SKEPTIC’S GUIDE TO INVESTING

Beyond the Vault: Why Gold Matters When Markets Falter

• Steve Davenport, Clement Miller

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Gold serves as a portfolio stabilizer during volatile markets while offering upside potential when traditional assets falter. We explore how this precious metal fits into a diversified investment strategy during uncertain times.

• Gold ETFs provide liquid exposure without needing physical storage
• Target allocation of 5-15% depending on market conditions and risk tolerance
• Gold demonstrates negative correlation to stocks during market downturns
• Multiple demand sources create price support: central banks, industrial use, cultural significance
• China's pursuit of gold backing for currency contributes to consistent buying pressure
• Writing covered calls against gold positions can offset ETF expenses
• Historical context includes Roosevelt's 1930s gold seizure, though unlikely in modern context
• Gold currently represents 7-10% of potential backing for US dollar
• During extreme volatility, allocation could increase to 15-20% for protection

Share this episode with fellow investors seeking to understand how gold might strengthen their portfolios during uncertain times.


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Steve Davenport:

and gold.

Clem Miller:

Welcome. This is Steve Davenport, and I'm here with Clem Miller from Skeptic's Guide to Investing, and today we want to talk about all the glitters gold. What is gold? How does it affect your portfolio? Is it something that you want to have in your rings and around your neck, or is it something you want to have in your portfolio? I think that the talk about gold is an interesting discussion because investment people will argue forever about whether it's an alternative, whether it's a personal asset or whether it's a key to your portfolio. So today, clem, I'd like you to try to if you could explain to me why you think gold belongs in your portfolio versus cash or other assets, and how do you figure out how it should be sized.

Steve Davenport:

Okay, thanks, steve, and welcome everybody to our show today. So let me just say first, steve, that I'm trying to stay away from all these conceptual issues that you know angels on the head of a pin, issues about whether gold is a currency or a commodity or you know whatever. It is right. I'm trying to stay away from that. The question is does it work as part of a portfolio? That's the only question. Does it work as part of a portfolio?

Steve Davenport:

And indeed, this year so far 2025, I've had gold as a significant part of my portfolio and it's helped in this current environment of a declining market and also a volatile market, and gold has generally, over the last year to date, has generally been rising and rising pretty significantly, and so the reason for that, I think, quite obviously, is that gold is considered by people in the market as a relatively safe asset.

Steve Davenport:

Safe in the sense that it is less volatile than other things that you could purchase, especially stocks. And the way I invest in gold is I invest in a gold ETF, and there are several out there. I'm not going to recommend a particular one on this podcast, but there are several gold ETFs out there and that's how I invest in them. That's a liquid way of doing it, so you don't have to have gold bullion in your dresser drawer or under your bed, although certainly you could have gold coins I know people have gold coins but I want to remain kind of liquid so that if you want to sell if I ever wanted to sell some of the gold gold ETF I can certainly do so pretty quickly. But right now, steve, I have in my portfolio I just looked 17% gold in my portfolio.

Clem Miller:

You think that's the upper limit.

Steve Davenport:

I can see myself. If the market continues to have, or if it has another round of volatility like what we saw around the time of the tariff announcements, I certainly would be inclined to increase gold, but I think, as it stands right now, I don't intend on increasing it over the next couple of weeks, if things seem to be relatively stable, but at the same time I don't intend on decreasing it either. If I'm going to edge back up in stocks, I'm going to do so by taking money out of cash.

Clem Miller:

Yeah, I mean, I think the whole concept of gold I like a lot better than other ETFs that are based on futures. So USO is a US oil and it's based on future contracts and that has caused problems, as there is extreme volatility because sometimes your positioning can be just a little bit off and it gets amplified. So I think that the gold ETFs that are physical, meaning there's a vault in London or in Chicago or in New York where the gold is being held, and so you are literally owning a piece or a share of that reserve in the physical asset. I like that. I like knowing that when I own silver or I own gold, I'm owning the underlying metal, and the underlying metal has demand from three or four sources.

Clem Miller:

When I look at what's happening with gold, I'd say one of the things that is a little bit hard to fathom, but it is the way it is is China is trying very, very hard to get more and more gold. They want their currency to be somewhat backed by some amount of gold, but because their economy has been growing so fast and because they don't have their own natural resources, in a large extent they are consistent buyers of gold in the marketplace. And when I think about it going up a lot, I think about all of these countries and sovereign wealth funds who are sitting there saying what do we do? Should we own this, should we have more of a certain currency? And I think that there is going to be gold as a place of safety for both governments and individuals. So I like that safety nature. But then gold also has the use in all kinds of plating and other chips and other manufacture. That is going to be a constant demand. And so when you look at it and then you look culturally, in India and other countries, gold is considered, you know, a piece of their culture and that when you have weddings or you have big events, you celebrate it with gold.

Clem Miller:

And so to me, as a person in the United States, I never realized until I started to research it how widespread gold as an asset is, not necessarily as an investment asset, but a demand that is regular from generation after generation of cultures around the world. And to me what that does is that puts a floor under it. For me, that puts you know. I know that there's, you know, different countries are going to do different things, but I look at the financial system and I think about people getting more and more nervous about paper assets and crypto assets, and I see that people aren't running to crypto. People are running to things that they feel more confident about, and gold is it.

Clem Miller:

And the question is you know not if it is going to be in demand, but how much demand? And does the price? Is the price inelastic? Can it go up a lot?

Clem Miller:

I don't know, but I think, as long as we realize that when people are scared, they tend to do one or two things they look for alternatives outside the market, they look for bonds and cash and they look for gold. Look for bonds and cash and they look for gold, and therefore, if you're looking to stabilize your account, then I think it does have a place in your portfolio. The question I have is how much place? Because I think this whole question about alternatives, bonds and gold is they're all pieces. They all work for you. How do you decide between these choices? And then you know what are the advantages of physical gold and the idea of having an ETF, I think is a great creation, but you know the different providers and I'm happy to discuss it. I think that I'll get into a little strategy I've used for some clients who were very nervous about gold and they wanted to buy gold because they were afraid of the markets. But what is it about gold in your mind that separates it from some of these other alternatives?

Steve Davenport:

So you know, I think you know we're talking about a time when we've got war in Europe, we've got war in the Middle East, we've got a gigantic trade war which has been launched, we've got political uncertainty in the United States, we have issues with the bond markets, which we'll get into separately in another episode there's a lot of volatility and uncertainty in the financial markets and I think gold offers some stability with some upside general upside at least we've seen it so far in 2025, that you know, really cash doesn't, you know, doesn't give you. I see gold as being a stabilizer during a very difficult time worldwide, geopolitically and policy-wise.

Clem Miller:

Yeah, I mean it comes down to correlations, right, because when there is a rush from equity assets, that is risk and there is a desire for more safety, they seem to perform. I don't know what correlation you'd use in your analysis, but I think it's probably negative. I think it's probably a negative. 0.4 is how I model it, but I think that it's probably a negative. 0.4 is how I model it, but I think that it's not a negative one. You're not going to get for every 1% drop in the technology and stocks. You're not going to get 1% increase in gold. But if you got a 4% increase for a 10% decline, that's a pretty good alternative.

Clem Miller:

So I like the fact that the correlation seems to hold up better than other assets. Yeah, I think that. I think that that at the heart of it, is why we're both quantitative. You know we're both cfas and we both look at things and say if it doesn't perform, then why would I add it? And I think that that what it performs at is offering that relief. And I think you know how do you like the idea of just having one ETF that has gold versus having gold miners and other people who produce gold people who produce gold.

Steve Davenport:

Well, you know, the problem with gold miners is that first of all, it's cap weighted if you're doing an ETF, and so you don't really know if the stocks with the highest caps are those which have sort of the lowest cost production, Because that's you know, when you're investing in mining companies, you really want to look for the companies that have the lowest cost mining production and those are big reserves, you know Well, but not just reserves.

Steve Davenport:

You know you could have all the reserves in the world, but it could cost too much to get them out of the ground. You want a company that is going to make a lot of money regardless of what the gold price is, and so a market cap weighted ETF doesn't necessarily give you that. I mean, if I wanted to look at a gold miners, what I would look at is all the major gold miners and do a lot of work to figure out what their profitability is when gold prices are low. And you know, honestly, you know I've got, you know I've got more. I've got better stock picks I can do than looking around for the cheapest gold miner OK, that's how I look at that picks I can do than looking around for the cheapest gold miner Okay.

Steve Davenport:

That's how I look at that.

Clem Miller:

Yeah, I think that there's more security risk and if you really just want the pure commodity, I think that's what you know there's people who say use futures. There's people who say you know there's different way to structure this. I think that the ETF is a great way because it is in physical item, being managed and stored for you, and it's got some expense the storage and so the way that I've tried to offset some of that expense of the ETF cost is to write calls against the ETFs. So in doing so, I'm not trying to generate 4% or 5%. What I'm trying to do is to make it costless in terms of covering the ETF cost and also add a little bit more income. So if I can turn gold from an asset that costs me 40 basis points and add you know, add one and a half to 2% from writing call options, now all of a sudden you know I've got a yield of one, I've got no expense, I've covered the expense of the gold and you know if it goes down, I might make more than one or one and a half.

Clem Miller:

So the volatility is something that you should always be thinking about and that, in my mind, is another way to supplement this idea of it as an asset class. I think that we, as investors, need to always be looking for is there another way to take this asset and do something different with it? I think the idea of using options isn't always for everyone, but it is for some people that might say you know, I got a pretty large portfolio and I don't like this expense for this asset. I'd rather buy the companies. There's trade-offs and I think that our trade-off is what's going to help the most amount of people, and I think from a skeptic's point of view. I want to be clear gold is an asset and it should be included in the mix of things you think about when you're trying to decide on how to find safety in a volatile environment.

Steve Davenport:

Now, steve, let me just raise one more thing.

Steve Davenport:

We always try here on Skeptic's Guide, to present sort of both sides to an issue right, and so I'm going to present the potential downside of gold.

Steve Davenport:

I don't see it as having anything more than a minimal probability at this point, but, just to be clear to everybody, there is a potential downside if you look at the history of gold, and that is back in the 1930s.

Steve Davenport:

Granted, it was a long time ago now, but back in the 1930s Roosevelt issued an order to seize all the gold, and he did so in order to try to strengthen the US dollar, so that the dollar would have more gold backing for it. And you know it was only much later on, with Nixon, that we went off that particular gold standard. But you know there was a risk at that time, big risk, that those who held gold would essentially have all their gold expropriated, and so you know that's a risk that's out there. I attribute a very, very minimal probability to that happening, but you know it could happen and it's, you know, in an absolute currency collapse scenario, you know one option the government could turn to is seizing people's gold, and so I think we need to be mindful of that possibility, even though the possibility, I think, is extremely minimal at this point.

Clem Miller:

ED HARRISON. Oh, I agree, I think the US as a currency backed by gold has obviously been off the standard for a while. So I think I'm trying to find what is the ratio.

Steve Davenport:

But I think it's been some MIKE GREEN the ratio of gold to dollars. Ed HARRISON Correct MIKE GREEN Well-.

Clem Miller:

ED HARRISON. Us Treasury owns this much gold and this is the amount of dollars in currency, the money supply.

Steve Davenport:

Yeah, yeah, so I mean, that would be an argument. So, whatever the number is, steve, there is vastly more dollars relative to gold ounces of gold than there was back in the Roosevelt days, and so-.

Clem Miller:

I agree.

Steve Davenport:

I'm just saying it's yeah well, no, the logic, the logic that that that forced Roosevelt, or encouraged Roosevelt to uh, to seize the gold uh was because gold back in the thirties was a higher proportion of a higher proportion could be a higher proportion of backing for the dollar. But today the amount of money supply that's out there probably would not be gold, would probably back so little of it that it wouldn't be worth expropriating.

Clem Miller:

Well, I think the number is somewhere between 7% and 10%, if I look at my past research on this, yeah. So I think that, if you think about China, is somewhere around 1%. Yeah, and it would take all of the gold from all around the world for China to get to 5% or 6% and they couldn't maintain it because their economy is going to grow faster than the underlying asset can be taken out of the ground. So when you look at the size of the Chinese economy, their ability to get to a backing equal to the dollar is one of the main reasons why people say it will be very hard for people to ever adopt the Chinese currency as a replacement to the government. So I look at that relationship and say China's going to try, but as long as the US and these other countries are the main holders, everybody would have to acquiesce to give China their gold in order for them to be again have a currency that is backed as much as the US is. Is it symbolic? Largely? But there is some underlying theory here that says when you want stability, you need to be able to say our currency has some backing.

Clem Miller:

And, yes, inflation is one of the reasons why people own gold. Inflation because inflation. Is it a perfect hedge to inflation? No, is it a good hedge? Yes, and so that's why I think there's uncertainty, there's war, and the last one is inflation as to a reason to own gold, and I think I guess I'd like to wrap up by saying to, let's say, we have the average listener out there, and that listener is 65, 35 traditionally, and he looks at his portfolio and he says I'm not sure I feel I want all those bonds, I'm not sure I want all that equity. What do you think is a mix that you would put into gold? That is just enough, though it has an impact, but not too much that it takes over the portfolio.

Steve Davenport:

So I would say, in normal times, which maybe 10% max, but 5% more like it. But, as I said, today is a different environment and that's why I'm up to around, as I said, 17% and could potentially go higher if things become more volatile.

Clem Miller:

Yeah, and I look at how inflation hurts our fixed income and I'd say first I'd probably have 30 percent in bonds and 5 percent in gold. And then I'd say you're going to start to remove some of the equity risks, so you take five off of the equity risk and now you get 10. And then I'd say you probably take your next five from equity and then you've got bonds and cash and alternatives. So I think somewhere in that five to 15 range is a good range for people to think about, but for everyone it comes down to do you want to impact your long-term growth by having too much in an asset that doesn't really produce anything?

Clem Miller:

As you remember, I think there was a CIO who we worked with who had certain opinions about gold and it wasn't a productive asset. And my point is it's a productive asset if it fills a role in your portfolio with low correlation. So I like assets to produce, but I also don't want to necessarily get into the selection of each individual gold miner. So I think giving people a guideline of something like 5 to 15 is probably a good space, do you think?

Steve Davenport:

I agree. You mentioned unproductive. I think that probably had something to do with the lack of a dividend yield associated with gold, and you'd want to have less gold in an income-oriented portfolio than you would in a total return-oriented portfolio. So that's what I said.

Clem Miller:

You can add income to it if you're right calls against it. So I mean, when I look at bonds that were basically negative yielding negative yielding I didn't hear anybody telling me about the lack of income that was being produced by your fixed income when everybody ran to buy bonds when the treasuries were at 2%. So I think there's a little bit of hypocrisy in some of the people who criticize gold, because I didn't hear those same people talk about bonds being a horrible asset. But I think this is a good spot for us to call it here. Gold is an asset. Yes, it glitters. Yes, you should own some.

Clem Miller:

And the extreme example I'll use is based on World War II. A lot of people used gold. You. They escaped from Germany. There were many people who sold all their assets, bought gold and then carried it across the border and over to whatever country they escaped to. So, yes, it can be a store of value. And I think we know why crypto was created. It was used by a lot of different underworld and other unsavory actors, and crypto has replaced one of the functions, which is to transport wealth across borders without people knowing that you have that wealth. So I hope we don't have those situations again. But there are people out there who are looking at this as a place where they want to own the physical and not just the ETFs, and I think it's really a different discussion about your personal situation and how safe you feel owning a physical asset like that. So, as an investment, we like it. As a physical asset, I think you could have some of it, but I'm not sure I would be digging big holes in the backyard right now.

Steve Davenport:

What do you think? Clint, I agree with that. Hold it in ETF form and ratchet it up or down depending on your perceptions of market volatility, all right.

Clem Miller:

I'll call it there. Thank you for listening and we hope you'll share and like our podcast and let others know, and also everyone. Have a great Easter weekend, thank you.

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Clem Miller, CFA

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Steve Davenport, CFA

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