There are always lessons that can be learned from the “smart money”.
Unlike regular investors, billionaire money managers like Ray Dalio and Stan Druckenmiller are professional investors. They have entire institutional teams at their disposal, dive deep into the nuances and complexities of the market, and spend every waking moment of their lives thinking about how to get more from their investments.
They want to make money – but they also want to execute on strategies that will protect their wealth and build robust portfolios that can withstand any type of macro event.
Turning to Gold
In recent months, some of these elite investors have turned to precious metals like gold as a part of their overall investment strategies.
In the following infographic from Sprott Physical Bullion Trusts, we explain why these investors are adding precious metals to their portfolios, the underlying tactics, and the best quotes each investor has on assessing today’s market.
Why are these billionaires buying precious metals?
Their cited reasons can basically be summed up with six categories: wealth preservation, store of value, inflation hedge, portfolio diversification, future upside, and investment fundamentals.
What Billionaire Investors are Doing
1. Lord Jacob Rothschild
In late summer 2016, Rothschild announced changes to the RIT Partners portfolio because he was worried about very low interest rates, negative yields, and quantitative easing, saying they are part of the “greatest monetary experiment in monetary policy in the history of the world”.
His solution? Buy gold to help preserve wealth, and as a store of value for the future.
2. David Einhorn
Einhorn has a similar assessment. He believes that monetary policy is becoming increasingly adventurous, and that this – along with the policies of the Trump administration – will eventually lead to large amounts of inflation.
In February 2017, he shorted sovereigns, and bought gold.
3. Ray Dalio
Ray Dalio is the founder of the world’s top hedge fund, Bridgewater Associates, but he’s also no stranger to gold.
If you don’t own gold, you know neither history nor economics.
– Ray Dalio, Bridgewater Associates
More recently, in 2016, Dalio is quoted as telling investors to own a well-diversified portfolio that is 5-10% gold.
4. Stanley Druckenmiller
Druckenmiller, some people argue, is the best money manager of all time.
Lately, he’s placed his bets on gold as well, but for different reasons than the above managers. Druckenmiller has always placed big trades with lots of conviction, and in February 2017 he put his money in gold because “no country wants its currency to strengthen”.
Why Gold is Money: A Periodic Perspective
Gold has been used as money for millennia. People often attribute this to beauty, but there are basic physical properties for why gold is money.
Why Gold is Money
The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money is an artifact of the past. In an era filled with cashless transactions and hundreds of cryptocurrencies, this statement seems truer today than in Keynes’ time.
However, gold also possesses elemental properties that has made it an ideal metal for money throughout history.
Sanat Kumar, a chemical engineer from Columbia University, broke down the periodic table to show why gold has been used as a monetary metal for thousands of years.
The Periodic Table
The periodic table organizes 118 elements in rows by increasing atomic number (periods) and columns (groups) with similar electron configurations.
Just as in today’s animation, let’s apply the process of elimination to the periodic table to see why gold is money:
- Gases and Liquids
Noble gases (such as argon and helium), as well as elements such as hydrogen, nitrogen, oxygen, fluorine and chlorine are gaseous at room temperature and standard pressure. Meanwhile, mercury and bromine are liquids. As a form of money, these are implausible and impractical.
- Lanthanides and Actinides
Next, lanthanides and actinides are both generally elements that can decay and become radioactive. If you were to carry these around in your pocket they could irradiate or poison you.
- Alkali and Alkaline-Earth Metals
Alkali and alkaline earth metals are located on the left-hand side of the periodic table, and are highly reactive at standard pressure and room temperature. Some can even burst into flames.
- Transition, Post Transition Metals, and Metalloids
There are about 30 elements that are solid, nonflammable, and nontoxic. For an element to be used as money it needs to be rare, but not too rare. Nickel and copper, for example, are found throughout the Earth’s crust in relative abundance.
- Super Rare and Synthetic Elements
Osmium only exists in the Earth’s crust from meteorites. Meanwhile, synthetic elements such as rutherfordium and nihonium must be created in a laboratory.
Once the above elements are eliminated, there are only five precious metals left: platinum, palladium, rhodium, silver and gold. People have used silver as money, but it tarnishes over time. Rhodium and palladium are more recent discoveries, with limited historical uses.
Platinum and gold are the remaining elements. Platinum’s extremely high melting point would require a furnace of the Gods to melt back in ancient times, making it impractical. This leaves us with gold. It melts at a lower temperature and is malleable, making it easy to work with.
Gold as Money
Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.
Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.
Animation: How Billionaires are Preparing for the Next Bear Market
No one likes to lose money, even if you have billions to spare. See how the world’s most elite investors – like Ray Dalio – are protecting themselves.
How Billionaires are Preparing for the Next Bear Market
No one likes to lose money, even if you have billions to spare.
It’s why the prospect of a bear market – a prolonged downturn which sees stock prices fall by at least 20% over two months or more – is something that keeps even the world’s most elite investors awake at night.
To hedge against this concern, the world’s billionaires use a variety of strategies and tactics to protect their wealth, including setting up their portfolios with specific asset allocations that can help soften any blow caused by an extended market downturn.
Today’s animation comes to us from Sprott Physical Bullion Trusts and it highlights a strategy being used by billionaires ranging from Ray Dalio to John Tudor Jones II.
Because market sentiment can change so quickly in the market, these elite investors protect themselves by having diverse portfolios that include uncorrelated assets.
While this sounds complicated, uncorrelated assets are simply investments that don’t move up or down in the same direction as the other asset classes in the portfolio. A small allocation to these uncorrelated items can help protect the value of a portfolio when market sentiment changes.
The King of Uncorrelated Assets
What kind of asset classes can be used for this kind of purpose?
While options like real estate, commodities, and cash can contribute to a more diversified portfolio beyond traditional stocks and bonds, many experts say that gold is the undisputed king of uncorrelated assets.
The price of gold doesn’t usually doesn’t move with the wider stock market – and often, because of its history, the yellow metal can even increase in price during the course of a bear market.
Here are some of the reasons billionaires turn towards an allocation in gold:
- Gold has acted as a store of value for thousands of years
- Gold can lower the volatility of a portfolio
- Gold can act as a hedge against inflation in some scenarios
- Gold is a traditional safe haven asset that investors flock to when the market goes astray
To kick off 2019, a new billionaire jumped onto the gold bandwagon – along with previous advocates such as Ray Dalio, David Einhorn, John Paulson, and John Tudor Jones II.
The newest entry to the club is Sam Zell, the pioneer behind real estate investment trusts (REITs). He bought gold for the first time in January, citing that it is “a good hedge” and that “supply is shrinking” as new mine discoveries dries up.
With market volatility back in the fray, it’ll be interesting to see how many more of the world’s elite investors also jump on the bandwagon.
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