“The most important thing is that technology evolves, but people don't. That's the biggest lesson of history—humans don't change.” – Simon Mikhailovich
In this episode of Outliers, I’m talking with Simon Mikhailovich (@S_Mikhailovich) about why gold is important in the current economy, how it maintains purchasing power over time, and important lessons from financial history.
Simon Mikhailovich is a contrarian investor and entrepreneur who is also the co-founder and lead manager of The Bullion Reserve (TBR), a private vehicle that enables investors to hold physical gold across multiple jurisdictions outside the financial system. Before starting TBR, he co-founded Eidesis Capital, was a Portfolio Manager at Falcon Asset Management, and with his deep understanding of financial history, predicted and profited from the financial crises of 2000 and 2008.
Chapters in this interview:
- 00:00:07 – Simon’s thoughts on gold’s role in the current financial market
- 00:07:19 – Why gold is important at this moment in time
- 00:14:22 – Cycles of financial euphoria
- 00:19:06 – The three ways to get out of debt
- 00:25:05 – Why holding physical gold is different and better than savings in other forms
- 00:30:46 – Gold is the ultimate insurance for bad financial outcomes
- 00:36:48 – Gold vs. other precious metals, and how gold is nature’s Bitcoin
- 00:41:58 – Should people invest in gold ETFs?
- 00:44:37 – Gold has no impairment risk or counterparty risk, and making money vs. preserving wealth
- 00:48:01 – How personal experience vs. historical experience affects our investment decisions
- 00:57:35 – How Simon has maintained an outlier point of view over time
- 01:03:37 – Simon’s recommended books on financial history
Links from the Episode
- Going for Gold in a Dangerous World - Barron’s
- Self-Proclaimed Contrarian Investor Bashes Bitcoin Digital Gold Narrative - NewsBTC
- Swiss gold exports and their destinations by country (chart from OEC)
- Ford Foundation
- The Great Depression
- Recep Tayyip Erdoğan, President of Turkey
- Jeff Bezos
- South Sea Bubble of 1720 in England
- ARK Innovation ETF (ARKK)
- Cyber Risk
- Lehman Brothers
- Volkswagen emissions scandal
- Paper Hands vs. Diamond Hands
- Quote from Warren Buffet - "The less prudence with which others conduct their affairs, greater the prudence with which we should conduct our own affairs.”
- Texas Bullion Depository
- Treasury securities
- Subprime insurance
- Exchange traded fund (ETF)
- Fiat terms
- Purchasing power
- Continental currency
- Survival bias
- Debt repudiation
- Special Purpose Acquisition Company (SPAC)
- Marginal demand
- Gold securities vs physical gold
- Credit default swaps
Books Recommended in This Episode
- A Short History of Financial Euphoria by John Kenneth Galbraith
- The Dying of Money: Lessons of the Great German and American Inflations by Jens O. Parsson
- When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany by Adam Fergusson
- The Fourth Turning: What the Cycles of History Tell Us About America's Next Rendezvous with Destiny by William Strauss
- The Lessons of History by Will Durant and Ariel Durant
- The Dao of Capital: Austrian Investing in a Distorted World by Mark Spitznagel
“The most worthwhile reading, I think, is history—financial history. You can read about gold, you can learn everything there is to know about gold; that's not what it's about. It's about understanding history. It's about understanding, “What do you need to solve for? What are the potential outcomes?” If you have sufficient imagination of what the potential outcomes are, you don't need anybody to explain to you what to do about it. You will figure it out yourself.” — Simon Mikhailovich
Daniel Scrivner (00:00:00):
Simon, I have been looking forward to this interview for a really long time. Thank you so much for making time and coming on Outliers.
Simon Mikhailovich (00:00:06):
Thank you for having me.
Daniel Scrivner (00:00:07):
I wanted to have this conversation. Today, we're going to go super in depth on gold as a topic. I just wanted to take a step back and I guess provide a little bit of context. I mean, personally, I started researching and trying to understand more about gold, why it's interesting, why and when you would want to use it a number of years ago, and I think something just that immediately was apparent to me is gold is something, especially in the Western world, that most people is, not even on their mind, which I think is fascinating and I'll talk about that in a little bit but just to ground this in today, and where we are today, it feels like in a lot of ways, we're at the fever pitch moment where gold really is interesting.
Daniel Scrivner (00:00:44):
We've got massive debt growth around the world, massive interest rate manipulation, the markets are at all times highs, you see speculation all over the map, whether you're looking at growth and options or margin leverage and new assets. I mean, when you look at that picture, do you draw any conclusions? You have any thoughts about just the environment that we're in today?
Simon Mikhailovich (00:01:01):
Well, demand for gold and what should be demand for gold are two different things. I mean, demand for, in the financial markets, in the western financial markets, people go by the history of the last 30, 40 years. I mean, that's essentially relevant history. For example, specifically about gold, if you listen to the commentators, you would hear a lot of talk about how gold is strongly correlated to the real rates and that recently, gold sold off because interest rates are going up.
Simon Mikhailovich (00:01:31):
You're asking me a question, how is it relevant in today's market, but think how people are thinking about it. They're thinking that gold is something that is directly related to real rates and they are directly one for one comparing gold to treasuries and they're saying, essentially, I'm indifferent to whether I'm holding treasury securities or I'm holding gold. What I'm interested in is the place where I can get the most income.
Simon Mikhailovich (00:01:52):
What's missing from that conversation is currency risk because then what you're saying is that you think that US Treasuries are risk-free assets. They have been for the last 30, 40 years but that's not necessarily how they are in the fullness of time. If you step back and expand your horizon to beyond 30, 40 years, or 50 years, in the fullness of time, the types of outcomes that gold protects against are not being priced in or factored in today. Whether people should be interested in, whether they're interested are two different things. Yesterday, I saw a great chart, which of course, this is a podcast so we can show chart.
Daniel Scrivner (00:02:30):
We can link to it.
Simon Mikhailovich (00:02:32):
Yeah, well the chart is of Swiss exports, gold exports and where they go by country. Switzerland refines about 60% of bullion that's refined globally. It has four top refining companies that dominate the refining business. If you look at that chart, you would see that these refineries basically did not export anything to the United States until March of 2020.
Simon Mikhailovich (00:02:56):
In March of 2020, there is a massive surge in exports displacing pretty much all other countries. That continues in April, May, then it starts adding in June, July, and then August, and then it's still not back to zero like it was before March but almost. What does it say? It's basically demand for, this is physical gold, this is not a market statistic. This is an industrial import-export statistic, expressed in tonnage as opposed to in dollars. It's not what the market participants are thinking or the strategies or reflexivity or anything like that. This is actually demand for bullion bars, which the Swiss produced.
Simon Mikhailovich (00:03:40):
You can see that this demand is inversely correlated to confidence. As soon as the market starts collapsing in March, demand goes through the roof. It's like demand for insurance. When demand for subprime insurance was almost zero, except for like five people or 20 people or however many people that actually were buying it in 2000, 5, 6, 7 and then of course, it went exponential once the whole debt world started blowing up. It's the same thing here.
Simon Mikhailovich (00:04:07):
To answer your question is there ought to be a tremendous amount of interest in physical gold and in gold but there still isn't in the West, nearly as much because people continue to be in this financial mindset. The gold trade, "is judged on whether it's working," meaning the prices going up, or not working, meaning the price is not going up, as opposed to is the risk higher and do I need immediately, urgently to acquire insurance before it's too late?
Simon Mikhailovich (00:04:39):
That's not the line of thinking. Not yet but there was a moment until the bailouts came and the market stabilized and the confidence surged back and then the markets went on, bigger and better. You can see how this works in living color but we're not there yet. We're still to be there.
Daniel Scrivner (00:04:58):
Yeah. It's so interesting you brought that up. Obviously, price in that story is going to be a lagging indicator on the best time to purchase gold is obviously when it's not "needed" at the moment but obviously that's not how the world works and that's not how most people operate.
Simon Mikhailovich (00:05:11):
That's very true.
Daniel Scrivner (00:05:12):
When you see a stat like that, and this may be totally a shot in the dark, but I'll maybe elaborate a little bit on why I'm kind of asking this question in a second, but when you see a chart like that, do you have any indication of just how the purchasers of that gold breaks down? Any sense for is that institution suddenly ramping up in interest? Is it individuals ramping up an interest? Does it blend of it all? I guess, just any thoughts or kind of color there.
Simon Mikhailovich (00:05:36):
I don't have answers. I can just give you my thoughts about it. These are exports of Swiss gold into the US. GLD, which is the largest ETF stores is gold in London. It's not that. That's something else. This is probably related to the sudden desire of a lot of COMEX traders to take delivery of gold in that period of time, which is last year, March through the summer and the shortage of gold and the COMEX deliverable gold and the COMEX.
Simon Mikhailovich (00:06:03):
That would probably be mostly hedge funds, I would think, because they discovered a little gimmick here that you can actually buy physical gold at a futures price because normally if you buy through dealer or somewhere, there are markups and commissions and so forth but if you take a futures contract and stent for delivery, you're essentially buying it at wholesale. That's kind of what was going on. No, I don't think it's big institutional demand.
Simon Mikhailovich (00:06:28):
By the way, if you look at the chart of GLD, you're going to see that there is a one for one correlation between the price of gold and the flows in and out of GLD. It's the totally opposite of what people should be doing. As the price is going up, they're buying more and as the price starts falling, they start selling.
Daniel Scrivner (00:06:42):
It's almost like a momentum play.
Simon Mikhailovich (00:06:44):
Momentum play and by the way, in that same chart of Swiss exports, the slack is being picked up by India from the summer, because as the price falls Indians and Asians, generally, start buying because they're long term value holders so they buy things when they whatever. You buy clothing when it's on sale. You don't buy when they double the price. That's basically what's going on here but then the financial market is the other way around, if the price triples, the demand quintuples. It's the opposite of buy low, sell high.
Daniel Scrivner (00:07:10):
Which makes no sense.
Simon Mikhailovich (00:07:11):
Daniel Scrivner (00:07:12):
I want to come back to that international point in a second because I think that's definitely worth discussing but maybe just to tee it up and take a step back for a second, you said something really interesting when we were talking and kind of preparing for this interview that almost no wealth survives 100-year time horizon and there's a bunch of reasons why that's the case and I want to talk about that, but maybe just to tee up the goal because what I'd love to discuss today is what is the goal that most people should have in mind, what are the problems related to that and then why is gold an interesting solution to some of those problems?
Daniel Scrivner (00:07:43):
The goal in my mind, which i just want to throw out and you can elaborate on, agree, disagree with is, I think, a lot of people focus on "wealth" in kind of fiat terms, which is just is the dollar unit amount of my wealth kind of growing over time and that is very different than something like focusing on purchasing power, in preserving and growing purchasing power over long periods of time.
Daniel Scrivner (00:08:05):
It makes sense to me that if you're going to optimize for one of those, it should be purchasing power. Just to stop there for a second, do you have any thoughts on that and is that the right way to kind of frame up why gold is important and why gold makes sense?
Simon Mikhailovich (00:08:18):
No question, not only is gold important in that sense, real assets are important in that sense and real assets include businesses but not necessarily buying stocks in businesses you have nothing to do with or know very little about but running businesses.
Simon Mikhailovich (00:08:31):
I mean, if you look at wealth, European wealth for example, you would see that a lot of wealth is held even today through either family companies, property, art, maybe gold, all kinds of real assets. That's lasting wealth. Unfortunately, the financial wealth, I mean, the history of financial wealth is pretty transient. If you look at the last 100 years in the United States, you don't need to go too far, well, other than the big names like the Ford Foundation and the Carnegie and whatever.
Simon Mikhailovich (00:08:59):
I mean, virtually no wealth has survived for 100 years because if you just dial back to say 100 years ago, I don't know, World War One, I mean, pretty much you can place yourself in any country, of course in the US and UK you would have done better, but you can place yourself whether it's Spain or Germany or whatever European country you want to be in and even in the United States. I mean, what have you been through? You've been through the Great Depression, the Roaring Twenties, that's the US Roaring Twenties.
Simon Mikhailovich (00:09:24):
If you were in Italy, that was Mussolini and if you were in Germany, that was hyperinflation. They were not so roaring, those 20s. A lot of wealth got wiped out. There then, of course, there were the 30s. Here, there was a Great Depression. There was Hitler and whatever happened and World War II, hyperinflations in most currencies, destruction of companies, properties but we don't think of that. Most of the thinking is post-World War II and post-World War II while there have been tremendous amount of wealth destruction in peripheries. The collapse of the Soviet Union, everybody lost everything except for a few people who made a lot of money by buying real assets.
Simon Mikhailovich (00:10:00):
Argentina, Brazils, Turkey this week, I mean, on Monday, Turkish Lira dropped 20% in a day. Today, President Erdogan is calling on patriotism of the Turks to sell their gold for lira to support the currency and to buy Turkish financial assets but of course, Turkey was a great empire. I mean, that was an Ottoman Empire that covered tremendous part of Europe and Mediterranean. Of course, today, Turkey is a peripheral country but even so. This is happening but it's inconceivable to anybody that this can happen in the United States or the dollar.
Simon Mikhailovich (00:10:37):
The dollar, I mean, factually, the dollar lost like 90% of its purchasing power. I mean, if you look at, I found a picture from early 1900s of a hotdog cart downtown Manhattan somewhere and the hotdogs were three cents apiece. Frankfurters, they called them then. They were three cents apiece and gold at that time was $20.67, I think an ounce or something. An ounce of gold bought like 600 some hotdogs. Well, today, gold is 1,700 whatever dollars an ounce and the hotdogs in New York are three bucks apiece. It's a similar ratio.
Simon Mikhailovich (00:11:10):
Gold pretty much preserves, not pretty much, gold has a tremendous record of over long periods of time, because there's volatility in the interim but over very long periods of time, gold preserves its purchasing power. Purchasing power, as opposed to nominal wealth, is key because I mean, think of what happened in Japan. I mean, we're all used to the fact that $1 is 100 yen but before World War II, I mean, yen was like a currency. Italian lira in the, those who remember '70s and '80s, it was 1,000 to a dollar but before World War II, a lira was like a dollar. It was a regular currency.
Simon Mikhailovich (00:11:46):
Currencies come and go. In fact, even in the United States that has happened during the collapse of the Continental currency in the United States. Like in the Virginia colony reading history, a pair of shoes was $5,000 and a suit of clothes was a million dollars. Dollars, still dollars, so we still have dollars, but the dollars change and their purchasing power changes and that's what happens to wealth, wealth disappears.
Simon Mikhailovich (00:12:09):
Financial assets are also not lasting. I mean, if you think about it, I mean, what company stock can you think about that's been out for over 100 years and still around and has made money during that time? Yeah, sure if you look at the index of the stock market, which is why all this passive investing, in which is why people are trying to rig the system this way but if you actually look at the components of that index, there's a survivorship. What it's called, survival bias? I mean, most of the companies are no longer there.
Simon Mikhailovich (00:12:33):
When you ask what is important in long term preservation of and wealth is a loaded word, savings. I mean, just family savings, leaving things to grandchildren. What if it usually comes down to grandchildren, a family home or something? It's usually not some stock certificates or bonds or something like that. Those rarely survive past 50, 60, 70 years.
Simon Mikhailovich (00:12:54):
Yes, I think of wealth and wealth preservation or savings preservation, multigenerational savings as real assets, real productive assets. We're in an era when something called financialization, which is financialization of wealth, which is where I started. I said a lot of people in Europe still own families own their wealth through their family companies that they still run. It used to be also the case in the United States; farms, companies.
Simon Mikhailovich (00:13:19):
Now, most of the wealth is health or financial assets. Basically, I mean, even Jeff Bezos, he runs that company but what does he own really? He owns stock of a publicly traded company that he founded and runs and sold to the public. That's how he's rich. It sounds like he actually controls that company and can do whatever he wants with it and can leave it to his children. I mean, no. It's a public company and has all other kinds of influences on it.
Simon Mikhailovich (00:13:45):
Yes, I think financial assets have a poor record of surviving long term and preserving their purchasing power. The reason the only thing matters is purchasing power because ultimately, what do you care if you have a thousand lira or a million lira or whatever the units are, I mean, if it buys, I mean, look at even Bitcoin, I mean, it's 55,000 per $1. Do you care how many Bitcoins you're worth or do you... I mean, people have to find some way to measure it. Ultimately, is what can I buy? What does this buy? Does this is buy a house? Does this buy a car? How many cars does it buy? That's basically what I think is the right way to look at capital and to look at wealth.
Daniel Scrivner (00:14:22):
I think that's really interesting. Building off of that, one thing you said there is just and one thing I found fascinating by studying gold is, I think, when I go and look at I think investment managers and investment firms that specialize in gold or hold a large position in gold, there aren't many in the US, at least not many that I'm aware of, but there are a lot in Europe and there's a lot in Asia, in India.
Daniel Scrivner (00:14:45):
Clearly, there's a very different cultural perspective on that. Even going back to what you just said about that in the West, most people hold kind of these derivatives of these financialized assets as opposed to real assets. Can you talk a little about why you think that is and where you feel like we went wrong or why that divergence seems like it's just gotten wider over time?
Simon Mikhailovich (00:15:05):
I don't want to get into sort of ideological issues and a lot of people associated the discussion of fiat money with ideology or hard money ideology but just a side from that, if you read a book, for example, which I highly recommend to everybody, it's 100 pages and it's probably the best 100 pages, particularly right now that you can read, it's called, A Short History of Financial Euphoria, by John Kenneth Galbraith, you would be laughing for the first 20 pages of reading that book because it just such a perfect description of where we are today but if you look at that book, you would realize that the cycles of financial euphoria are everlasting and come and go.
Simon Mikhailovich (00:15:42):
When you to think of how to compare what's going on right now to how things have been throughout history, I mean, we're in an acute moment of time. It's acute, because for the first time ever, the world is on a fiat money standards, which simply means without any ideologies, that elasticity means supply and demand and availability of money and credit that have forever been highly restricted and limited by scarce resources have suddenly stopped being scarce. That is the first time that's ever happened.
Simon Mikhailovich (00:16:17):
This is an experiment that started in 1971, when Nixon took the dollar off the gold standard formally and it's ongoing, and we don't know how it ends. I mean, the truth is, we don't know how it ends. You will hear a lot of people say we're in unchartered waters and then immediately proceed to lay out their view as to exactly what's happening and where it's all going.
Simon Mikhailovich (00:16:38):
As I've said before, when you're in unchartered waters, what it literally means is you don't have a chart. You don't really know where you are and therefore, you may think you know where you're going but you don't really know where you're going because there's no chart to show what's ahead of you but what's to the side of you or what's even behind you.
Simon Mikhailovich (00:16:55):
You're in unchartered waters. I think it's very important. That goes back to gold. It goes back to sort of anchoring, in trying to anchor in this world. It's very difficult to anchor with financial claims on assets that are highly leveraged, in an environment where it is not really clear what the value of the currency is. I mean, we know what it is in terms of its purchasing power at any given moment because we know what the prices are but when you're in a situation like this, where we have never been before, where we essentially have the outstanding stock of money is so massively large and when I say that, you have to include credit as well. Nobody even knows how much credit is out there. It's incredible.
Simon Mikhailovich (00:17:39):
When you're in that type of a situation, it's very difficult to say what anything should be worth, what anything is worth, and what anything will be worth maybe literally the next minute because we are so untethered from reality in this sense. Again, this is not an ideological statement. It's an observation. I'm not an advocate of hard money. I'm not saying that fiat money is the root of all evil. What I am saying is that free markets have a role of exercising excess. When free markets are disabled and then not able to do that, then excess continues to the point where it's hard to tell how excessive it is but by all historical measures, interest rates are at 5,000 year lows, which just using financial math translates into asset values being 5,000-year highs.
Simon Mikhailovich (00:18:31):
In the world that's up to now has been mean reverting. I mean, that should suggest somebody that maybe it's time to step back and think about what if I'm wrong. What if all of this is wrong? Now, the real world isn't wrong but what if these financial markets are wrong? What if the currency is wrong? What if this government is wrong in its policies? I mean, all of these things are possible. I think not giving them serious consideration, which I don't think people are, well, some people are beginning to, but professionals in the financial markets are not. I think that's dangerous.
Daniel Scrivner (00:19:06):
How do you, I mean, even just that stat that you shared thereof, we're literally at a moment in time where we're a 5,000-year outlier, which is an incredible stat. Even you were talking a little bit about just where we are and I would imagine whether you're looking at debt, whether you're looking at money that's been printed and in circulation that we're technically off the charts and clearly, it just feels like even just over the last year, there's been a bunch of things that have pushed us and enabled us to get even further detached from reality. Do you have any perspective on where this goes?
Daniel Scrivner (00:19:36):
Clearly, there has to be a moment where there is a reset, where there is that reversion to the mean, I guess your thoughts on how that may show up when that might come even just directionally or philosophically?
Simon Mikhailovich (00:19:48):
Well, there are only three ways to get out of debt. I mean, you either pay it back, which I don't think is in the cards because I think the outstanding stock of debt far exceeds the real cash flows that can be produced to service and retire at normal interest rates. I mean, it's not suppress interest rates. The only other two possibilities is either you inflate the money away. The nominal debts are paid in real value, which is materially less than what the nominal value suggests or you default, you repudiate the debts.
Simon Mikhailovich (00:20:19):
Now, all of that has happened through history, meaning both of those outcomes. Clearly, the government right now, governments around the world are trying to inflate away. They're trying to implement financial repression. This is an attempt to inflate away steadily by capping interest rates while allowing inflation to run high. Essentially, expropriating savers by disabling or by making it almost impossible for them to achieve returns to access the kinds of assets that can achieve returns that would protect their capital from destruction by inflation.
Simon Mikhailovich (00:20:56):
For example, I mean, very easy, regulation that requires a pension funds and public managers and mutual funds to hold a certain percentage of treasury securities or something like that and treasury securities are yielding negative real return.
Daniel Scrivner (00:21:08):
Which is insane in and of itself.
Simon Mikhailovich (00:21:09):
Yeah, exactly. There you go. In fact, the vast majority of assets is held through institutional asset managers. It's not like they have to forbid investing in Bitcoin or something like that. They can just do it through public pensions, because that's where most of the assets are. Public pensions, mutual funds, SEC regulated managers, and so forth and there you go. That's financial repression or debt repudiation, which is deflation, which nobody wants but that has happened before in the United States.
Simon Mikhailovich (00:21:35):
US states in 19th century repudiated their debt. In fact, were indignant as to how the foreigners were stupid enough to lend them so imprudently this money that clearly they could never pay back. When you ask me what is going to happen, I don't know what is going to happen and I don't know when it's going to happen.
Simon Mikhailovich (00:21:52):
What I think we know from history is what the implications would be, and what can protect you and what can't protect you. The implications are loss of real purchasing power by financial claims. That's really what it is. To the extent that every dollar of debt is somebody's asset, if that dollar of debt cannot be repaid a service in real terms, in hard money terms, that means that whoever has that loan on the books as an asset, is going to lose money. By losing money, maybe they don't lose dollars. They just lose the purchasing power.
Simon Mikhailovich (00:22:27):
I think that the outcomes are not that difficult to envision. It's just very difficult to envision exactly which way it's going to go, which is, again, we're in unchartered waters but based on the book that I just recommended, it became clear to me when I reread it a few months ago, that we are perhaps in the largest bubble financial bubble the world has ever seen.
Simon Mikhailovich (00:22:49):
That's not a hyperbole. That's simply because the world has never seen infinitely, elastic money and credit. If you have infinitely, elastic money and credit, you can blow the bubble much bigger and last longer than ever has been possible before. It's sort of like nuclear weapons versus conventional weapons. I mean, they destroy. They just destroyed a lot bigger scale because it's new technology. It's the same thing here. It's new technology and it can destroy on a much bigger scale but nothing that's going on is new in substance. It's just all new in form but it's not new in substance.
Simon Mikhailovich (00:23:22):
The one thing I was looking at the South Sea Bubble of the 1720s in England, we're observing the spec phenomenon today where the issuance of specs, that's the other chart we can't show but would be nice to see, I don't know what it was, was a few billion dollars every quarter, up until the first or second quarter of last year, when suddenly it became $30 billion a quarter. In this past quarter, well, this current quarter that's about to end, it's $100 billion or something like that.
Simon Mikhailovich (00:23:50):
Well, so in 1720, when the South Sea Bubble was on its ascent, over 100 companies raised money to piggyback. One of which companies famously had a prospectus that says that the company was for carrying and undertaking of great advantage, but no one to know what it is. I mean, is that a spec of what?
Daniel Scrivner (00:24:11):
It does sound vaguely similar.
Simon Mikhailovich (00:24:13):
1720? We're precisely 300 years later and we're doing exactly the same thing. We're calling it something else. The technology for floating the shares is more sophisticated. The issuance is much higher. In fact, that company raised 2,000 pounds. Now, we're doing 100 billion dollars' worth of these companies but that's exactly what they are.
Simon Mikhailovich (00:24:32):
I mean, truly there's nothing new under the sun. I don't know how it ends exactly and I don't know when it ends exactly but I think history, common sense suggests that it will end, it will not be the end of the world, it's not Armageddon. Everybody wants to talk about Armageddon because they don't really want to contemplate what really happens but it's going to be a massive wealth transfer from people who have savings to people who have debts. That's the way it's going to end and it's to anybody who is saving for their retirement or whatever, it's going to be a huge problem and soon I think.
Daniel Scrivner (00:25:05):
This goes back to that whole point if, at the end of the day, all that matters is preserving and growing purchasing power. Obviously, when you said that there's multiple different ways that this could kind of unravel but the bottom line implication for all of those is a loss in purchasing power for sure and likely a large loss.
Daniel Scrivner (00:25:22):
One of the things that I wanted to talk about is, just to transition it, there are multiple ways people can save, people can obviously, I don't know, this is also goes back to just the point time that we're at but I've heard everything from some of the like Reddit crowd are considering putting money in an RKTF savings and kind of safe money. We have people that are doing it and just putting cash in a bank account. Then, you have something like gold. Just talk about it a high level why gold, holding physical gold, holding gold is different and better than kind of holding savings in other forms and some of the reasons why that's the case?
Simon Mikhailovich (00:25:57):
Okay, when you say holding, savings and other forms that does not include, let's say, running your own company, which is a way to hold value in the form. When I say running your own company, I mean it could be a hotdog stand, that it doesn't matter. It's a source of income that generates some sort of you have customers that you serve well, that respect you, that you've established rapport with and that use your services and that's essentially is a source of wealth of real wealth. It's a source of real savings.
Simon Mikhailovich (00:26:25):
Now, if we're talking about people just setting money aside or financial asset aside, then we go back to what you and i talked about before with this interview and that is gold, in and of itself, is not anything particularly exciting. It's an answer to a price. It's a specific tool that can be used for a specific purpose. Of course, 50% of this "tool" is used for jewelry, which is a luxury good, which people like to wear, but in terms of savings, it simply is the only liquid financial asset that has three attributes, which I believe these attributes are compromised in the current financial system.
Simon Mikhailovich (00:27:05):
The main attribute is independence. Gold is independent. It's a physical good. It's not a promise. All financial assets ultimately are promises to perform, something or to give something, to the extent that equity securities are not exactly promises but claims on productive assets. They're heavily intermediated. The company can be in debt, the company can be poorly managed, the company could be fraudulent. I mean, there are a lot of different things that can happen between the claim that you hold and the real value that supposedly underlies that claim.
Simon Mikhailovich (00:27:36):
It's the only financial asset that's independent from the financial system. It's physical, it's the only physical financial asset, it's the only tangible financial asset. Therefore, it does not depend on the banking system. It does not depend on the swift or whatever networks. It's the only cyber immune financial asset, that's the other thing. We live in the digitized world. Not only are cryptocurrencies digital, but all financial assets are digital and they have different risks and different things about them but the cyber risk is real. It's actually the number one risk as identified by the US Defense Department and the Homeland Security Department as the number one strategic threat facing the United States is cyber risk.
Simon Mikhailovich (00:28:14):
It's the only cyber immune financial asset. It's the only liquid financial asset that's independent from the financial system and it's not a promise. It is lasting. Its molecular structure is unique and it's really literally indestructible, which is not true about financial assets in general. They're very much destructible under different circumstances and scenarios and it's scarce. I mean, it's really scarce and the scarcity is absolute. In other words, there's only one kind of gold. There could be no other kind of security similar to gold or an asset similar to gold. There's only one gold and we know how much there is of it and we know where it is pretty much. It's all above ground and it all exists.
Simon Mikhailovich (00:28:54):
You have a scarce, lasting and independent financial asset, which are unique attributes, which is why gold represents sort of insurance because demand for that, I mean if you think of what i just said, it's a counterparty free instrument. When do people want a counterparty free liquid instrument?
Simon Mikhailovich (00:29:16):
The only time they really want it is when they have a problem with counterparties. If you don't believe in fires, I mean, why would you want fire insurance? If you think counterparty is a fine, why would you want gold? Now, if you suddenly think that maybe there's a Lehman brothers on the other side of you or a company that's about to become Lehman brothers on the other side of you, well, then suddenly your desire for some instrument that doesn't have the risk of that type of a counterparty, is higher.
Simon Mikhailovich (00:29:41):
That's why gold is insurance because it's dynamic. These properties that I've just described create demand at times when confidence, in conventional assets, fails and that's when you want insurance. Otherwise, yeah it doesn't produce income and it's not very interesting to sit on it but the reason people own insurance is because It protects them from losses they can't afford. People insure their cars. They insure their houses. They insure paint. I mean, they insure everything. They don't insure their savings.
Simon Mikhailovich (00:30:10):
I mean, think about it. There is no concept of insuring your savings. I mean, a lot of people with money can buy another car. They can afford to lose a car but can't afford to lose their capital. The one thing that's absolutely irreplaceable, which is capital, particularly as you get older, I mean, of course, like at your age, it's easier to do that than in my age and I'm 62. If I lose all my money, I mean, the chances of making that money back are pretty slim, and none, not insured. Again, why? Because nothing like that has happened in the last 50 years. People, I mean, if anything history teaches us is that people don't learn from history. There we are.
Daniel Scrivner (00:30:46):
Yeah, I loved doing research for this and listening to one of your interviews. I heard you kind of frame up gold as the ultimate insurance on kind of bad financial outcomes and it's an insurance policy with a symmetry built into it. Can you just elaborate on that a little bit? Why that asymmetry exists? Why that's important?
Simon Mikhailovich (00:31:05):
It's a very big question. I mean, it sounds like a small question but it's a very big question because it really goes to the heart of what gold is and what gold isn't. There's not a tremendous amount of understanding of what gold actually is. It's not a commodity.
Simon Mikhailovich (00:31:21):
See, a lot of people analyze gold as a commodity. There's a tremendous amount of ink, analysts think spilled on mining industry and how much the miners produce and whether there's a shortage of gold or a glut of gold, I think it's much better to think of gold is, say art. There's an outstanding inventory. At any given moment, somebody holds that inventory.
Simon Mikhailovich (00:31:42):
In other words, every ounce of gold, now we say gold demand is up, gold demand is down. No, no, that's margin of demand. Every ounce of gold that exists above ground is owned every moment of every day by someone. It's not like it's just sitting there owned by nobody waiting to be harvested. No, it all exists. If you take the bigger picture view here, so there are about $10 trillion worth of gold in the world at today's price. The gold miners produce something about $2 trillion worth. It's roughly about between one and a half and 2% of the outstanding stock of gold.
Simon Mikhailovich (00:32:19):
There's no difference between gold that's produced yesterday and gold that was mined a thousand years ago. I mean, it's chemically exactly the same. At any given moment, people who are selling gold, just like art at an auction, are offering their goods to someone who wants to wants those goods. People who want those goods, are bidding on whatever goods are being made available. If you then think about it for a minute further, you'd realize, first of all, the gold that's mined is not mine to be consumed. It's mine to be owned, just like art. The artist painted not to be consumed. The art is painted to be hung on the wall and owned and all of the art in theory that some artists painted, it's pretty much exists, unless burned down something. It's all exists and so available.
Simon Mikhailovich (00:33:07):
Then, the next level, think about what does it take, what drives somebody who suddenly develops desire to own gold to exchange dollars, let's say, if you had currency or financial assets, for an asset that produces no income, what drives them to suddenly acquire that urgent desire to do that?
Simon Mikhailovich (00:33:28):
Well, as we said earlier, it's probably loss of confidence or not maybe loss, but weakening confidence in the financial assets, and their willingness to exchange their financial assets for this thing that produces no income, but has no counterparty risk and is actually lasting, and scarce and known brand and all that.
Simon Mikhailovich (00:33:49):
Well, I'll take the other side of that. Now, somebody does own this. Well, what drives their desire to give up this thing for financial assets and currencies? At what time do they have a massive desire or lack of desire to do that? If you think about this, what I just said for just a moment or two, what you would realize is that the reason gold acts as insurance is the same reason, credit default swaps, credit insurance acts as insurance.
Simon Mikhailovich (00:34:18):
When the risk goes high, people who own insurance are afraid to sell it because their confidence is lower and they don't want these financial assets because they're afraid of them. People who have too many financial assets want to get rid of them in exchange for something that doesn't have the risk of financial assets. You have a perfect storm, just like the chart of exports from Switzerland. I mean, all of a sudden there's a massive surge in demand for physical gold.
Simon Mikhailovich (00:34:46):
Now, that's important to understand, this asset that I'm talking about is not gold securities. Gold securities are used for speculation and gold price. There's a whole community of people who trade gold and they look at interest rates and they look at all kinds of things but as insurance, it's physical gold and it's this dynamic that I just described and because mining only produces one and a half percent, you can say that in any 12-month window, the supply of available gold accounts for 90, what is it 8-1/2% of theoretically available inventory and only 1-1/2% is definitely for sale, which is the miners. The miners would definitely sell their production because they need money to operate the mines.
Simon Mikhailovich (00:35:30):
At any given year, only the mining production is definitely for sale. Everything else is not definitely for sale. It's for sale for the right price and under the right circumstances. That's what drives this a symmetry of gold because the moment when demand for gold is at its highest, that's when supply of gold is at its lowest.
Daniel Scrivner (00:35:51):
Yeah and I think something like credit default swaps or thinking of it in insurance terms definitely makes sense. It's like a flood just happened. What does that do to the price of flood insurance? Obviously, it's going to go through the roof and be very difficult to get.
Simon Mikhailovich (00:36:03):
Demand, that's right. All of a sudden, suddenly realizes they urgently needed. Now, of course, by the time the hundred-year flood has already happened, the need for insurance is probably lower than it's been. That's the financial part of owning gold as insurance. That's similar to the big short, except it's a big long. Of course, the big short was also big long and enough people know that but the people who made money in the big short they were not short anything, they were long insurance. They were long credit insurance and that insurance paid off when the underlying mortgage is default.
Simon Mikhailovich (00:36:35):
It's the same thing here, your long an asset and the demand and the price of that asset is at its highest at the moment when you need this coverage. That may be when you exit and buy something else, that everybody's trying to get rid of.
Daniel Scrivner (00:36:48):
Yeah, I want to dig into something that you said there because i feel like it's a common misconception or a misunderstanding and that's kind of two parts: one is why is gold and I know we've covered this a little bit that gold is not a commodity, but I think a lot of people, when they think of gold, they immediately associated with precious metals and then gold gets put right alongside silver and platinum. I want to talk about that a little bit, why that doesn't make sense, why gold is kind of separate and distinct.
Daniel Scrivner (00:37:14):
Then, the separate piece, just to expand on it a little bit is I think for a lot of people they think, okay, I want to own gold. Great. I'll go buy that gold ETF as opposed to holding it physically, which obviously it's more difficult, it's more time consuming but I would love to talk about those. Maybe, just starting first, can you flesh out a little bit of just why are silver and platinum and other things that are lumped in precious metals so different than gold and why don't they serve the same purpose?
Simon Mikhailovich (00:37:38):
I mean, gold has some industrial demand but it's fairly low relative to its production into outstanding stock. Demand for gold basically is the luxury, jewelry, which is already different right there because it's a luxury good. It's positively correlated to economic growth. It puts a floor underneath the price of gold. See, there's demand for gold, regardless of whether gold is monetarily desirable, insurance-wise desirable, it's a reserve asset, of course, for central banks but it's also jewelry. There's demand for that. Now, of course, maybe it's not at today's price but at some price, there is a demand and people have been wearing jewelry for the past whatever, thousands of years. I don't think it's about to change.
Simon Mikhailovich (00:38:18):
Most of the silver platinum and other platinum group metals are consumed in industry. They're industrial metals. For example, platinum, I mean, you can observe their platinum price. I mean, platinum, traditionally, used to trade above gold, higher than gold because it's more rare than gold, it has similar properties to gold in terms of its longevity and independence and everything but it's just traditionally not been used as a monetary metal.
Simon Mikhailovich (00:38:46):
When there was a scandal in Germany with Volkswagen, fudging numbers for diesel emission standards, demand for diesel engines collapsed and demand for platinum, industrial demand for platinum collapsed. The price of platinum collapsed and frankly, it hasn't recovered yet. I mean, platinum is still trading at what, 1,100 or something and it was trading almost at half the gold price for a while there.
Simon Mikhailovich (00:39:09):
This is a good example. I mean, all of a sudden the major component of the demand and the price for platinum was not monetary platinum, was not jewelry platinum, it was catalytic converters for diesel engines and once that demand collapsed, so did the price of platinum. Silver is in a similar situation. Now, we all know about the, what is the punch line, the silver squeeze or whatever?
Daniel Scrivner (00:39:31):
Simon Mikhailovich (00:39:33):
Well, that actually probably is a more financially sort of astute endeavor than trying to squeeze gold because there's not that much silver around, because silver is not produced to be owned. Silver is produced to be used. Of course, some of it is owned in coins and but the majority of silver is produced to be used. There is not a massive above ground inventory.
Simon Mikhailovich (00:39:56):
For example, those people that are "squeezed silver," so instead of trying to do financial markets, all they can do is buy up the silver. Don't play the leverage. Don't play with the hunt brothers try to play him, got defeated that their own game. Just buy it that's it just take it out of the market and eventually that would put the squeeze on the silver market.
Daniel Scrivner (00:40:13):
A natural squeeze.
Simon Mikhailovich (00:40:14):
It's a natural, exactly, it's a natural squeeze. It doesn't need to be any financial operation but see, that's not easy for people to do. That's a pain and people are looking for easy solutions. They're looking for something where click, click, click on the screen, boom, boom, the next thing you know the price goes up, you sell, you make money, you move on. That's not the way it works here.
Simon Mikhailovich (00:40:33):
The difference between gold and these other metals is it is not produced to be used. It is produced to be owned. Therefore, the stock of gold and the flow, the stock to flow ratio so called, is such that in theory all the gold is available for sale, in theory, at some price, which is not true of silver because it's consumed. I mean, you can get silver back out of these cellphones after it's done. I mean, people recover silver but it's hard. There's a high cost of recovery, whereas gold is just sitting there. It's there.
Simon Mikhailovich (00:41:02):
Gold is more of a monetary metal. It's a luxury good. It's a reserve asset for central banks and it's a monetary metal. By the way, the reason it's a reserve asset for central banks is exactly the same reason as insurance because it has no counterparty. When things go bad and the currencies go bad, that's what central banks use to settle accounts with each other and that way they don't have to trust anybody. I mean, that's nature's Bitcoin. Gold is nature's Bitcoin. I mean, that's really what it is.
Daniel Scrivner (00:41:27):
I've never heard it described that way but I love that definition.
Simon Mikhailovich (00:41:30):
I mean, if you think about it, that's exactly what it is. The one thing that gold does not have that Bitcoin has, it doesn't have dependence on the network. It's truly genuinely completely independent. Those are the difference between precious metals in general and gold specifically, which is what makes gold so efficient as a monetary asset, because it doesn't have the supply, demand, disruptions or whatever, capacity for reasons that are not related to its either monetary or jewelry use.
Daniel Scrivner (00:41:58):
Then, switching over to the kind of ETF topic because I think, I want to discuss this with a little bit of nuance because obviously there's a very well-known ETF, I think it's SGOL, the iShares, ETF which one point in time, I haven't looked recently, but at one point in time, it was supposedly physically backed and you could take your kind of portion of ownership and actually exchange that for gold. Then, there are other ETFs that market themselves as physically backed.
Daniel Scrivner (00:42:23):
One question that I want to ask there is just from your perspective is there any truth in the ETFs that market themselves is physically backed and would there be any reason to invest in one of those? Basically, are there higher quality ETFs or lower quality ETFs or is it just all of that doesn't make any sense for the reasons we've discussed and it just goes back to the point of holding physical gold?
Simon Mikhailovich (00:42:45):
It's a non-sequitur discussion. It doesn't make any sense for the reasons we're discussing. I apologize. I should have addressed it in my previous answer.
Daniel Scrivner (00:42:51):
Simon Mikhailovich (00:42:52):
It's like plugging a backup generator back into the grid. i mean, what's an ETF? It's a hybrid fund that's between the mutual fund and a closed end fund. It has a complex structure of how prices of shares are equated to the value of the underlying gold. They are underwriters that are making markets. They're custodial arrangements that are at banks.
Simon Mikhailovich (00:43:12):
If we go back to the financial repression discussion, if we go back to the discussion of systemic risks, why would you want to buy insurance against collapse of Lehman brothers from Lehman brothers? I mean, it's basically because you will not get paid if your insurance expires in the money, if you will, because by definition the event against which you're insuring is the event in which you will not get paid. Whether there is real backing, whether there is no real backing, is an issue but that's a secondary issue if one is thinking of it as insurance. If one is thinking or speculating, buying today and selling three hours later, it doesn't really matter what you use. You can use ETFs? Yes, it's better to use ETF that's properly backed by gold.
Simon Mikhailovich (00:43:54):
I mean, if they're saying it's backed by gold, let's assume that it is. There are a lot of conspiracy theories, maybe it is, maybe it isn't but what I'm saying is gold that's stored in a warehouse that's not connected to the financial system is insurance. Anything that's in the financial system, be bullion bank, be the broker dealer, be the custodial account at Vanguard or whatever it is, is in the financial system and whatever risks that you're trying insure against, those risks are pertained directly to all those securities, whether they're backed by gold, real gold or not real gold, doesn't matter. It pertains to all these things. Just like I said in the beginning, you don't plug in your backup generator into the grid, you don't get insurance against financial calamity in financial markets. I mean, you just don't, best practices.
Daniel Scrivner (00:44:37):
Yeah and that's the reason why clearly if you're owning gold as a, and maybe just to walk it back and kind of recap what we've discussed because we've gone all over the map on a great way but we start out that everyone's goal at the end of the day, yes to some people, may say things like I want to get wealthy, some people want to just grow, hit a certain kind of monetary figure but ultimately at the end of the day all that really matters is preserving and growing wealth.
Daniel Scrivner (00:45:00):
There's a bunch of things out in the world especially the monetary policy experiment that has been going on over the last, I don't know, 50 plus years that put that at serious risk and where the outcome is that you lose purchasing power over time and that very little wealth kind of survives that. Gold is that insurance policy and then as we talked about its insurance policy with asymmetry in it, it survived through debt booms and busts. If you're owning it for that reason, then clearly you want to own physical gold. You don't want to own precious metals and you want to have that because at the end of the day, there's no impairment risk or counterparty risk is that kind of articulating that, pulling that all together in a way that makes sense.
Simon Mikhailovich (00:45:38):
Yes and you know what? Thank you for saying this last thing, the impairment risk, that's key. Not only is this an asset that doesn't have a counterparty, it doesn't have impairment risk. In other words, an ounce of gold is an ounce of gold is an ounce of gold is an ounce of gold. It's not going to default on its obligations so not only is not a promise of somebody, in itself is just a thing. You cannot get impaired in a way that a stock or a bond or a promise can get impaired meaning not only they don't do what they promised, but you can never recover. See, with gold, there's price volatility but there's no impairment.
Simon Mikhailovich (00:46:10):
I think the issue that you touched on, which we haven't touched on, is making money versus preserving wealth. It's a lot easier to make money than it is to preserve. I mean, you can see in the crypto markets tremendous wealth has been created. The question, this is pretty new wealth. The question is how lasting is this wealth going to prove to be. There's tremendous wealth created in the internet boom in the '90s, most of that did not persevere. I mean, some of it survived and became bigger than ever some of the companies that we know but most of it didn't.
Simon Mikhailovich (00:46:40):
Gold is really, it can be used as a speculative vehicle like anything else. I mean, you could speculate, you can make money in pork bellies. We're not talking about that use of gold. Yes, of course, people can speculate and gold would leverage to create wealth. We're talking about preserving the wealth that has already been created.
Simon Mikhailovich (00:46:58):
Physical gold, in the way it that I'm describing it, is not for people who want to get rich, it's for people who want to save the purchasing power that they have already acquired and yes, it is possible and likely that when bad things happen and you are the only one or one of very few people who have preserved your purchasing power, while others have not, you have opportunities to create additional wealth by using your liquidity to buy assets at distressed prices because other people don't have liquidity and have to sell them but that's the next leg of the strategy, if you will.
Simon Mikhailovich (00:47:34):
The front leg of this strategy is to preserve purchasing power and that can only be done through physical gold because it is the only medium that is free of counterparty risk, free of impairment risk, universally recognized, doesn't depend on anything and whose demand or demand for which exponentially rises as confidence in financial assets and other alternatives declines. Basically, the inverse of trust, that's what it is.
Daniel Scrivner (00:48:01):
Yeah, I want to go back to one point we made earlier, which was around just thinking about managers or investors in Europe and in Asia and why they tend to prefer real assets, meaning things like real businesses as well as gold. I want to be super clear. I don't want to have any kind of an ideological discussion but part of what I want to suss out there is to try to talk a little bit about just the mentality.
Daniel Scrivner (00:48:23):
Clearly, if we just contrast to that idea so an investor who thinks I'm growing my wealth over time, I'm going to do that by owning real businesses and having a claim on that income as well as real assets like gold and that's the way I'm going to preserve it, clearly for them, it seems like they're more focused on preservation, they're more focused on something that's real and tangible and that they own directly as opposed to owning something that's, I don't know, five steps removed like a security and a company that seems to be very different from people in the western world who, to your point, they're focusing, they're very comfortable with financialized assets and they're very focused on appreciation versus preservation.
Daniel Scrivner (00:49:02):
I just would love to know your perspective on why that is the case, what does that suggest about the difference perspectives in the world and just a little window into that mentality of someone who cares more about preserving wealth over just seeing their kind of numbers tick up on a screen?
Simon Mikhailovich (00:49:19):
It's the difference between personal experience and history. I mean, there's more of an overlap between personal experience and historical experience in other parts of the world than there are in the United States. The United States has not been at war since the civil war, on its territory, has not seen physical destruction. Essentially, during, I mean, we had the Great Depression but that's already 80 years ago, whatever. Well, it's almost 90 years ago now. It started 90 years ago.
Simon Mikhailovich (00:49:48):
Nobody who was alive during that time as an adult is alive today. I mean, there's people who are born during that time but they don't remember. They were children. It's worse than that if you look at the '70s. That was the last real bear market. The dollar lost like 60% of its purchasing power in a few years during the '70s. It was terrible. But nobody who lived through that is managing money today. I mean, you have to be deep into your 70s just to have been, I guess, if you were born in 1950, you were just 20 in 1970. You're just starting your investment career, let's say.
Simon Mikhailovich (00:50:22):
There's really no firsthand experience in the United States with the kinds of debacles that Europe had. I say something else, which I think is very important, why is there less interest in gold, let's say in Latin American and some other places? Because the dollar has played the role of gold for people outside the United States. To preserve wealth in the last, whatever, 30, 40 years, what you needed to do is just open dollar account. If you were an Argentine wealthy family, you'd have accounts in Miami. That was your gold. You didn't need gold.
Simon Mikhailovich (00:50:55):
Think of it, what happens to the world is the US dollar has to get devalued, which I think is either the US dollar has to get devalued or the US assets have to get devalued? The dollar denominated assets have to get devalued. Something's got to get devalued. That's the conundrum that we face. One of the great opportunities in gold is that it's under owned and underappreciated because there have been alternatives for it, which are now coming into a problem.
Simon Mikhailovich (00:51:21):
In the United States, there's a much less of a perception and experience that Americans have with the kinds of things that Europeans have had experience with when generation after generation, it gets drilled into you that every so many years your farm gets burned or your state gets burned, because either the Germans come through or the Germans come through, or the Germans come through. That was three times. Paris was occupied by Germans a few times in the 20th and 19th century or the Russians come through and take everything away or somebody.
Simon Mikhailovich (00:51:51):
I mean, now, I have a different perspective because I grew up in the Soviet Union. I left there when I was 19, basically with a suitcase and $100. I have a much more acute sense of what expropriation looks like without Armageddon. It's personal Armageddon for somebody, but it's not like the world goes on. Everything's fine.
Simon Mikhailovich (00:52:12):
I'm more conscious of it and that's what kind of got me interested in once I've been fortunate to have some savings, to try to figure out how to protect them from the kinds of things that have happened in history before but I think that's the difference with Americans, we have not had hard money since 1970s. Nobody remembers really what it was like. It's world money. The world has been very successful at essentially inflating itself into this bubble that we're in, by all historical measures it is, but when you're inside it, you don't necessarily appreciate it.
Simon Mikhailovich (00:52:44):
People have food on their table. They live. They can buy house. They can get credit. We've had disruptions from time to time, like 2020, 2008, 2000, every so many years, but we haven't had a big reset and I believe that it's coming. It probably will be a terrible thing but it will be a positive for the long-term. It has to happen because forest fires clear the brush and that's the natural part of the... That's what the problem that we're facing is that we have deferred these forest fires for decades.
Simon Mikhailovich (00:53:16):
Instead of having small fires, we're going to have to have a big fire but it's possible to survive it if people think about it and take steps and don't take undue risks and triangulate as to what happened and read this book that I just recommended because there's nothing new under the sun. It's all happened before but perhaps it's never happened on the scale because we have untethered ourselves and we're going to have to retether ourselves. I don't see this the end of the world. I mean, I see it as something that's natural that we have managed to defer for a very long time.
Simon Mikhailovich (00:53:47):
That goes back to answer your question, so why aren't Americans aware of this? These things haven't happened here. They've happened in other places. Of course, our exceptionalism tells us, what happened in Turkey this week could never happen here but it can. It has happened to all empires that came before and they all go on. London is a beautiful city, but Britain is no longer an empire. That's just the way it is.
Daniel Scrivner (00:54:09):
Yeah, I think you said it perfectly. We've deferred the pain for so long. We've got to pay that bill eventually and experience that. That's just part of the natural way that things need to go.
Simon Mikhailovich (00:54:17):
Precisely. That there will be a reset, some things will persevere and become even better through this. I mean, think of the companies. I mean, think of this, just in practical terms. All this excess capacity, we haven't had inflation, "inflation and consumer goods," because all this cheap money has enabled all these factories to be built in China, wherever, it is cheap labor, producing all these things. Everybody's like, "Oh, gee, this is all great," but in the meantime, American workers used to make these things. They're medium wage hasn't budged in 30, 40 years.
Simon Mikhailovich (00:54:50):
Now, on top of the financial crisis, we have THE political crisis. We have a social crisis. We have a geopolitical crisis. We have an economic crisis because the economy, the resources have not been directed into where they need to be directed. Now, they're talking about infrastructure bills, building the roads, building the bridges, yet now that we are in the hole, we're going to get into a bigger hole to do things that we should have been doing for the past 30, 40 years but haven't been doing.
Simon Mikhailovich (00:55:15):
Look, the priorities are going to be changed. One thing in history is very clear, when the government cannot solve economic problems, the system changes to a system that can solve those problems and we see that around us right now. I think, people just have to be very aware and realistic and it's not realistic to ask everybody to be realistic because that's just not the way it happens, but to the extent you can convince some people to open their eyes and look deeper into what's going on.
Simon Mikhailovich (00:55:43):
I think that it's important. There's a tremendous desire for solutions. I mean, I think this whole crypto space speaks to this, aside from the speculative fervor to get rich quick, the ethos of it speaks to this desire to get out of the system to find another way. I have to think that's not the right path for a number of reasons, not because it's bad technology, not because it's not safe haven, it has been tested. There's future in it but just like with internet, I mean, who you that some bookseller from Seattle, Washington is going to be what it is today, but 99% of them didn't make it.
Simon Mikhailovich (00:56:16):
It's the same thing here. I mean, there are kernels of truth all around us and you can see these impulses all around us, the mistrust of Wall Street, the mistrust of the system, this GameStop thing. I mean, all of these things, these events that we're suddenly watching, they're all symptoms of the underlying discontent and this discontent, even though I say people don't realize it, I mean people realize it, maybe they don't know how to express it, they don't know what to do about it, but it's happening. These are all symptoms.
Simon Mikhailovich (00:56:47):
If you watch the symptoms, if you make the right diagnosis, then once you make the diagnosis, you can start thinking what are the solutions that fit the bill given the risks that we're facing and then gold, owning your own business, hard assets, something less levered, more fundamental, start your podcast. I don't know, whatever. Find your customers, find your people to whom you can provide something that will be important and necessary even when the circumstances change.
Simon Mikhailovich (00:57:16):
I don't think there are any kind of miracle, cures or silver bullets here but there are solutions and the solutions have to be rooted in realization of what the situation is. The first thing to do is to diagnose it correctly. That's what we've been trying to do here a little bit but that's just the beginning, I mean, it's a much bigger exercise obviously.
Daniel Scrivner (00:57:36):
I want to shift and ask a few closing questions and the first one is just a personal question, which is as you mentioned there, you've definitely had some personal experience being from the Soviet Union where you've had a firsthand perspective of what this kind of feels like and why gold is important, which most people don't have but that was a long time ago and you've managed to have, what I would call a very outlier point of view in a world that it seems like everybody just kind of gets sucked in to what's happening at the moment and that things have changed and gold is no longer relevant and we should just lean in to kind of grow stocks and technology stocks and I'm just kind of throwing out things but i feel like there are very few people with outlier perspectives that have been able to hold those over long periods of time.
Daniel Scrivner (00:58:18):
Any thoughts on how you've been able to do that and I'm sure some of that is the clients you work with, some of that is just your world purview but how have you been able to maintain this very detached point of view?
Simon Mikhailovich (00:58:28):
That's because I made a decision not to be in the asset management business about six, seven years ago. This is one situation where pros are materially impaired relative to amateurs. I mean, this is where citizens have a lot more control and ability to do things than professionals. The reason for this is because the dynamic of being a professional, meaning managing money, you have to deliver returns right here now or you get fired. You basically lose your business.
Simon Mikhailovich (00:59:01):
The way I was able to express this view is to essentially create a business that was aligned with my view and build it over a long period of time just like the old fashioned way where I can afford to do this and I don't have to deliver performance to people because I'm not selling to them performance, I'm not managing money. This is where people who have income and who have careers and who have their own savings, it's hard emotionally but practically they're in a much better position than the money manager who basically doesn't have a choice not to be in the market, can't just go and sit in gold or in some farming assets or some esoteric things that are not showing performance because he's going to lose his livelihood. I mean, it's as simple as that.
Simon Mikhailovich (00:59:48):
In fact, I think this is one of those rare circumstances where people who are not professionals have tremendous advantage where they have a freedom to do what they want to do. I mean, they're not answering to anybody with their savings, except for themselves. Maybe their FOMO is what's, fear of missing out, preventing them from taking a longer term view. It's very hard. I'm not saying it's easy.
Simon Mikhailovich (01:00:14):
My ability to do that simply is rooted in the fact that I've already seen things go pear shaped in a big way. I left the Soviet Union way before it collapsed. I didn't have to deal with that experience but it was a very hard experience leaving it and there was a huge, "trade" that tremendous barriers to entry, if you will, huge cost, very highly uncertain outcomes. I've already kind of done it once and it was worth it, hugely, obviously. I made my money in the asset management business but then once I decided that the system was compromised, I sort of stopped. There's another thing I'm going to say, this is a bigger issue, how much money is enough?
Daniel Scrivner (01:00:55):
Simon Mikhailovich (01:00:56):
Yes. It's a great question. For example, I mean, crypto people is a good example. People rode this from whatever, 0 to 55,000 and now they're hoping to ride it to 400,000. That's why fortunes don't last. At some point, you have to say I've eaten enough. You usually have to say that before everybody else decided to say the same thing. That's the only way to preserve your money over time.
Simon Mikhailovich (01:01:19):
To my mind, the right amount of money is the kind of money that lets you live your life and doesn't interfere with it. Whatever lifestyle you like, if you have enough money where you can lead that lifestyle, and your money is not interfering with your ability to do it, like you're not waking up at two in the morning to check the app, what's the price today, you can relax, that would be the right mind but that's another thing, there's no concept like that. What's enough money? The sky's the limit.
Daniel Scrivner (01:01:47):
Even with that, it's like, I think, that's such a great point is say you're sucked into an asset or investment because of FOMO, well, if that's the case then, you're absolutely not going to eject out because built into FOMO is this sense that you just have to stay in or even if you pay attention to kind of the community on Reddit, there's this whole term like diamond hands versus paper hands, and no matter what the volatility, you've got to just keep holding it and it's like that is both wealth building and wealth destroying, but you're basically going all in on volatility, and you're absolutely not going to hit the eject switch.
Simon Mikhailovich (01:02:15):
Well, this whole huddling thing. That's exactly what it is. When do you get off that train? When have you eaten enough? The problem, I mean, that's why, again, for the third time, I would recommend the book because it basically explains why wealth is lost on such scale, FOMO. I mean, Galbraith didn't use those words but that's basically what it is. It's almost impossible to exit early because it's not yet, it's not yet. I know. I know. we can get more. We can get more.
Simon Mikhailovich (01:02:42):
People who quadrupled, quintupled their money and [inaudible 01:02:45], oh my God, I could have made so much more. That's the problem. That's where the human nature interferes with our ability to sustain ourselves. I think that this is the time to be, again, Warren Buffett said that, "The less prudent of people in conducting their affairs, the more prudent we should be in conducting our affairs."
Daniel Scrivner (01:03:02):
It's a great quote.
Simon Mikhailovich (01:03:03):
That's essentially what I'm advocating here on all fronts and gold is a part of that but it's not all of it and getting to it requires a lot of this other thinking that you and I have touched upon but that's a bigger, I think, state of mind than just, "Oh, get gold because you're going to make a fortune." No, no, no.
Daniel Scrivner (01:03:25):
That's not at all the point.
Simon Mikhailovich (01:03:25):
That's not what it's about. I mean, it could be about that for some people but that's not what it's about the way I'm doing it.
Daniel Scrivner (01:03:30):
That's probably somebody who's going to buy an ETF or it's going to just speculate on the price.
Simon Mikhailovich (01:03:33):
Of course, so futures. I mean, you have huge leverage and futures. I mean, why not? Of course.
Daniel Scrivner (01:03:37):
You recommended the book earlier in the podcast. Just want to reiterate for everyone. We'll link to it in the show notes as well but a short history of financial euphoria, which I'm definitely going to read and you actually mentioned that to me before. This is another good nudge to go and actually read that book.
Daniel Scrivner (01:03:50):
Are there any other books for someone listening, who we've piqued their interest on gold and I'm not saying books on how to invest in gold but books that potentially talk about the history of gold or around the topic or maybe even just books about preserving purchasing power and why that's important and different? Is there anything else that you would recommend to people that kind of is in line or feels like another book that might be worth reading alongside a short history on financial euphoria?
Simon Mikhailovich (01:04:16):
The most worthwhile reading, I think, is history, financial history. I mean, that is critical. Again, you can read about gold, you can learn everything there is to know about gold, that's not what it's about. It's about understanding history. It's about understanding what do you need to solve for. What are the potential outcomes?
Simon Mikhailovich (01:04:35):
If you have sufficient imagination of what the potential outcomes are, you don't need anybody to explain to you what to do about it. You will figure it out yourself. Books for example, like the Dying of Money. I don't remember the author but if you Google the Dying of Money, you can't get a physical copy of it, but you can find it in PDF online. The book like When Money Dies, I mean, similar name but different. Both of those books are about German hyperinflation and American inflation of the 1970s. Our website is bullionreserved.com. There's recommended reading there.
Daniel Scrivner (01:05:11):
Okay, we'll link to [crosstalk 01:05:12].
Simon Mikhailovich (01:05:11):
I mean, there are books by George Orwell and Aldous Huxley, I mean, this is a time to be reading about repression, about political outcomes, about democracies, about history about the rise and fall of empires. We're at the tail end of a very long cycle, debt supercycle. It's 100-year type cycle. Of course, the Fourth Turning, I highly recommend that. None of these books, if you read the book you'll know exactly what to do but those are the books that raise their awareness that make your mind, the juice is flowing and you say, "Oh my God, this is familiar."
Simon Mikhailovich (01:05:49):
Of course, this is exactly what's going on. I see it. When you read Presidents, that's why I said, when you read Galbraith's book, like the first 20 pages you'll laugh because the description of how bubble works is like, "My God," and he quotes this thing that I quoted you about this company that nobody's to know what it is. It's for carrying on an enterprise of great advantage but no one has to know what it is.
Daniel Scrivner (01:06:12):
Sounds like the worse business proposal or business plan ever.
Simon Mikhailovich (01:06:16):
Well, I mean...
Daniel Scrivner (01:06:17):
What's that mean?
Simon Mikhailovich (01:06:17):
... there's $100 billion worth of those issued in the first quarter. That's exactly what it is. When you read this and when you understand, then you don't need to hear me, some guy spouting, "This is what's going to happen," or "This is what it is." No. I mean, knowledge is power in this case and knowledge of history is power.
Simon Mikhailovich (01:06:34):
If i can recommend one thing to people is just you can go on our website but you don't have to look at different books about history, about the history of the 20th century, about the history of the rise and fall of empires, there's another great little book called The Lessons of History, about 100-page book by Will and Ariel Durant.
Daniel Scrivner (01:06:53):
It's wonderful audio book too.
Simon Mikhailovich (01:06:55):
Yes, it's 200 pages. Between these two books, between the Euphoria book and the Lessons of History book, is 100 pages each. I mean, you can put these away weekend apiece and you will gain so much better perspective on where we are and how the world has gotten here than anybody can explain to you or tell you or anything, you will come to it yourself. That's really the key to this is coming to it yourself. Once you come to it yourself, nobody's needs to try to convince you of anything. Then, you have questions that you want to answer. That's the right way. Once you're asking the right questions, then you can start coming up with answers. Otherwise, if you're asking the wrong questions, you're not going to get the right answer.
Daniel Scrivner (01:07:34):
No, I think it's a wonderful point and just to further that, I feel like, one, these are books that I see regularly recommended and I don't regularly hear that point but I think there's so many people today who are just so fixated on technology and that everything is moving so fast and I just need to kind of read and think about the future and I think it's such a great point that we all have to counterbalance that by really having a sense for historical precedent and how things have worked over time and how things are likely to play out.
Daniel Scrivner (01:08:01):
Another book I would throw in alongside but it's a book I'm obviously throwing out that you're not throwing it out but it feels like it maybe lives in the same vein or is somewhat related as The Dao of Capital just because it does talk a little bit about how money works in practical terms, how it works for someone that actually owns a business and how that's different from someone that's speculating and all of this feels very related. Thank you for those.
Simon Mikhailovich (01:08:22):
The most important thing is that technology evolves but people don't. That's the biggest lesson of history is that humans don't change. That's why every 20 years there's a financial euphoria because our instrumentalities change continuously but we're still doing the same thing just because I'm sitting on my couch watching the show, it used to be somebody had to strap on sandals and put on a toga and walk maybe two miles to an empty theater to see a play.
Simon Mikhailovich (01:08:47):
Now, they can sit in their underwear drinking beer on their couch but what are they doing? They're doing exactly the same thing. They're just consuming it in a different way but they're consuming the exact same thing. They're like people who are doing something on the screen, otherwise they would be on the stage. It's the same thing. They're very little of what, if you think about all these great technologies what is Amazon? It's a Sears catalog. I mean, think about it. You go on some device, it used to be a book, now it's an electronic device and you point this, that, and that, the next thing it shows up at your door but what did Sears do 100 years ago? It did exactly the same thing and that's true about a lot of different things.
Simon Mikhailovich (01:09:24):
Information storage, now it's in the cloud? Well, there used to be a company. What was the company called? The trucks were everywhere. They would come with shredders. ID whatever something?
Daniel Scrivner (01:09:33):
Simon Mikhailovich (01:09:33):
Iron Mountain and they would take your piles of papers into some warehouse somewhere. Okay, that's cloud storage. I mean, different access.
Daniel Scrivner (01:09:42):
Its' a physical precedent.
Simon Mikhailovich (01:09:43):
Yes. I think that that is one of the biggest insights that people can have is that instead of trying to penetrate the edge of what this technology means, think of what does this mean to people. Do you still get up in the morning? Do you still put on slippers? How do you brush your teeth? I mean, none of that has changed.
Daniel Scrivner (01:10:04):
Understanding people in history [crosstalk 01:10:05].
Simon Mikhailovich (01:10:05):
Understanding people and history and FOMO and greed and fear and all of those things, that's basically what the insight is about. There's no magic key. I didn't invent any of it frankly. I mean, I'm just synthesizing what I've read and experienced through my life but none of this is new. Let's put it this way.
Daniel Scrivner (01:10:23):
Those human traits are, I think there's a 0% chance they are not here a thousand years from now. In a lot of ways they're the ultimate thing to understand [inaudible 01:10:31].
Simon Mikhailovich (01:10:31):
Daniel Scrivner (01:10:32):
Kind of incorporate into your worldview.
Simon Mikhailovich (01:10:33):
Yes. Greed, fear, love, sex, I mean, well, that's basically what drives humans. Money? That's what drives human and that's not going to change and the fact that we can do this in somewhat different ways or with different instrumentalities, it doesn't change the essence of what we're doing and that's where I think one gets to get some insight as to what's going on and how it might end and where it can lead and how can one try to position oneself and one's family and those for whom one's responsible to navigate and maybe even to get advantage from these events in some way.
Daniel Scrivner (01:11:07):
I think that's a perfect note to close on because in a lot of ways we've gotten completely full circle in this interview. Thank you so much for your time and your generosity for coming on and kind of going all over the map and talking about this. You already shared your website but maybe I'll ask you to share that again but for anyone that wants to follow you on social media, find out more about what you're doing, where can people go to see you and follow you?
Simon Mikhailovich (01:11:27):
I'm on twitter. I've taken a few days off. I'm a little like a lot of news but nothing new. It's the same thing all over and over again but it's s_mikhailovich, M-I-K-H-A-I-L-O-V-I-C-H on twitter or bullionreserve.com, B-U-L-L-I-O-N reserve.com and there you can see my thinking. There's some interviews you can see that I've done with others talking about gold, talking about what's going on and most importantly suggested reading, which is I think the start of the journey.
Daniel Scrivner (01:11:58):
If anyone hasn't, I would just also recommend you've got some fantastic interviews with Grant Williams and others on Real Vision that I really enjoyed. If anyone really liked this conversation, wants to hear more, I would throw that out. Thank you so much for your time, Simon. This has been so much fun and I really appreciate it.
Simon Mikhailovich (01:12:11):
Thank you for having me. It's been great.
On Outliers, Daniel Scrivner explores the tactics, routines, and habits of world-class performers working at the edge—in business, investing, entertainment, and more. In each episode, he decodes what they've mastered and what they've learned along the way. Start learning from the world’s best today. Explore all episodes of Outliers, be the first to hear about new episodes, and subscribe on your favorite podcast platform.
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