.

Yep.

Some people say it goes up when people are worried about disinflation or deflation.

Some people say it goes up when investors are feeling happy about the state of the world.

Some people say it goes up when people are feeling sad.

Because it's not like a bond where you can say, okay, you've got certain growth rates and certain inflation rates and that tells you that the bond should be you know here it's not like stocks where it's like this company's doing really well its share price has gone up it's a bit of a squidgy one where people kind of paint their own adventure onto it so i was at a briefing earlier today at fidelity international which is next door and mike riddell from there was saying you know when the line goes up people pin all sorts of reasons on it and that's exactly what's going on here so you can talk to like 10 different people who are all positive about gold and ask them why they're positive about gold.

And they'll all give you completely different reasons.

But let's start with one sort of simple one.

It's that gold tends to go up when people are nervous about, you know, war, famine, pestilence, financial crises, all that sort of thing.

It tends to be treated as a safe retreat in times of stress.

The problem is that sits very uncomfortably against a market that is like fine at the moment.

You know, stocks are doing great.

Stocks are doing great and the fundamentals are pretty good.

Sales growth is pretty good.

Earnings are pretty good.

If you look at the macroeconomy, we do have these quite poor job growth numbers.

But outside of that, there's a lot of indicators that say the economy is charging along okay.

Not least the government's estimate of what GDP growth is, which, you know, is 3% in the last quarter or whatever, 3% plus.

So it is weird, but in a way, this speaks to how many of our minds are split right now.

That one, we've had an incredible rally and a strong economy that continues to defy expectations and makes it very hard to be short any kind of financial asset whatsoever.

At the same time, we have general

rather amorphous worries about the Trump agenda for the world economy.

That, you know, the tariff stuff doesn't work and the overall isolationism doesn't work and

pressuring the Fed for big rate cuts when inflation is still above target doesn't work and et cetera, et cetera.

And maybe gold is the asset.

Having gold in a certain percent of your portfolio is the asset that lets you eat your cake and have it too.

You can both worry and belong risk assets overall.

Yes,

and you can make yourself sound very clever or think that you sound very clever saying, ah, yes,

it's a debasement trade.

I'm debasing.

I hate that.

So it's this idea that, you know, this accusation has been pinned on all sorts of different administrations in the US and elsewhere over the years, but it's this idea that what we're seeing is the debasement of the dollar.

So, you know, interest rates are going to be held too low for too long and that's going to be bad for the value of the dollar.

And so we're trashing the dollar or it's the debasement of like the entire financial system the idea that government bonds are worthless again because interest rates are too low and borrowing is too high and so that pushes people into the arms of this supposed other safe asset which to be clear does have periods of falling really hard in periods of market stress but nonetheless it's this idea that you want to hold gold because nothing else is safe everything else is getting debased and that i think think, just sort of takes you to, there is a legitimate debate to be had around:

are governments borrowing too much?

Is this system all sort of sitting on sand?

You know,

I worry about that.

I'm not sure gold is the way that I would express it, although if I had done over the course of this year, I'd be doing very nicely out of it.

But that's a real debate, isn't it?

Yeah, I think that's right.

And a related point,

very closely related to this point, and this is something that really has changed in the last three or four years, is that central banks around the world are expressing

fear about being too dependent on the dollar, the potential debasement of the dollar, by adding gold to their store of reserves.

So I have before me a chart of gold as a percentage of international reserves.

And

10 years ago, it was at 10%, and now it is at 21%.

Yaoza, that's a big increase.

And that's a lot of gold.

And in the last three quarters, these are numbers from the World Gold Council.

I'm just doing quick math here.

Something around

over the last three quarters

1,000 tons of gold purchased by central banks, which is a lot.

Wow.

And central bank purchases have been on that order since kind of mid-2022, since, you know, the post-COVID period has been one in which central banks are like, you know what?

This stuff, it can't be sanctioned by the United States, can't be devalued by the United States.

We're heading to a world that is de-globalizing.

Bonds of trust are breaking.

Let's try the yellow stuff.

And I think that's real.

And I don't see anything that suggests to me that trend is going to change anytime soon.

Yeah.

The other thing that happened in 2022 is, of course, Russia's Russia's full-scale invasion of Ukraine, at which point Russia's dollars got frozen.

And I mean, to my mind, why should normal countries have to worry about that?

You know, unless you're going to launch a war of aggression against your neighbor, then why do you care that this stuff is in dollars?

But it has sparked a bit of a rethink among reserve managers around, okay, are my dollars like neutral and apolitical, or should I hedge that a bit with other stuff?

I would say the decision of the reserve managers is quite rational.

Even those who are not going to invade their neighbors,

we live in a world of strange alliances.

If you are India, I don't know, I'm just picking out that example as a country

who is somewhere in the world where you're going to naturally have a lot of divided alliances.

If you're a Middle Eastern nation,

who knows what kind of conflict you're going to be drawn into by your friends or your enemies and which side of that conflict you're going to be on and you're going to want a neutral asset and gold looks like a neutral asset.

This is really the reason that now I understand,

you know, I was like you, I was, it's a pet rock.

I was camp pet rock for a long time.

Yes.

But now

even while I think the current price is probably unsustainable, I do understand why you want to have some of this stuff in a portfolio.

Yeah, it makes sense.

But so look, so we've covered off like the big global reserve managers.

They're like sort of national, massive pots of money.

But retail investors are also, they love themselves a little bit of gold.

So

exchange-traded funds that are physically backed by gold, again, these are numbers from the World Gold Council.

These ETFs drew in their largest monthly inflow ever in September.

Strongest quarter on record of $26 billion flooding into these things.

The numbers are just cray-cray.

Like, people cannot get enough of these things.

So, that means that you don't have to actually buy a block of gold and find somewhere safe to keep it, either paying someone to keep it in a safe or putting it under your bed.

You can buy an exchange-traded fund that just tracks the cost of the price of this thing.

And so you get all of the benefit and none of the storage nightmare.

And the ETFs do, I should say, own the physical gold.

Yeah.

It's not a synthetic product.

It's the gold itself.

So that is reassuring.

Aaron Trevor.

You know, leave the ETF operators to sort of worry about the physical storage and all that sort of thing.

But there's just a lot of things pulling the same way.

And like, you know, I didn't disagree with you back in September when you were saying, oh, I think gold's getting a bit toppy here.

But this thing just seems to be one-way traffic at the moment.

I don't see what turns it around.

You know, we're not going to get a sudden end to

fiscal incontinence in the big economies.

We're not going to get a sudden kind of reset to something much more normal in US economic policy.

So what's to stop gold just like going on and on and on and on?

I think you are

underestimating the possibility of some kind of return to sanity.

I'm massively, yeah, underestimating that.

I mean,

that is what happened.

What happened to the gold spike in the 70s is the 80s.

Suddenly, you had Ronald Reagan and a resurgent economy and winning the Cold War and everything else, and gold struggles terribly.

You had the great financial crisis, and gold was extremely strong, and even for several years after the great financial crisis.

But as the recovery continued and people became more confident, gold struggled again.

So, you know, we could have political change in the United States globally.

Wars could end.

You know, it always feels like when you're in a patch of bad news, it always feels like the bad news is going to go on forever.

But sometimes it doesn't.

And the geopolitical news has been terrible, but it is possible for geopolitical news to get better.

Aren't I just like a little ray of sunshine here?

Ew.

Betting on an outbreak of sanity.

Yes.

I have to say you are on your own with that one.

I am generously going to give you another opportunity to be wrong about things in just a sec with Long Short.

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Alrighty, it's long, short, that part of the show where we go long a thing we love or short a thing we hate.

I am gonna be short the Japanese yen.

There is a lot going on.

They've got another, a new prime minister in waiting, Sanai Takeichi.

She's the first woman ever to do the job.

But the market is saying, oh, hang on a minute.

Is she going to try and stop the Bank of Japan from raising interest rates?

So people are suddenly really quite nervous about an outbreak of volatility in the yen and in Japanese government bonds.

It could all get quite...

It could get quite tasty.

So

I'm going to be short yen.

I'm going to be short yen.

What about you?

Our new colleague, our new colleague, not very new, but new-ish colleague on the newsletter, Hakyung Kim, wrote about Japan yesterday.

And I thought her piece was very compelling about why we should expect a weaker yen.

But with that in mind, I'm going to hedge the yen and buy Japanese stocks,

which I still like for exactly the same reasons.

I think, you know, if this new leader gets what she wants,

then the same reasons that that should make you worry a bit about the yen should make you feel good about your Japanese equity allocation as long as you're you're hedged.

So you heard it here.

We've given you a pair trade, short the yen, along the stocks.

The thing with Takeichi, and they're calling it the Takeichi trade, is that she models herself on the UK's Margaret Thatcher, but people are worried about whether she could end up being the UK's Liz Truss.

So,

you know, normally Japanese government bond markets are aggressively boring and they've suddenly got really interesting.

So I'm here for it.

One way or another, I'm here for it.

Listeners, we hope you will be here for us.

We will be back in your ears on Thursday, so listen up then.

Unhedged is produced by Jake Harper and edited by Brian Erstad.

Our executive producer is Jacob Goldstein.

Topha Vorhez is the FT's acting co-head of audio.

Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free.

A 30-day free trial is available to everyone else.

Just go to ft.com/slash unhedged offer.

I'm Katie Martin.

Thanks for listening.