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In this episode of THE FINANCIAL COMMUTE, host Chris Galeski invites Managing Director of Investment Sasan Faiz to discuss Q3 and how investors can try to protect themselves in unpredictable market conditions.  

Q3 saw a struggling market with the S&P 500 down 3.2% and MSCI EAFE down 4%. Bonds have also faced challenges as they were down 3.2% for the quarter and 1.2% for the year. This is because higher interest rates have had a negative impact on equities and bonds.

Sasan and Chris agree that investors should consider adding gold to their diversified portfolios to try shielding themselves against these volatile market conditions. Gold has historically maintained its value and is viewed as a hedge against inflation. Costco has been selling one-ounce gold bars online that sell out within hours even though members are limited to two per order, so demand has clearly been increasing as people realize inflation is rising and the dollar is depreciating.  

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Watch previous episodes of THE FINANCIAL COMMUTE here:

Ep. 53 Celebrating a Year of Financial Commute Insights: Join Us at the Investor Symposium

Ep. 52 From Mortgages to Market Trends: A Deep Dive Into Real Estate

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Hello, everybody, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Managing Director of Investments Sasan Faiz. Sasan, thank you for joining us.

Thanks for having me on, Chris.

So we just finished the third quarter right? September 30th was, it was the end of Q3. Some interesting stats and we do like a brief recap of the quarter.

A struggling quarter for the market, even though bank failures are kind of in our rearview mirror. Those are in like Q1, Q2, but for the quarter. So Q3, July, August, September, the S&P 500 was down 3.2%. So its year to date up 13. The Russell 3000 down 3.25, up about 12.3 for the year. International stocks, MSCI EAFE down four for the quarter, but up seven and a half for the year.

Bonds had their most interesting quarter. They were down 3.2% for the quarter and then down about 1.2% for the year. Bonds have really been struggling in the last month or so. I think the ten year went from what, 4.2 to 4.65 this morning. Yeah. Yeah. What are your thoughts about, you know, this recent quarter or the year or so?

So I think the you know, as the Fed was raising rates, I think there was a lot of optimism built into the equity markets that at some point the Fed will be forced to lower rates. I think markets are starting to realize that we are in a higher for longer environment as far as rates are concerned. And that's why we've seen a re-calibration of yields.

Uh, and that has really caused havoc in equities and bonds and, and gold as well.

And not trying to pick a specific period because something like gold, when you look at it over a very long period of time, tends to do well during times of uncertainty, higher inflation, higher rates, some, you know, fiscal instability. But so far, the last couple months, gold hasn't been reacting all that well.

But the U.S. dollars remain extremely strong. You know, talk to us a little bit about, you know, how we eventually got to where we are with gold, maybe starting with the gold standard back to the seventies.

Yeah, absolutely. So post-World War One, everybody went off the gold standard and obviously they had a lot of currency crises and World War II.

So just in July of 1944 or so, a year before the end of World War II, uh, delegates from 44 nations got together at Bretton Woods in New Hampshire, and they designed the financial system called the Bretton Woods system, basically to promote currency stability and economic cooperation. And that was the goal of the of the conference. So that was actually the beginning of the development of IMF, the International Monetary Fund and the World Bank, which came into existence several years later.

The U.S. was running persistent accounts deficits. In 1971, President Nixon went off the gold standard. So basically, the U.S. could not honor redeeming U.S. dollars for gold and gold, that initiative was set at $35. And as the U.S. went off the gold standard, gold was able to fluctuate freely. So it became another asset. And I think it's a little bit of a misunderstood asset class because it's really a store of value.

It's a hard reserve currency. The whole idea of gold was that countries cannot continue to print money without any kind of checks and balances. And we see that now the U.S. is doing it and many other countries are doing it as well.

I saw something interesting a while back that said an ounce of gold many, many years ago could buy a really nice high end Italian suit.

And that was, you know, 250, $300. And we'll go back 30 years. Now, all of a sudden, you know, you look at gold at 1900 dollars an ounce, that's probably a really nice high end Italian suit. So it definitely has held its value.

Yeah, I think with the inflation in the past couple of years. I think we all realize that our U.S. dollars are not buying as much.

I mean, over the long run we know that that happens. But it's really been an accelerated trend over the past couple of years with inflation higher and we see our U.S. dollars do not go as far. So gold is a perfect hedge against the U.S. dollar and against inflation.

So, when you look at what's going on this year, sit on like bank failures, commercial loan defaults, higher inflation.

You'd think that gold would have done better. And, you know, the U.S. dollars remain strong. So gold maybe in terms are priced in U.S. dollars has not fared well. But you have to kind of leave the U.S. and look at the global picture to take a look at what's going on.

Yeah, absolutely. I think I think in the U.S., really the main driver of gold is the real rates.

So nominal rates minus the inflation rate. And when that rate has become positive, anywhere you look at gold is an asset that doesn't produce cash flow. Right. So it doesn't pay a dividend, it doesn't pay interest. And so it's difficult to value it based on traditional metrics like book value or discounted cash flow. So what the what the value is usually determined is by the level of interest rates.

So we were in a negative yield environment for a long time. And that was positive for gold as yields have risen obviously because of inflation and that has really been a headwind for gold.

And then where you're meaning to is if if interest rates are zero and inflation is 2%, we're at a -2%, you know, rate environment.

Whereas now all of a sudden, if interest rates are at five and inflation's at four or that's positive. And so it's not for gold.

Yeah, and I think that's just one component. But as you I think mentioned, a lot of central banks do buy gold. So last year and 2022, central banks, global central banks bought most amount of gold that they had since 1950.

This year it has slowed down a little bit. But also there's a more affluent investor in emerging markets that they're buying gold and I think there is a support behind the price of gold, but obviously it is day to day fluctuations with respect to yields, with respect to the level of the U.S. dollar is always going to play, uh, play a role in day to day movements in gold.

I came across an interesting article that my wife actually sent me. Costco is selling one ounce gold bars online only, you have to have a Costco membership. They limit two per person per transaction. And apparently, they sell out within hours of releasing them online. Now, you know, and you're limited to two coins per transaction. So two ounces, it's really hard to build up a sizable amount to really protect yourself, but the demand seems to be there.

Yeah, absolutely. The demand is there. And you mentioned the regional banking crisis in in March, we actually saw a lot of inflows into gold ETFs at that time as well. So it is truly a hedge against inflation, but it also does well in times of stress. So it's really an asset. I think that's a little bit misunderstood, but it has a place in a well-diversified portfolio.

And so let's talk about well-diversified portfolio, because that's kind of what you do for a living. It's to kind of figure out, hey, what percentage of clients’ assets should be in this bucket versus that bucket? How do we properly build out a resilient portfolio that meets cash flow needs, growth needs and resiliency and protection during bad times? How do you view gold as it relates to an asset class inside of a portfolio and why is it important to you?

So we view gold as a strategic asset, so meaning that it has a place in the portfolio on it on a permanent basis, basically a hedge against inflation and fiat currency depreciation? I think that's the main thing. Also when you're looking at a truly diversified portfolio, we are looking for assets that are non-correlated and they have independent drivers of return and that they can add value in diversifying the portfolio.

So gold, I think it fits all those criteria and that's why we think that it makes sense and even makes us more in the current environment where we might be in a higher inflationary regime going forward. I think gold will be a perfect hedge against that.

Yeah, you bring up some good points. I mean, it's really easy to look at performance of your portfolio and see that you know, number of things are doing well, but maybe gold's flat or slightly negative in U.S. dollar terms for the year and say, Oh man, maybe I should sell this and buy something else.

But that's actually counterintuitive. You should be selling something that that's doing well and maybe buy more gold. Right?

Exactly. Actually, if you look at gold over the past maybe quarter of a century, it has outperformed stocks and bonds. So, there are short-term price movements, as you mentioned, that don't necessarily reflect the fundamentals. And I think those would be times where you want to be adding.

So we believe that both gold and natural resource equities have a place in the portfolio, a diversified portfolio, not necessarily putting a lot in it, but we have a tendency to allocate to both gold and natural resources as a hedge against inflation.

Yeah, and you know, you said preserving its value. I mean, not to go too negative, but with the U.S., you know, 30 plus trillion dollars with a debt and getting worse every year, I think globally, $300 trillion worth of debt, the simplest way is to kind of fix that by either defaulting on your debt, letting inflation run away, or devaluing your currency. It's kind of one in the same. But gold can be a nice sort of hedge against those those currency manipulation.

I think I think higher inflation is is good for borrowers. Yeah. And so you want to be a borrower in that environment so you can monetize that debt, pay off your debt with depreciated U.S. dollars and gold is a perfect hedge against that.

Thank you so much. Look forward to more of these conversations if you haven't heard already. We have our investor symposium on October 12th Thursday at the Westlake Village in. We hope to see you there. Thank you.

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Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.

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