Today’s guest, Tom Taulli discusses commodity investing and more specifically, the historical case for investing in gold.
While the book is quite broad in its coverage of commodities, Tom and I specifically discuss gold — it’s top of mind for many investors and I wanted to learn more.
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Today’s guest is Tom Taulli. He’s a prolific author. His most recent book is called “All About Commodities.”
We’re going to focus specifically on gold, because I think that’s an issue top of the mind to everybody. But the book, “All About Commodities,” is a true overview of the entire commodities investment field, everything from using futures and options to enter the commodities market, some risks to the trading, the ways to identify patterns to help you make better decisions, and even dealing with using funds to access commodities, the benefits and disadvantages to those.
I focused specially, again, on gold, because I think that’s most interesting to people right now, but the book is definitely broad. If you’re interested in learning more about commodities, definitely check out the book. I’ll turn it over to Tom.
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Tom: My name is Tom Taulli. I’ve been in the investments world for, probably, 20 years. I’ve written nine books on investing, anywhere from topics like short selling to investing in technology, IPOs, hedge funds. Now I have a book out on commodities.
I tend to focus on those areas that maybe the typical investor may not be familiar with, and provide some coverage on it and some techniques and strategies on how the retail investor can take advantage of these new approaches to investing and make it so they can be successful. With what’s going on in the world today, I do think you do need to have some new approaches to investing. It seems like the old ones may not work as well as they used to.
Zack: The hardest part of investing is forecasting the future. It’s like meteorology, in that sense.
Tom: We have a hurricane coming our way right now. We’ve had nine different instances in the last year, here in the United States, where weather has resulted in destruction of at least a billion dollars, with the tornadoes and flooding. When it comes to commodities investing, you need to understand the weather.
Zack: Just to understand a little bit more about your background, do you also manage money, or are you focused more on the content, the research side of the business?
Tom: I focus on the content research side. I do have my own money. I do, to some extent, manage money for people that I know, but I don’t do that as profession, when it comes to institutional money or as an ongoing business. It is something that I’ve thought about in the past. On the commodities side, it’s actually hard to find managers in this area. It might be an opportunity down the road, but for the most part, it’s a close group of people that I work with.
Zack: You’ve written a total of nine books. The newest book is on commodities. Why commodities and why now?
Tom: Why commodities is that it’s something I’ve been interested in for a long time, and I’ve invested in for a while. What I saw is that there weren’t many good resources on the market.
This is the same thing as my IPO book, 12 years ago. I was investing in IPOs. I had to learn about it on my own. I had to go on Edgar and look at the filings. It was not easy, and if it weren’t easy for me, it would not be easy probably for a lot of people.
I came to look at it as an opportunity to help investors who want to understand what’s happening. Commodities is increasingly becoming an asset class for major institutions. I suspect that more and more retail investors want to understand it. So I saw a huge opportunity to participate in something, which I did with IPOs and did with short selling.
I’ve seen this movie before. I write mostly for the retail investor. It took about a year to write and a lot of research, a lot of time. It was a tremendous learning experience. Most of my experience has been in equities. Now I’m diving into futures, options, more on ETFs, global economics, and so forth. It’s been a great experience.
Zack: That’s awesome. If you’ve seen the movie before, I guess you can tell us how it ends, right? Just kidding.
Tom: That is a good point. I wrote my IPO book that came out in February 1999. We had a year and a half left in that parabolic move on IPOs. Hopefully, my commodities book is not a telltale sign that the market’s hit its top. I don’t believe it. There are so many forces at work that will drive commodities. There may be certain segments of commodities that will go into a bear market, but I don’t think they will all go into a bear market.
Zack: We’ll come back to that point. Truly diversified portfolios, at the endowment level and things like that, commodities always played a part in their allocation.
Tom: That’s a good point. The Yale endowment or Harvard, they were at the forefront of moving into alternative investments, and that included not just private equity and venture capital, but also exposure to commodities. That’s been going on for decades. That’s not a new phenomenon.
What caught me as a surprise is, a couple weeks ago, I saw an interview from the president of Black Rock, the biggest asset manager in the world, and he’s recommending to clients 20% exposure to commodities.
Zack: Wow, 20?
Tom: 20. I almost fell out of my chair. I don’t even know if I would want to recommend 20%. It was not just, “Put it all in gold.” It was a cross-section of commodities.
You probably don’t even realize you have exposure to commodities with some of the stocks you buy or some of the funds you invest in. He was making a broad statement. But it’s becoming more and more of an approach for financial planners to get some exposure to this, maybe not necessarily 20%, but some.
I think it’s here to stay. It’s becoming normal, whereas 20 years ago, it was more of a sophisticated investment. Now it’s getting easier for investors to get into this. You’re seeing institutions increasingly and hedge funds increasingly get into this, and the retail now. So I think it’s here to stay.
Zack: 20%. That’s amazing.
I told Tom before we started the conversation that we could probably spend an entire interview on each one of the different commodities that he outlines in the book. I thought it would be useful to stick with gold just because, given the huge price runs it’s had, it’s top of mind for a lot of investors.
Can you give us a little intro into gold investing, how gold is used, the different ways people can invest in gold?
Tom: I have a chapter on precious metals in my book. I met with someone last night. I gave him a copy of my book, and the first chapter he went to was gold. That may say something about what’s going on in the world today.
Gold has a great history. We’ve had wars over gold. We may have wars in the future over gold. You never know. What I think has happened is a couple of factors at work. Gold is getting harder to find. There’s no question about that. Some say we may be at peak gold.
Zack: Just like the peak oil theories?
Tom: Exactly. If you look at any commodity that’s mined, we’re reaching limits, or we seem to be, on commodities, and gold is no exception. You have a tight supply, and then on the demand side, it’s not just regional demand. It’s people in China, people in Saudi Arabia, people in India, people in Russia are buying up gold.
You’re also noticing, this year, a new phenomenon, where the central banks are starting to increase their ownership of gold. Keep in mind, a lot of the gold that exists in the world is still in central banks, sitting in vaults under the New York Fed, just collecting dust.
A lot of the gold is already owned. There’s not a lot of supply. Demand is going up. Gold has traditionally played a role in currencies. With instability with the dollar, instability with the euro, no one can really get into China when it comes to currencies, investors are looking to it as a currency as well as a hedge.
I can understand why gold has had the surge that we’ve seen. I can also see why we’ve had the volatility, because you have so many players in the market, and you’re seeing more retail investors come in. I suspect we’ll see more volatility.
In terms of investing in gold, you can do it the old fashioned way.
Zack: Before we move on to how we do it, can we talk about where that demand is coming from? You mentioned two buyers of gold. Some are individuals in emerging markets, and the others are central banks. Can you talk about why there’s increased demand in both of those parties?
Tom: On the central bank part, look at, say, China. They’re holding a lot of dollars, and they may be a little concerned about what the value of those U.S. dollars may be in the next ten years. They’re buying gold, I think, as a way to preserve some of the value of their currency.
Zack: For them, gold is more of a story about the weak dollar.
Tom: Weak dollar and instability. It’s a bit of a safe haven. Where do you put your money in times of insecurity? When it comes to central banks, it’s more of a currency issue and a reserve issue.
In the United States, a lot of our reserves are actually covered by gold, and that’s the case with other countries around the world. But in emerging markets, I think in China it’s only a couple percent of their reserves are covered by gold. They’re playing some catch-up on that.
Zack: Has gold really become the new safe haven, over other types of hard assets, like real estate or something like that?
Tom: At least for now, until it isn’t. I don’t know if it’s the new safe haven. It’s been, historically, a safe haven. I think that’s the other attraction. During the ’70s, when we had stagflation, gold became a place to put money. During the Depression, the U.S. government resorted to outlawing the ownership of gold.
Zack: I read about that recently. Over five ounces, or something like that, they outlawed. Something crazy.
Tom: They actually confiscated gold from people during that time, because gold was perceived as, in times of instability. I think, if you go through hundreds of years of history, you’ll find that gold is perceived as just being a safe haven. It’s not as deep as, say, the Treasury market. I don’t think it’s the perfect safe haven, because of that.
Zack: Because of the potential of confiscation?
Tom: I do mention that in the book. There are people that are concerned about that possibility.
Zack: You compared it to a Treasury bond, and you said it wasn’t as big of a safe haven. I’m just trying to find out why.
Tom: What I mean by that is the market isn’t as big.
Zack: Okay, fine. Understood.
Tom: There’s a limited supply of gold, whereas there, essentially, is an unlimited supply of Treasury bonds.
Zack: Just keep issuing new debt.
Tom: Who knows. Maybe tomorrow we may even get more, with Bernanke. That’s the nice thing about the safe haven is you can’t print gold. You can always print more Treasury bills and dollars. You can’t print gold. But the fact that you can’t print gold means that it’s not as big a market. When you have trillions of dollars moving throughout the economy, it’s not the most effective safe haven, because it has limited supply. I think that’s a problem there.
Central banks, it’s all about currency. It’s all about reserves. That’s been a big change. Over the last ten years, there’s been a lot of reduction in gold holding, and that’s starting to reverse.
On the retail side for demand, or investment demand, I think a lot of that is driven by these new ETFs like GLD, that make it extremely easy for just about anyone to buy gold. On a daily basis, you’re seeing tons of gold move in and out of those vaults.
Zack: Do you know how big of holders the ETFs have become of gold stock?
Tom: GLD, this week, became the biggest ETF in the world, bigger than the S&P 500. John Paulson, who’s one of the top hedge funds managers . . .
Zack: Or he was.
Tom: The former great hedge fund manager. He owns 31 million shares of GLD. Soros had a big position.
Zack: My question was, what percentage of the global gold stock do these ETFs hold? Are they the biggest holders now? I’m just trying to get an idea in terms of scope.
Tom: They’re still a very small proportion of the actual amount of gold, when you look at what’s in central banks. It’s very small. Look at Libya. Apparently there’s hundreds of tons of gold, and no one seems to know where it’s at right now.
Zack: Better gold than nuclear weapons, I guess.
Tom: There are a lot of countries all around the world. There’s also Venezuela. They’ve nationalized their mining industry and they’re recalling gold back into the country. A lot of the gold we never see. It’s in vaults that countries own. That’s where it is right now.
Zack: Given everything you’re seeing, do you think the parabolic rise in gold is sustainable?
Tom: I’ve looked at the history of finance and bubbles and manias. So far, from what I can tell, no parabolic move goes on forever.
Zack: In the end, we all die.
Tom: We all die. We’ll run out of greater fools at some point. The thing is, now, it’s a global market, so the pool of fools has increased substantially. You could probably have a parabolic move that’s even more sustained.
Someone at The Wall Street Journal or MarketWatch recently compared gold to the NASDAQ during the ’90s. It’s tracking in a very similar way to what gold has done in the last ten years. When NASDAQ had its parabolic move, it was from 1998 to 2000, a good two years.
When markets go crazy, they can go crazy for a while, and they can go to heights that are just unbelievable. That’s the nature of a bubble. I don’t know if we’re there yet, but if it goes parabolic, and it goes up every day, and it goes to heights that are just unbelievable, as an investor I’d be very careful about holding onto gold.
I still think there’s room on the upside, and I think there will be continued volatility, but I don’t think we’re at that stage where we’re at top of global.
Zack: I see a lot of research reports or mainstream media look at gold prices in terms of inflation, or even in relation to other commodities, some type of ratio. Are those insights useful? Is that useful to try to get a handle on whether we think gold is expensive or cheap, on a historical basis?
Tom: There are relative valuations comparing gold to the Dow or gold to the price of silver. Unfortunately, the ranges are so wide, there’s not much you can do with it. The only time is, when these go to such extremes, that they’re so out of whack. But even then, if we’re in a bubble, those metrics probably don’t matter anyway. Markets could go up another two years and go crazy for another two years. When investors look at valuations right now, a lot of it’s about technical analysis: 200-day moving averages, breaking through support lines, or resistance. You see a lot of that in the market.
Then you have Jim Rogers, or folks like that, who are the fundamentalists. They look at supply and demand, what’s going on fundamentally around the world. That’s another approach.
The ratio analysis, from what I’ve done through my research, it’s not the best predictor unless it goes to extremes. Even then, the timing of it is extremely difficult.
Zack: Are we near any extremes on a ratio basis?
Tom: I think we’re near extremes when you compare it to equities.
Zack: What about the silver?
Tom: The gold to silver, I don’t think we’re at extremes on that. If you look at the other asset classes, there are some warning signals there. You have gold going up a lot, and then we had a crash in the stock market at the same time. Both are going opposite directions. That tends to pull the ratios out of whack too.
Zack: I cut you off before. You were going to talk about ways investors can get access to gold. I want to hit on that and then end with some resources. You mentioned your website. You send out a newsletter that has information on precious metals and other commodities. Other resources that you could recommend, if people are interested to learn more about gold or other commodities, that you find useful, that you recommend to other people.
Tom: Sure. First of all, how to invest or the ways to invest, there are so many ways to invest in gold. You can buy futures or options. Before you do that, take it slow. Maybe you want to take a course.
Zack: Leverage hits both ways.
Tom: Leverage was really good until the last two days in gold. Had you started three weeks ago, starting off your career in futures, you would have been a rock star until . . .
Last night, it sounds like the CME increased the margin requirements on gold. That’s actually helpful, because you’re not as exposed to the leverage. You need to be in those markets every day. You need to understand the intricate rules. As a retail investor, unless you’re really committed to it and want to take the time to learn about it, stay away from that. There are other places to go.
When you look at gold, there’s the gold – bullion, coins, and so forth – and then there are the miners that explore and produce gold. In a bear market, miners don’t do very well, because all stocks don’t do well. We’ve actually seen that this year, where gold goes up but the miners are lackluster.
I think we’re actually going to see a big move in some of the miners over the rest of the year, just because the gold price is so high. These companies, even though their costs are increasing, they’re going to wind up having some big profits in the next two quarters.
The way to play gold miners is an ETF like GDX, just a real easy way to play that game. If I were to play individual stocks, I would just stick to the well-known stocks, unless you want to go and do lots of extensive research on understanding reserves. Each country is different.
Zack: Does GDX also include some of the junior miners?
Tom: No, but there is a junior ETF. I don’t look at it as much, but I can get it to you.
Zack: I think it was one of the Van Eck ones, right?
Tom: Yeah. The GDX looks at the big companies. If you’re starting in this area, you might as well start with the big ones. Once you get deeper in, you might start on the juniors, which tend to be more in the exploration stage, a little more risky.
Zack: It’s GDXJ, but the way.
Tom: Okay. Exactly, that’s the junior one. Now, if you want to physically own gold, you can do that. You can go to a dealer.
Zack: Your local vending machine in Saudi Arabia.
Tom: CoinStar might start selling gold pretty soon.
Tom: We might be able to get it through the mail from Netflix, stream it.
You can own gold, but you need a safe. You need some insurance. That’s a whole other ball of wax. I like GLD. It’s backed by gold. It’s legitimate. Big-time investors like Paulson and . . .
Zack: What about those rumors, those new ETFs that came out, there’s some conspiracy theory that GLD is not fully backed by all the gold stock.
Tom: That’s the fun thing about gold. There’s no shortage of conspiracy theories. They’ve been going on for a lot longer than we’ve been alive, and they will go on after we die. I’m convinced of that.
Zack: That’s what makes prices go up and down.
Tom: That’s what makes markets markets, and what makes gold such a fun investment. You have people that say that, but then you see George Soros, not an idiot. If he’s going to invest billions of his own money, he’s going to make sure it’s done right. You see top investors at the biggest institutions, like Black Rock in GLD.
It’s backed by State Street, the fund that works it. For them to perpetuate a fraud, especially when it’s become the biggest ETF in the world . . . if it does turn out to be a fraud, we’re looking at Enron-type exposure to people’s livelihoods and going to jail. I just don’t see that.
Now how they do it, logistically, I marvel at that, especially as it gets big and we’re seeing tons and tons of gold in these vaults. Every day it goes in and goes out. Logistically, it just seems like an enormous challenge to me. I can see why there are conspiracy theories about it.
I think it’s a lot safer than actually having an armored truck come to your home, deliver gold to you, put it in your safe and get insurance. I would think there’s still some risk with that as well.
You’ve got the ETFs with the miners, whether you want to go with the big guys or the juniors. The GLD ownership of gold.
If you want to buy bullion, you can do that as well. Just be careful. Make sure it’s a qualified dealer. Kitco or Monex are great firms, if you want to go that route. There are also those that will store it for you, in their own vaults, which makes it easier. If you want to go that route, fine.
Now, you said there was a conspiracy that there’s no gold there. The other conspiracy theory is what happens if, say, gold becomes illegal in England? Might they confiscate that in the GLD? Or if there’s a U.S. based firm that has gold . . . it’s happened before. It could happen again. That is definitely a possible risk.
We’d have to go into a depression. We’d have to have a horrendous economic downturn, but it could happen. Then again, you’ll probably be on the street, hunting for food and things like that, so it probably won’t matter too much. There is always that possibility of a doomsday.
Zack: Any other ways to do it? There’s obviously diversified commodity funds, where you get a piece of gold exposure.
Tom: There are funds that have an index of it, and maybe 2% or 3% of it is gold. What happens with these indexes is that, when a commodity grows very quickly, they rebalance the fund. Every year, every six months, they try to rebalance the fund and bring it back into some type of normalcy, so a huge percentage doesn’t become gold. That’s another way.
I look at gold as a hedge. If I were to look at it that way, I would just buy GLD, something where I know what my exposure is. With an index, that can be a moving target, and it may not get you as much as you want. Also, some of these indexes are heavily weighted to energy, too, because energy is by far the biggest commodity. When you look at these indexes, they tend to be skewed.
Zack: Crude could be 40%, 50% of the entire index. Right?
Zack: Let’s finish up with some of the resources you can point people too, that you find useful.
Tom: Speaking of Kitco, Kitco actually has a great resource, Kitco News, of all the information on precious metals. Great resource I go a lot to. Mining.com is a great resource.
The one thing I’ve noticed about a lot of these sites is that there’s so much information on it, you can get lost. What I actually do is, to make things easier, I go to Google News and do alerts, say on gold or bullion or copper. Then it comes to my email and I can sift through some of this. That’s what I do. It goes and hunts out for me different resources, and it tends to find some really good ones, broad cross-sections.
The other thing to do that’s helpful is, if you’re interested in a commodity, let’s say gold, the World Gold Council, gold.org, has great resources. Sometimes industry associations are a great place to go learn about a commodity. If you want to go learn about nickel, there’s the Nickel Institute. Coal, there’s the World Coal Institute. The Aluminum Association. Agriculture has a whole variety of different associations and websites. Those are great places to start to learn about what these commodities are and how they operate. Google News is a tremendous resource.
Then I have something called Commoditiessnap.com. I have a daily newsletter, where I do commentary myself. I have links across precious metals, energy, industrial metals, the soft, like corn, and wheat, and so forth. I have links, every day, to things I find that are interesting.
Zack: That sounds like an awesome resource. Someone once also mentioned to me, a portfolio manager, that he read the S-1, the initial filing for the GLD IPO, and he said it was one of the best resources on the entire gold market that he’s ever read. I’ll just add that one to the mix.
Tom: That’s a great point. Actually, writing my book, I did that for GLD, for the gold chapter. There’s a physically-backed copper ETF, and I read through that. It had some great historical information about some of the dynamics of the market. That was a great resource.
With my book, I checked all that information and tried to present it in a very understandable way. The S-1s can be a little intimidating, but they’re great resources to help understand the markets.
Zack: Tom, this was a great conversation. Thanks for your time today.
Tom: Thank you very much. Good luck on everything, and let’s see what happens to gold.