[00:00:47]Mike Philbrick: Wait, we do not have any intro music anymore. No, that is right. We are just going to hum a bar and jump straight into it. What happened to our intro music? Oh my God.

[00:00:47]Rodrigo Gordillo: We will do it next time. Lucky we cannot always be perfect. But, welcome everybody to this. This is going to be a fun episode about gold, Bitcoin, precious metals, all the fun stuff that came out of this unique report.

But before I get into it, for those who are new listeners here, I got Mike Philbrick, CEO of ReSolve Asset Management and co-founder of Return Stacked® ETFs. Myself, I am President of ReSolve Asset Management and co-founder of Return Stacked® ETFs. And today we have a special one for us, something we have talked about a lot in the past, Mike. Since the day we met, we have been talking about gold. Back in 2011, gold is very near and dear to my heart given the Latin American angle, and U.S., immigrating to Canada because of hyperinflation, 7,200 percent in six months.

Man, do we wish we had owned some gold back then? So tell us a little bit about the report that we are going to cover, because it was the first time I have read it, and you have all these beliefs, and it has always been part of my portfolio and client’s portfolios, but seeing the numbers that they put out and everything that they talk about, was actually quite awe inspiring, especially given what has happened recently. So why do not you tell us a little bit about the report, the authors, and stuff there.

[00:02:05]Mike Philbrick: Yeah, again, it is In Gold We Trust, and the report is done annually. It is in its 19th year. It is published by Incrementum, which is a Lichtenstein based asset manager, started in 2007. It is in four languages and it really has become the global industry bible on gold and hard asset themes across the world, and probably because it is such an in-depth report. So there is a 400 page report. There is a summary report of 40 pages, and then there is a video summary as well, all of which, depending on where you are, and how much you wanna dig into it, and how much time you want to devote to it, will give you some ideas on how they think about gold.

And I think what is interesting is the track record that they have from just going back and looking through. If we look at 2020’s IGWT or In Gold We Trust Report, that is when I started really paying attention to the report, just because it was such a good summary of what was going on in the world, and they were calling for a $4,800 gold. They talk about how a bull market, or a market evolves. You and I know this. We have been around to know that generally you get an accumulation phase where there is some buying, but it is ridiculed by peers, right? It is frowned upon.

And I would say really that has been the case up until the last year. Even central banks were selling up until the last couple years. Institutions have fairly small allocations. But I think we have transitioned into the public participation phase in the last year where you are starting to see some people pay attention.

And I evidence that from some of the Exchange Traded Fund (ETF) flows we are seeing in North America finally coming into the asset, whereas I remember us talking about it last year, where gold was on quite a run, and having reasonably good performance and assets under management (AUM) in the large ETFs. It was going down.

It was going down, not moving, which is absolutely insane. And that was part of that stealth market where you get that sort of interesting buying. There is a transition happening. There are people that are sick of holding it and there are the new people that are in. And so that was interesting, and last year’s theme was The New Gold Playbook, which was the idea that emerging markets are going to start to demand this. They are going to demand alternatives to the U.S. dollar. And we saw that over the last year. We saw countries like Poland becoming a major buyer. 2023 was a thousand tons, I think, of gold bought by central banks, which was the highest ever, and gold ETF outflows reversed in that second half of the year. So we are starting to see the public and the public writ large, both institutional and retail, catch on.

So this year’s report is called The Big Long, which is an homage to The Big Short, obviously refers to the same sort of thing. The Big Long is be long gold because there is a loss of trust in fiat currencies and institutions and global monetary systems, right? That long-term assets like gold and Bitcoin are somewhat of a contrarian bet, but we are probably now in the fifth inning, if you will, in the middle innings, and institutional allocators, family offices, pensions and retail investors remain heavily underweight.

And by the way, In Gold We Trust report, if you put that, just Google that. You can get this report from Incrementum, and it is free and there is no obligation. They do not take your email or anything like that. So it is quite a good report. Got lots of great stuff that we are going to dig into, yeah, and encourage people to take a look at it.

[00:06:05]Rodrigo Gordillo: So let us start with just, let us start from the beginning, okay, because this is something that I get asked a lot and it is, I think it is an important starting point because as investment professionals, we are often asked to think about investments from the cash flow perspective. What are you investing in? What are the cash flows? What are the dividends? What is the yield that you are going to achieve from these? And that is ultimately what you end up getting paid for, taking the risk and whatnot. Yet, gold is not any of those things. Gold is just this thing that just does not seem to go away.

For thousands and thousands of years, we have used it as a society. It should not have a positive real rate of return, and yet it’s exhibited pretty robust real rates of return, especially in the last 40 years. Why is gold a thing that we should care about? How did we get here?

[00:07:02]Mike Philbrick: It is a very interesting question and one that is hotly debated. To some degree I look at it and say, does the Mona Lisa create cash flow? Does it have value? So if you look at it from the perspective of the Australian School of Economics, that the idea of cash flows is something that is looked at a little bit differently. So I guess I am not actually sure. I am not here to make that argument from the standpoint of, hey, it does not have cash flows, or it does.

What we do see though, is it is a monetary asset and it is a monetary asset that seems to be in demand by central banks, which are running our monetary system. It is an asset that over the last 5,000 years has represented an interest, an asset that does not allow an interest of somebody else. It is not related.

If you own it, you hold it in your own hands, it is yours and it has some value of transaction. And that transactional value is happening between governments, between people, been around for a long time. So I guess I am just not going to fight it and die on the rock that says, it does not have cash flow. There are a lot of things that we buy in this world that do not have cash flow that we perceive to have value in some way, shape, or form.

[00:08:18]Rodrigo Gordillo: Yeah. And it seems, look, it is, there is, I remember having Michael Green on the podcast and having him lay out the case originally, white gold, because we have had many stores of value in the past, right? We have had salt and silver and different types of metals, but gold ended up being one that was plentiful across the whole crust of the planet. So it seemed to pop up everywhere. So if you were anywhere in the world, you somehow mine this beautiful metal.

And then when trade began, that was the one common area that people could see that was a medium of exchange, and then, yeah, when you have every culture have gold, part of their ethos, right? We go back to the history of Latin America, India. It, I think has just, it became ingrained as a store of value and we have now created a whole financial system around it. Central banks own it.

And every single time in our, when we studied gold, it seems to be a very important hedge for global macro volatility, right? That is number one. And then currency basement. Those are the two elements that you can count on when governments screw up from a fiscal perspective, or if when there is war or chaos globally, we have seen a run to gold.

Normally it is a run to the U.S. dollar. The reserve currency used to be the, used to be the U.K. currency and before that many other nations that existed, but that, that took, that reserve currency dominance. But when it became, when the government itself started losing control of their expenditures, gold was always a place that seems to be there for investors.

So from my perspective, it is just something that we have observed that does well. When I look at portfolio construction, I want things that make money over time, but act differently, and create some sort of hedge for different scenarios that bonds and equities cannot do. And we are, it was stealthily making money for a couple decades, and now people are starting to pay attention, which is interesting, this accumulation phase that you were talking about.

Now, let us get into why the recent run-up and gold. You talked a little bit about it, but there is a structural reason and then there are some fundamental reasons. I just talked about some fundamental reasons, which is global macro volatility. That has certainly been an important thing that we have seen in the last couple of years, right, with the Ukraine war and what we are seeing now with Donald Trump, yeah.

But then there is also the structural area that you were about, that you also address, and the structural area is how much, like it is the almost like the stock to flow idea. There is only a set amount of gold. There is 1.5 percent of gold being mined year over year.

[00:11:14]Mike Philbrick: Yep…

[00:11:14]Rodrigo Gordillo: And then, there is another stat that I saw recently,

[00:11:17]Mike Philbrick: … and it costs money to mine that gold.

[00:11:19]Rodrigo Gordillo: And it costs a lot of money to mine that gold and the price, the, it is a ten year cycle to mine it, and the incentives to mine it were the prices of ten years ago when they were like, okay, what is the price? Now we will start the process of opening up this mine. And from a structural perspective, it has just been interesting to see, I did not even know this from the report. I will push it up here. What percentage of, let me ask the audience here, what percentage of peoples’ portfolios, of investors’ portfolios do you think that gold represents? If anybody wants to guess, we will give it a couple minutes while I pull up the slide.

I’ll share my screen here. Anybody have an idea? We got a three. Lance. Lance, nothing. And it says 3%, then we got a one and a five. All right, I am gonna share my screen here. Yeah, it is actually around one percent according to this gold report. So you are looking at, out of the alternative sleeves that you got a 42%, the whole alternative asset class, private equity, private real estate, the infrastructure, art and commodities. Gold is just 1%, and there is a lot of room to run here. Oh yeah. Given that we have had zero adoption for all this time and people are waking up to, it really is the only class asset class that has done really well this year.

[00:12:51]Mike Philbrick: Yeah. And I think, there was that whole process where there was gold trading at a different price in London versus Shin Zhang China, and you saw gold moving from the east to the west and, or I guess from the west to the east. From the west, east, yeah. From the west to the east, rather. And that was where we had that stealth buying, right? And now you are seeing it more proliferate into, and we did not see it in AUM on ETFs like GLD for example.

But now you have seen that, and I was talking to a reporter with the Global & Mail in Canada, and we had done a review last year on this very topic. And it was just interesting to go over it again and see this change in regime from the standpoint of central bank buying of the assets, because they are.

[00:13:45]Rodrigo Gordillo: And this is the one, this is the one that you talked about, right? This is the cumulative gold ETF holdings, right, going flat, and then all of a sudden, you have this demand. Like, the price of gold going up and only now it is starting to pull retail demand for it. Yeah.

[00:14:00]Mike Philbrick: So, the point is it is not too late, right? So if you only have a one percent allocation, or you have a zero allocation, then you know, this is something to consider. And at the moment, as we sit and chat about this on May 23rd, we have got a little bit of digestion going on in the gold market. So it sets up the opportunity to start to think about how you might add assets, hard assets like Bitcoin and gold and how they might complement the portfolio. But yeah, it is astonishing how low the exposure across the asset allocators it has become.

[00:14:38]Rodrigo Gordillo: Here is why it is astonishing.

[00:14:40]Mike Philbrick: In spite of the performance, in spite of the perform…

[00:14:41]Rodrigo Gordillo: Yeah. Here is why it is astonishing, right? Because this is a chart that got me where I am like, if I would have shown anybody, I, this is just, for those listeners where I am going, I am looking at the performance of gold against different currencies from 2000 to today, and it is just a sea of green.

It is not like other non-correlated asset classes that tend to have 50% of the time like commodities, or 80% of the time they are losing money, 20% of the time when there is inflation, they are making a lot of money.

Like, gold has had a phenomenal run, fairly consistent volatility similar to equities, 15% annualized, it is actually lower than equities. And yet, if I would have shown you blind these returns, you would have jumped at this opportunity, until the moment I say it is gold. There is just this stigma about gold in spite of the fact that we had ETFs, central banks buy it, everybody knows about it. There is just none of it in people’s portfolios. So this is what…

[00:15:41]Mike Philbrick: Interesting thing is, it is going to be neat to watch the narrative for investors change, right, because now we are in the public phase of it actually creeping out into institutions, creeping out into retail. And then the question is, of course, how do you put it into your portfolio? How are you going to build it into your portfolio? What are the steps you might take to do? And what other assets might you use that have similar characteristics?

[00:16:07]Rodrigo Gordillo: It is terrifying right now, let us be honest, right? You got two, you got a 25% return last year, another 20 plus percent return this year. It, this is why I like the report because it just, you always want some framing. Okay, where are we? Is it over? Is it now like a 50% bear market for the next ten years?

And some of the key elements about the report was how even like the U.S. 30 year yield is higher than we have seen it in a long time. And then the, and then Germany, the last holdout of prudence when it came to fiscal spend, just finally threw in the towel. And you have seen German bunds yields just pop through the roof.

[00:16:59]Mike Philbrick: And what do we know, or what have we perceived about the relationship between real returns and the price of gold? Previously, higher real returns meant lower gold prices, right? Because the, you could get a real return, but in the face of rising yields, you have gold strength. That to me, signifies a kind of regime shift, that this asset, and they refer to it a little bit here and there in the report, are you playing offense with this asset or are you playing defense with this asset? And previously you were playing defense, right? This is a defensive asset that would actually score a few goals for you, but now it looks like it is turning into an actual asset that can create returns for the portfolio. It is shifting and there is a regime shift afoot as we change into the public participation part.

[00:17:49]Rodrigo Gordillo: So let me show you a chart that I was updating today that we used to use a lot, you and me, Mike. I am actually going to block off some of it first because I will show you what I used to do, because I was quite, again, I know this, it is just when you see it, it becomes a little bit surprising, but I used to always, when I talk to investors, look, you should be as diversified as you can. You are currently in equities and bonds. You should probably be invested in as many non-correlated things that are fairly liquid.

And so I would show a chart from, oh, that is why I do not, anyway, I would show a chart that showed equities, gold, commodities, and currencies. And let me see if I can bring it up. I am gonna bring up an old chart here, but, I, it was, they all ended up at the same spot from 1990 to today. Okay. I am having a trouble bringing up the thing. So equity, that is a great chart too. Once I get it out, I get you are talking about, yeah, tires.

Okay. So, trials and tribulations are going live. Yeah. There we go. So we have, this was from 1990 to 20, what, 2021, 2023. You can see how they all ended up at the same spot. That dark blue line is an equal risk portfolio of all of them. But, since then, the Treasury component has just plummeted, right? It has been like, this is the next chart here. Like that blue line has just, this is a 30 year Treasury, just absolutely plummeted and flatlined from 2023 to 2025. And the winner ends up in the most recent period to be, almost to be gold, right?

[00:19:25]Mike Philbrick: Which follows a period 2011, when gold peaked in its last run to what was it last year at probably around this time, that was a 14 year, 13 year sideways market in gold. And maybe we are on a 13 year sideways market in bonds.

[00:19:47]Rodrigo Gordillo: Yeah. It has happened before, right? And absolutely few people know this, but how, what was the largest drawdown for, in real terms, for Treasuries? This is my favorite Meb Faber quote, is like 65% drawdown in real terms. Absolutely bonkers. And what did well at the time, this is way back in the 19oos, but at the time you could have invested in gold mining stocks. I actually did it in analysis because gold was pegged, but if you invested in gold miners, it did, they did fairly well, which is something that the report also talks about. And an interesting kind of transition away from gold. What did you garner from the gold miners part?

[00:20:33]Mike Philbrick: It that old Don Coxe saying, “when those who know it best, like it least, you got a buying opportunity”. And if there is something that has not disappointed more often over the last few years as gold has actually appreciated, and to see whether you are looking at broad based ETFs, GDX, GDXJ, the juniors in gold, they really have not felt that participation.

There is old, if you get this gearing from gold stocks that you get like a three to one leverage when you buy gold stocks versus just owning the gold, and we have not seen that. We have seen sort of one-to-one participation with a lot more volatility over the last year, call it.

And if you go a little bit further back and say, let us go back three years, what is, the large cap gold stocks are up 65% and gold is up 80, right? So the stock side of it has absolutely underperformed the physical metal side. But there is a lot in there. When those gold companies are producing, they sell a lot of the production forward in order to make sure they can make ends meet.

And when the price is languishing from 2011 to 2023, you end up selling a lot of your production forward just to get by. And then you start to getting, get into a period where, like you said, Rod, it is that ten year cycle. You’ve got to build a mine. In order to build the mine, you want to take some of that financing risk off the table.

So as you are building and producing, you are selling forward your production, in order to make sure you have got that locked in, so you can run your business. So very interesting. And it seems to me that, I do not know, maybe that set that area is due for some catch up, but that is always a bit funny too, right?

And you and I know that there is the beta in gold stocks and then there is the gold and gold stocks. And when you mix the two, again, I think Incrementum did a great job on, here is an interesting portfolio of how you might incorporate commodities and gold and silver, and thinking like silver and gold stocks, and silver stocks are more of these kind of more offensive, like higher geared opportunities, which they absolutely are, which means they have more downside risk too.

[00:23:00]Rodrigo Gordillo: Assuming you cannot lever up the thing you want to lever up the most, this is the basis precise, the basis risk that you take. Do you believe in gold, and what, it is going to do well? Yes, you could trade all these other things because you get more volatility out of them. But for guys like you and me that love futures contracts and want to get, in order to get a better portfolio construction, we can gear it up. I would rather gear up that main asset. So that is my only, yeah, the main factor, right?

[00:23:28]Mike Philbrick: If, like you have got operational risk, so you are gonna buy a company that mines gold. There is operational risk there, tailing ponds go wrong. The stuff is not there. How much of their gold exposure that they hedge. Exactly.

[00:23:44]Rodrigo Gordillo: And so you are not getting the upside, it is just, you are taking on pro-cyclical risk that is correlated to the economic cycle. So I would rather just buy the pure gold, even silver, right? Again, I think it is more about gearing, but silver ends up being more of an industrial metal, so there is going…

[00:24:05]Mike Philbrick: More economic sensitivity, right? Yeah. So, you want that unique orthogonal nature.

[00:24:10]Rodrigo Gordillo: Yeah. And I think for, let us transition a little bit toward Bitcoin, right? Because they, this is what has been termed as the new gold and the debates have, I have been part of many debates, people saying it is a hundred percent gold. No, it is a hundred percent Bitcoin. Bitcoin has the same qualities. You can transfer it quickly. You can have it in low quantities if you want to, so you can have partial shares. You can travel with it without anybody having to, you have, having to declare. You can walk through borders with all this money in your pocket, in your brain. Like, all these benefits of the new gold. So what are the similarities and where is the risk there?

[00:25:00]Mike Philbrick: Oh, it is a great one. You and I are largely yes and people, right? I do not think it is an and/or question. You can incorporate both quite honestly, but as you say, so, does Bitcoin have central banks around the world buying it in mass amounts? Starting, but not yet.

[00:25:18]Rodrigo Gordillo: That is another thing they covered in El Salvador. Yeah. You started to see, you have the crypto are, of, what is his name? Yeah, El Salvador. David Sachs, El Salvador, buying, making it as some…

[00:25:29]Mike Philbrick: Yep, so it is happening. So if we set the table, so the market cap on gold is call it $15 to $17 trillion. The market cap on Bitcoin is $1.3 to $1.5 trillion, so call it 10X. So gold represents 10X. It has been around a lot longer. Probably makes sense that is the case.

There are just different features to these two asset classes and a different track record or and by track record, historically gold has been around for a very long time. Bitcoin is the new kid on the block, and I think they both offer some very interesting and unique characteristics.

One is that gold has a historical volatility of ten percent. It moves around a bit, but it is not like gold, yeah, where it is like 80. So volatility is just how much it goes up and down on a random…

[00:26:21]Rodrigo Gordillo: That is my framework for it. I am not fully, I, you are a lot more sold on this being a way of the future than I am, I’ve got to be honest. But let us just go through the similarities.

Okay. So it seems to have that same idea that it is widely distributed around the globe, so anybody can get it with, anybody with a computer, which is most of the population, now can get it. It is an asset that every four years, the amount that can be mined gets cut in half, right, until there is no more to mine.

And so it becomes this asset, a scarce asset that will go up and down depending on whether humans actually care about it or not, much like gold, right? We could not have, we could not quite pinpoint anything for gold except for the fact that we want it, and humanity uses it, and everybody has got broadly distributed gold.

But 5, 6, 7 years ago, the volatility of Bitcoin was 120. Yeah. Gold has been 15, then it has gone down to 100, to 80, and most recently going down to 75% annualized volatility. Now, that is a lot, right? But this is my framework for it. So I like to use it in my portfolio as a currency debasement trade, but I am always willing to have that go to zero. I do an equal risk approach, and we can talk about, I will show you some slides that I have shown already in the ReSolve Riffs Podcast back in the Christmas episode with Meb, Corey and Wes.

But if I am, if you are right, the volatility of Bitcoin will continue, as it gets more and more adoption the volatility of Bitcoin will get lower and lower. If you are managing that kind of currency debasement portfolio and equal risk, then that Bitcoin portion will get higher and higher.

If I am, like, I am not saying that I want to be right about this, but let us say that the other side happens, and Bitcoin becomes less and less of an option, that there are some issues, that it gets hacked.

The volatility of that asset is going to go up and up, back to where it was in the beginning, until it goes up so high that from an equal risk contribution perspective in my portfolio, it becomes a non-allocation, right? So the volatility to me gives me all the information I need to acquire an asset that I think is very interesting, very interesting, but we can manage the risk by not having a static allocation, hope for the best. You know what I mean?

[00:28:46]Mike Philbrick: Oh, yeah. And also your initial allocation. Let us, so in your context, you say, I want some hard assets in my portfolio because I see a lot of what is happening in debt, I see debt monetization. I see fiscal dominance, and I see some things that are somewhat concerning, and I am getting the confirmation of strangers through price, both price and Bitcoin, and price and gold. I have confirmation of strangers and that more people are buying and selling. That is why the price is rising. So I like, all of that makes sense.

And then to say, then how much, so if you have some position in your portfolio, let us say you have got, ten percent is an easy one. People say ten percent in gold. I don’t know, I do not know how we got there, but that might be right, might be not right.

But if you got ten percent in gold, then okay, what does that mean for a Bitcoin holding? Probably something in the neighborhood of, why would not we do 10% to the both assets where you have got 8% in gold exposure and 2% in Bitcoin exposure, thereby equalizing those two exposures, so you have got equal risk coming from them and incorporating that, both the old and the new into the portfolio. From the standpoint of diversifying the portfolio, I think at this point we can probably suggest that Bitcoin is a bit more of an offensive player, right? I mean it is, it is that…

[00:30:08]Rodrigo Gordillo: It did not do what gold did, right? Gold went, yeah, in sorry, in 2020, and but this year it is acting interestingly, right? It is actually doing, offsetting gold and gold has a bad period. So it is, let me show you the original

[00:30:26]Mike Philbrick: And gold having a trend while Bitcoin was languishing around the highs and having pullbacks. So they are very complementary to one another as well. So again, I think it is not and/or. And then the next question is, as we are purveyors of the concept of Return Stacked® Portfolio Solutions, then why do you want to even give up your stocks and bonds that you love and trust?

[00:30:48]Rodrigo Gordillo: But before we get into that, let me just, that was just a tease. Yeah. Let me just address the concept of kind of equalizing risk here, and I did this at a time when everybody was saying, I, you should either be, you’re Bitcoin or gold. And I was just showing people how unfair that comparison is given the volatility. So this is, I started a reasonable period where Bitcoin was not absolutely insane. So 2018, just to show that yes indeed Bitcoin has done 20% return versus gold during that same period had done 10%. So this is a little, this is back in December of…

[00:31:28]Mike Philbrick: Yep, last year. Still relevant. Still relevant.

[00:31:30]Rodrigo Gordillo: Sharpe ratio, around .6 for both of them though, right? So what does that mean? It means that if I were to scale gold up to the same level of volatility of Bitcoin, which can be done with a futures contract, right, this might seem a little insane, but it is insane to invest a hundred percent of your assets in an 80 vol product in the first place.

If you are that type of person, you can also just easily lever up a gold futures contract 5.7 times, I think, was that what I ended up doing there, to hit the same level of vol as BTC, and now we are looking at better returns from gold during that period. In fact, if I were to like, we now know that 2025 you like, gold is actually killing it.

So, the question is, yeah, maybe gold, right? And of course my answer is, why not both? If you were to equal risk this, again, you are equal risking, you are grabbing instead of 5.7%, you just buy 50% of Bitcoin and 285% of a gold futures contract, and equal weight, did not rebalance. And guess what happens? Because the correlations, what is interesting is that they are both, they both seem to be good for currency debasement stuff, but the, their daily correlations is some, it is on average zero, sometimes negative. And as you and I both know from Shannon’s Demon and the rebalancing premium, that when you have two negative correlated assets that in this case, and both making money, and you are able to rebalance from them, you create this rebalancing premium.

And so what is interesting is that by putting this portfolio of equal risk together, your volatility goes from 80 to 61, but your returns go through the roof. Your returns are significantly higher because of that rebalancing premium. Sharpe ratio goes up. So again, this is a portfolio construction over ethos or a gold religion or a Bitcoin religion.

It is just be, you like them both, put them in equal risk. Now, I am not going to invest in an 80 vol anything. I am not going to, I am not going to invest in this portfolio I am showing you, right? And what an average investor could do is what you just described, right? Instead of levering up your gold, lever everything, lever Bitcoin down to equal risk to your gold allocation.

So we could, you could do that by just looking at the market cap of gold versus Bitcoin, which I think is like, Bitcoin’s what, 10%? You mentioned it earlier. 10%. 10 to 1. Oh, call it 10 to 1. So 10 to 1. So that is nine, 90% in gold, 10% in Bitcoin, when you do equal risk contribution. It used to be like 7% when it, when you started doing this with Bitcoin in the beginning, and now it is like bumping up to 15 to 20%.

Yeah. And it will vary depending on volatility is expanding and track correlation, expand contract. But I think that, given that they are in around the same theme, I like that they are non-correlated. Even if you, like, the people talk about silver and miners, they are too correlated to be able to benefit from the non-correlation, if you can get the leverage you wanted to from just using this. I like the fact that it is Bitcoin and gold being so non-correlated that they are creating their own return stream.

[00:34:42]Mike Philbrick: On a day-to-day basis, right? They really are. And it stems from the fact there are very different buyers that own both of these assets still.

[00:34:51]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind listeners that while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast, and we try to do this by providing cutting edge, globally diversified, and systematic investment strategies that are designed to be broadly non-correlated to traditional equity and bond portfolios. So we actually manage private and public funds as well as bespoke separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run.

So if you do want to see that theory that we have been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

[00:35:33]Mike Philbrick: And Bitcoin is going through the institutionalization. Gold has been institutionalized many moons ago. And so, it is an interesting juxtaposition of both the new and the old, but both have finite supply. Building new supply is hard, costs money, whether you are mining Bitcoin or you are mining gold, whether you are trying to get the machines to solve the problem or get a contract approved to develop a site to mine gold.

These are hard things and they cost money to do but again, I also think there is a different, a very different group of buyers for each of those, if we look right down to it. And the individual investor does not really have to think through that in the sense that they have access to the products, right? You have access.

[00:36:25]Rodrigo Gordillo: Where they did not a few years back, right? Correct, right? You have got financialized Bitcoin products, whether they are through ETFs, whether they are through the futures markets, all allowing you to build in this unique asset class. We have had that in gold for some time.

[00:36:40]Mike Philbrick: But again, combining those two together, bringing both the old and the new together and thinking through, not letting the maniacs run the asylum, right?

If you say, I am going to give you a dollar of gold and a dollar of Bitcoin, that is fine too, but you are largely going to be dominated by the higher volatility asset, which is going to be Bitcoin, but if you are thinking through an allocation from the perspective of, I have got some gold, and I will sell a little bit of my gold and buy a stack of Gold and Bitcoin, then you have got your Bitcoin stacked on your gold, which you could do.

[00:37:15]Rodrigo Gordillo: You know what is interesting? I just remembered and pulled this up. When we wrote the paper on the rebalancing premium, like something about risk parity, in the beginning we did an analysis on the correlation between just three assets, gold, stocks and Treasuries.

And so you can see the correlation is very low just within gold. And what is interesting here to point out, is that if you just do the compound returns of the portfolio, like the, just an arithmetic addition of what they would do in a portfolio without rebalancing, you are looking at a 6.7% rate of return.

The rebalancing between gold, stocks and Treasuries, which are not, the correlation is pretty low. You are looking at an extra 1.2% per year in that portfolio. So that portfolio with daily rebalancing compounded an 8% rate of return. Now add another hyper non-correlated asset, because it is also low, it still has low correlation to Treasuries and stocks. You are just adding more rebalancing premium, which I love.

[00:38:15]Mike Philbrick: Yep. And that is a really interesting time period too. June 82-2020, right? So you have got gold peaking at that point. You have got rates peaking, so you get a great bond bull run, but you get a pretty vigorous gold bear market, right? So it still, even though those were more persistent trends throughout that period, that 38 year period, you still came up with wonderful rebalancing opportunities between the asset classes. And that is such a wonderful thing.

[00:38:47]Rodrigo Gordillo: And here is why this is important, right? Here is why it is important. This goes back to Antti Illmanen and when he, when we brought him in to speak about commodities, right? This view that commodities is a, it has a zero real rate of return on their own, but when you create a commodity portfolio and you weight them appropriately, and you capture that rebalancing, treat, and guess what, now you have a real return because you have basically extracted a yield from non-correlated asset classes.

So in a way, yes, we just, we started the conversation by saying, what type of yield does gold provide us? What type of yield does Bitcoin provide us? And they do not, but if you structure your portfolio the right way, if you include them in your portfolio just a little bit, you are already going to be capturing an excess yield that is, this idea of the, that one plus one equals three, right? This is the whole is greater than sum of its parts.

[00:39:49]Mike Philbrick: And the systematic nature of that, right? You do not have to be super smart to just do your rebalancing. I would say the challenge I guess on the behavioral side is, it is uncomfortable to rebalance sometimes because you are selling what is working and buying what is not working a little bit. Sure. But that does work over time, and if you are going to send a little, as I think Rob Barnett says, if you are gonna send a little, go for it.

[00:40:17]Rodrigo Gordillo: Let it be about saying a bit more. So let us go into other ways of doing portfolio construction, because I think ultimately what we discovered in trying to get people to add diversifiers to their portfolio is that they do not want it. It is too different. It is too hard. Even as I showed that incredible run that gold has had since 2000, people are still reticent to own something that different when that, they cannot understand, right? So I think the advent of Return Stacking® and all the things, all the different products are coming out, that allow to stack things on top, give people an out, right?

You’ve got to, you now have an option to possibly not have to sell your favorite toys, sell your core stocks and bonds, in order to make room for these weird diversifiers. You can now actually just get, keep your 60/40 or 80/20 and just add the diversifiers on top. Yes. In this case, volatility is likely to increase a little bit, but you do not have to go a hundred percent, right. You add a 10-20% allocation depending on how, what your view is on currency debasement and continued global macro spheres.

[00:41:33]Mike Philbrick: I totally agree and I think that if we are honest with ourselves, the math makes sense. The returns are better in gold. They were last year, yet no one gave a Why? There is a huge behavioral aspect to this. Are my friends doing it? My friends are not doing it, and I am not feeling the pressure of that, of those peers, and the, what do they call them, best practices. Then it is okay that we did not hear it from anybody that, oh my God, gold did X and your diversified funded Y and that was less than X.

No one ever says that. Right now, the darling in the room is the S&P 500. We have been around for a couple market cycles, so it has not always been that, BRICS been ’08 and then the U.S. back in 2000 again, and you go back to ‘82 and it was gold and gold stocks. So there is this huge behavioral tax that people pay waiting for that public adoption, right?

They are not in, when there is a stealth opportunity, when you could be in, if you were just simply rebalancing or stacking, or doing something that allows you to participate in the markets that your friends are participating in, so that your tracking are as lower, so that your behavioral biases do not undermine your success, versus taking the big plunge we just talked about. The numbers from 1982 for crying at one, like it makes sense to have some gold in your portfolio, yet the allocation by pension funds, family offices, large sophisticated asset allocators, is a sub 1%. We all are humans. Lemmings.

[00:43:20]Rodrigo Gordillo: I must admit the gold community is a little weird. You know what I mean? It is those kind, but I am not talking, this is the funny thing, right?

[00:43:28]Mike Philbrick: We get painted as a gold community. I am a centrist here. Totally. I am not a gold guy, I am a centrist. I am like, you should have some, because it is different, because it adds value.

[00:43:38]Rodrigo Gordillo: That is it. Like from a, like, I can get behind it from a portfolio construction perspective. I just correct you and I have met a bunch of advisors that are, have been all in on gold, and good for them. They, but they have been all in on gold, like a hundred percent of everything for a long time around precious metals. We grew up with Eric Sprott.

[00:43:56]Mike Philbrick: Oh yeah. Where I, being Canadians? Yeah.

[00:43:59]Rodrigo Gordillo: That is all that was.

[00:44:00]Mike Philbrick: And you are Peruvian from… So natural resources in gold are well ingrained. They are probably more acceptable to us as investments than a lot of people in the U.S. And we do see that, we see that in the numbers. And I guess that this is where, in that public stage, where you are, it is gonna start to be okay as an allocator and advisor to start incorporating gold.

Get this, it is going to start to be okay. You are going to be able to actually do that and not suffer the slings and arrows of being considered a weirdo. So that is something to consider. The pendulum, the behavioral pendulum is swinging. It is a little bit more centrist. The gold has some returns that back it.

It is, we have got a number of concerns that gold can respond well to, whether those are geopolitical concerns, whether those fiscal dominance, monetary, there are some things that evolve to make gold sort of a key part of the portfolio, especially as bonds start to potentially falter. So it is going to garner some acceptance. Now, how are you as an allocator or an advisor going to start building that non-correlated source of returns into portfolios?

Bitcoin is going through the same evolution, starting from a much smaller base, obviously, but again, how are you going to think through allocating to these types of things in your portfolio? Do you want to take some of the things that you know, love, and trust out, sell some of your stocks and bonds and do diversification through subtraction? Possible? Or do you want to do diversification through addition, where you stack?

[00:45:37]Rodrigo Gordillo: Let us talk about that, the difference between those two from a behavioral perspective, because I do not think that gets enough airtime in terms of when you, let us say, everything, Trump solves everything. We have, we take care of the debt. The U.S. becomes a reserve currency again. Everybody starts behaving. No more wars.

That is obviously going to affect gold negatively. If you have chosen to have an allocation of gold, what you will, if you have made, sold your equities in order to get gold, you are not only losing whatever the 20% that gold might give you, you are losing out an opportunity cost of that equity component that may be up 30%.

So you are getting a double whammy by, in terms of allocating, when you make room in your portfolio for these diversifiers. Whereas when you stack them on top, you are at the very least, not having that opportunity cost of owning the equities in case they go up 20%. You are still having a little bit of tailwind, but you are certainly cutting it by a lot, right?

So in terms of wrapping your mind around adding weird things, you, I think everybody here knows that we think that a good solution here is stacking. And yeah. And then you’ve got to decide when, right? Like we, that is, I. Right now, even though I have been an advocate of gold from the beginning of my career, when people come to me now and they say, should I allocate? And I am like, yeah, you need to allocate.

And then I have to go back to these reports and be like, okay, what is happening? Like, why is this still? Why should I not be timing this as much as I want to? And just the evidence is so, like, even the Chinese government with the capital controls. Nobody is going to invest in like, few people invest in the stock market unless they are really gambling inside China. Like, apparently the only thing that they can invest in without a lot of control is gold.

And that is a large part as to why all of this is happening. And as it become more insular, I think that is another interesting secular trend. Latin America, emerging markets are buying more and more gold.

[00:47:40]Mike Philbrick: That was the theme from last year, right, that would start to happen. And the theme this year is now we are, it is the big long, right? It is, now it is a broad acceptance. Now it is, yeah. We are getting, this is the part where you, when you get the broader acceptance, you are now going to start to get the green light, whether you are an allocator working with an institution or pension fund, or you are an advisor working with individual families, you are going to start to get the green light to be able to incorporate this, and not compromise the relationship.

Not call into question the relationship for doing something that is too weird. And that is a real challenge in managing assets on behalf of other people is, you want to do the mathematically correct thing, and the preferences of the individual investor sometimes get involved in, don’t allow for that to take place. That is about as common as anything in this business.

[00:48:34]Rodrigo Gordillo: And one thing that I have learned quite a lot from with the, when it comes to macro cycles is Bob Elliott, who constantly reminds us about how long it takes for macro cycles to actually play out.

[00:48:48]Mike Philbrick: Yeah.

[00:48:49]Rodrigo Gordillo: They take years, if not decades, to fully play out to their maximum extent. When, even, the recent disinflationary growth period where equities kept on going up, it was like there was a straight line with a low volatility, bonds, 40 years.

Like these are long secular cycles that we have seen, and bonds have finally broken, and it took 40 years for them to break in any meaningful way whatsoever. And so, when you think about just the concept of, okay, price of gold is up, I, there is going to be all this demand. Where are we going to get the supply, from nowhere? It is going to take ten years to build more supply. We still, we are not, I am not seeing any commercials to sell my gold jewelry to get gold. Not yet. That will be a sign though. That will definitely be a sign.

[00:49:41]Mike Philbrick: Start melting down the silver, the silver forks and spoons. Yeah.

[00:49:46]Rodrigo Gordillo: So, when I think about it that way, I got, that gives me, okay, I need to have this as part of my core strategic portfolio. It is not going to be a fun ride on its own, but it is a portfolio.

[00:49:56]Mike Philbrick: Yeah. And allocate, this is the nice thing. You can allocate it into the portfolio over time. You do not have to take the approach that today is the day where I am going to allocate the full X amount.

So let us say you come to the conclusion that alright, this is an asset class that I probably should have 10% in the portfolio. So what are the steps I am going to take? Let us buy 1% today. Let us get it on the books, let us get started. Because when you own it, you watch it and you get familiar with it, and you get some intuition as to how the asset responds in different circumstances.

And that is always something that is a bit challenging and unique. When something has gone through the process of becoming a 1% allocation across investors’ portfolios, they are really not paying attention to it, right? So build up your intuition and your tolerance, because it is going to be.

Some days you are going to look at it and go, this thing is stupid. And then other days you are going to be like, oh my gosh, wow, look at that. And you are going to get a sense for that. And then it allows you to build the, and this is both at the institutional level and the retail level. This is across all things, when you do not have an intuition for an asset class, because you have not dealt with it. And I would assume most people are of the age that a lot of times they do not have a lot of experience with gold in the markets today. So they are going to have to build up that intuition. So start small, but start, right.

And look at how it interacts with your portfolio. And then in our, as you have mentioned so eloquently already, our perspective is, you do not need to sell what is in your portfolio to add these diversifiers, to stack them on top. And that will help alleviate some of the tracking error that comes from those times when those main assets are doing great.

[00:51:40]Rodrigo Gordillo: Yeah, I think we are moving the needle, Mike. I think we are going to take this from 1% to two. Let us do it. I am feeling it this time. It is good because, we literally have had this conversation in every room that we stepped in since the day I met you.

[00:51:56]Mike Philbrick: I and I know, and I feel as though, like I get painted as a gold bug. I am just, I am a gold centrist gold bug.

[00:52:04]Rodrigo Gordillo: We are not, we do not have outrageous weightings of gold in our portfolio. Not at all. It is just not zero. It is not zero. Exactly. Exactly. We still have a bunch of people waiting and watching.

I am just curious if anybody has any questions. I am just going to go up and see if there were any. There are some things we cannot discuss here. Volatility drag, a problem with UGL on daily reset. Okay. So UGL is a double bowl, I think, right? Yeah. Yeah. So yeah, so that is, yeah. Let you go for it.

We have discussed volatility drag quite a bit. There are a couple articles on the Return Stacked® site. If you look up volatility drag, you will get to understand a little bit more about whether it is even a thing that you need to worry about from a portfolio construction perspective. There is no shame in using 2X levered anything, as long as you are rebalancing, and you are rebalancing it against other non-correlated stuff.

Volatility drag is basically, when you 2X an asset class, what tends to happen is your variance goes up by 4X and your real, your compound rate of return is the variance of the portfolio. It is half the variance of, is your, and if, is your arithmetic rate of return minus half the variance of the portfolio, right, so what you end up getting penalized if you are just owning that asset at 2X of volatility.

But that does not just apply to 2X S&P or 2X gold. It applies to 2X anything. If you are increasing the volatility of your portfolio, whatever it is, you are increasing the variance and you are getting a drag from the compounding of, or negative compounding of that, like that variance drag.

But if you are increasing leverage in order to have a more diversified portfolio, we use the example in one of the podcasts that we did, where you talk about the 2X S&P 500 versus stacking a hundred percent S&P and a hundred percent trend following. For example, when you stack a hundred percent S&P, your volatility is actually, you are getting, you are not getting twice the return, and your volatility is doubling.

When you are stacking a non-correlated, what we call defensive leverage on top, you are stacking the return, but because it is non-correlated to the underlying asset, you are not increasing your, necessarily, the standard deviation, and therefore your variance drag is much lower, okay, and so it just, the answer is, it depends on how you use it, okay? Yeah, so, use it for portfolio construction. Use it to create robust portfolios. Make sure you are rebalancing, and if you do it, it is a great instrument. It is volatility that you can use to do, to create rebalancing premium.

[00:55:05]Mike Philbrick: Yep. The, those, I would add one final, UGL, that type of thing where it is 2X of the same asset. Those are often trading assets, so you should be engaged in the trading of the assets. As you have mentioned, they re-gear up every day. So if you make 10%, they are going to re-gear that up tomorrow at some point. You get lots of leverage built into your position and you have a correction, and that is where you get that volatility drag.

But if you were harvesting that and saying, no, I am going to trim a little as it goes up, and then I am going to add a little when it goes down, you can attenuate that and you might do that with cash, you might do that with other assets. It is all fine, but it does require, the leveraging is daily and the asset is somewhat volatile at times. So it can require adjustments daily. If you are doing that type of thing, it is fine.

Certainly when we are looking at futures contracts and things like that, in portfolios that we are managing, those are reviewed daily and are rebalanced, brought back in line on a regular basis because the volatility with the leverage and the other pieces of the puzzle, yeah, the other positions in the portfolio.

[00:56:16]Rodrigo Gordillo: Look, when it comes to leverage, we always talk about internally that you do not want LICE, and LICE stands for leverage that is illiquid, concentrated or excessive, right?

So in this case, we are talking about a liquid product, but it is concentrated, and it can be excessive depending on how much you put into it, right? And so you just want to avoid LICE when it comes to leverage. And what you really want it to be is part of a portfolio, or you want to stack it with other things.

And, if you are going to use leverage, use what we call defensive leverage, things that are non-correlated to the thing that the main stack that you are going to use. So if you keep that in mind, you are going to minimize the chances of blowing up.

All right? We are coming up to an hour. Mike, anything that we may have missed that you want to chat?

[00:57:08]Mike Philbrick: No, I think we have covered just about everything that we wanted to discuss. I think the report is well worthwhile. We have got one of the portfolio managers at Incrementum that is going to join us in June, and we will take a little bit more into the report itself, and talk a little bit more of the intricacies of the gold market itself, things that, where we will learn some stuff as well. So look forward to that, and look forward to tuning in with that. And I think, the other thing is every year that he was, in talking with the guys over there, they have noted that every year when they launch the report, gold is, goes down.

[00:57:49]Rodrigo Gordillo: It is just like they launch it into a poor seasonal period, or like exactly, seasonality. And I think gold is entering a poor seasonal period, which is going to be a great entry point. There we go.

[00:58:00]Mike Philbrick: Exactly. Starting, start your allocation today. Go slow, go steady, get the intuition. You are going to see that public opinion. This is, for what it is worth, from my perspective, public opinion is changing. We are entering that public phase. We are seeing that in the AUM growth in the ETFs, so it is something to look at and consider. And how you might allocate to that is, there are many ways to slice that sandwich. We would encourage you to look at the idea of Return Stacking® as a way to incorporate it. And, if you have any questions, just always reach out to us.

[00:58:35]Rodrigo Gordillo: We have got a couple minutes and they, there are a couple of questions that I do want to answer. They were talking about borrowing costs, right? So the, it depends on how you borrow.

You can get, again, if you are using, there is a bunch of product out there that is helping you create capital efficiency by making room on your portfolio, by giving you like, WisdomTree as a 90/60, right? You are getting leverage at the cheapest possible level of, on the futures markets, right? So yes, what you are going to need to decide is what you are stacking. Is it likely to do better than cash?

And what we have seen, what we have shown you from gold, is that gold has had positive real rates of return. So when you think about creating portfolios, especially in the context of Return Stacking®, it really is the way. I think about it as Lego blocks, right? See if I have different colored Lego blocks, here you have your equity. I do want to find that third color, but let us assume that this is, you got your equity risk premium that you are going to buy and get exposure to, you are going to get your bond risk term premium that you are going to eventually, over the long term, get paid for taking duration risk.

And then let us say that is a hundred portfolio, then you’ve got to decide, okay, what excess returns can I count on to be there? It turns out the gold has had pretty decent excess returns in the last 40 years.

So then you are whatever excess returns that end, that is you are stacking that return on top, and then you find another thing that you want to stack, whether it is managed futures, trend, or merger arbitrage or market neutral portfolios, that you can literally decide to stack all of these different risk premiums that are non-correlated to each other, to the level of portfolio volatility that you can stomach, right?

So yes, everything costs, to stack. It is always the risk-free rate. But every asset that we have discussed today has had a long-term excess return above cash. And if you feel like you can count on that over a long enough time horizon, then really you are just stacking excess returns, plus the cash premium you get on your core holdings.

Hope that answers your question. And yeah, if you guys have, want to reach out and ask any further questions, you can reach out at @RodGordilloP on Twitter. Mike, what is your handle, Mike99. Is it still Mike99. Yeah. Mike, that is his football jersey.

[01:01:16]Mike Philbrick: @MikePhilbrick99.

[01:01:18]Rodrigo Gordillo: @MikePhilbrick99. And please, this is not investment advice. This is just a couple guys talking about some research that we thought was interesting to share, and be happy to discuss further offline for anybody who wants to do that. And looking forward to that gold conversation continuing in June. Mike, thanks for absolutely, thanks for, it was your initiative. I really enjoyed this conversation. Thank you for that.

[01:01:42]Mike Philbrick: Absolutely. Stay diversified everyone.

[01:01:45]Rodrigo Gordillo: All right. See y’all.

[01:01:47]Mike Philbrick: See y’all.

[01:01:48]Rodrigo Gordillo: I did want to take a quick second to remind our listeners that the team works really hard on these podcasts. We spend a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we are asking the right questions. So if you do have a second, just do hit that subscribe button, hit that like button, and share with friends if you find what we are doing useful.