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DAVID MCALVANY | Vaulted

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Inflation, making your money as potent as a jigger of whiskey in a bathtub full of water - David McAlvany Vaulted

What is a hard asset? Why should you know what it means? While stock markets provide access to a huge variety of investments they can sometimes lose value remarkably quickly. Hard assets have real intrinsic value that can provide protection in troubled times and especially against inflation.

David McAlvany runs a hard asset fund that focuses on precious metals, global natural resources, infrastructure, and specialty real estate. He also founded Vaulted and oversees the precious metals brokerage business that his dad started in 1972. Vaulted is an app that allows you to buy and sell gold at a press of a button on your phone.

We spoke about the forces that may be leading the world to higher inflation:

“The flexibility gained by having a printing press is that not only can you borrow but you can also print. You can create some form of value out of nothing. And you have to be careful because if you create too much of that stuff, then everything else that proceeded it in the creation process becomes worth less. Imagine the potency of a jigger of whiskey, a shot of whiskey, fairly potent on its own. Mix it into a bathtub full of water and you can barely tell that it's there. When you increase the amount of money in circulation that is an essence what happens. You end up diluting it. It loses its efficacy. It loses its ability to purchase what it once did.”

We also covered other hard assets, or as David described them, things that you can stub your toe on:

  • Real Estate
  • Gold Silver Platinum & Palladium
  • Natural Resources
  • Timber
  • Infrastructure

Through the Vaulted app, you invest in 99.99% pure gold kilo bars manufactured by the Royal Canadian Mint and certified Conflict-Free

Vaulted App buy and sell real gold from your smart phone

The bars are produced by and stored at the Royal Canadian Mint, a ISO-9001:2000 certified refinery. The gold in the Royal Canadian Mint’s vaults is insured and guaranteed against theft, damage, or other losses.

 

Gold allocated to you is never mixed with anyone else’s gold and can never be leased or used by Vaulted or the Royal Canadian Mint.

 

Only with your permission can your gold be physically delivered, to your home, business, or another vault in about a week via FedEx.

Also mentioned in the episode were the following links to more of David's resources:

McAlvany Wealth Management

McAlvany Weekly Commentary

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Phil (37s):

Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. What's a hard asset? Why should you know what it means? While stock markets provide access to a huge variety of investments, they can sometimes lose value remarkably quickly. Hard assets have real intrinsic value that can provide protection in troubled times and especially against inflation. Joining me today is David McAlvany from McAlvany Wealth Management. Hi David.

 

David (1m 4s):

Phil, great to be with you.

 

Phil (1m 5s):

And great to have this preliminary chat before even started recording to talk about arts and philosophy and Bertrand Russell and Richard Feynman.

 

David (1m 16s):

Life is very interesting for the curious and all of these things seem to blend together. So our shared interest in finance, for me, it's not a surprise that these things should emerge.

 

Phil (1m 26s):

David runs a hard asset fund that focuses on precious metals, global natural resources, infrastructure and specialty real estate. He also founded Vaulted and oversees the precious metals brokerage business that his dad started in 1972. And just before we get into hard assets and explaining hard assets, you believe that psychology and philosophy have a lot of lessons for people interested in finance and in investing. Tell us about that.

 

David (1m 55s):

Yeah. I think one of the fascinating things about finance for me is that it's at the intersection of almost every field. So if you're interested in the psychology of the markets, it's certainly a study in and of itself. If you're interested strictly in finance, there's enough numbers to go around and digging into balance sheets and 10-Ks, or what have you, will keep you plenty entertained. But we find that there's things like international relations and public policy and so many fields that ended up feeding into the way that assets perform. Because these are the backdrop issues which inform the business cycle that we're in and ultimately promote growth in individual sectors.

 

David (2m 38s):

So for the very curious, I think it's wonderful to be able to go back and forth between psychology and philosophy and finance and history and so many things. So to me, finance is a wonderful place for the generalist to flourish.

 

Phil (2m 54s):

And it's also somewhere where people can learn about how the world works. Because really finance and money flows through every aspect of how the world works.

 

David (3m 4s):

I completely agree. I completely agree.

 

Phil (3m 6s):

Yeah. So let's go through the list of hard assets. Before we do that, though, how do you define a hard asset?

 

David (3m 13s):

You know, really, we're talking about real things. And so this would be assets that drive their primary value from, as you said earlier, the intrinsic nature of the thing itself. It could be farmland, it could be art as a real asset, it could be productive company like a BHP Billiton or Freeport McMoRan where they're digging in the dirt and they're dealing with real stuff. It could be a company that owns real stuff and has a cash flow attached to it, for instance, a cell tower or even a toll way, a freeway toll way. And so if it is a real thing and that's the driving, you know, structure of the investment, that's where we've chosen to have a particular focus.

 

David (4m 0s):

There's so many things that you can invest in and, certainly within a diversified portfolio, should invest in. For us because we've spent 50 years within the precious metal space, it's a natural move, sort of a lateral move, into other real things. So precious metals is certainly an area of interest global natural resources, which would be everything from timber and copper iron ore, you know, a whole host of natural resources. Real estate is of interest to us. Again, a real thing with cashflow and infrastructure. And infrastructure spans the old stuff, bridges, roads and what have you, to the new stuff, which might be data centers and cell towers. So infrastructure real estate, you know, for us, we want to de-risk real estate as much as possible by finding some niche aspects within it.

 

David (4m 48s):

And then again, global natural resources and precious metals. Those are the four areas that we fill out within a diversified portfolio and try to find, you know, as many as 10 different names in each category. So a portfolio of 40 different companies, roughly for our approach there.

 

Phil (5m 3s):

And diversification is so important for a portfolio. And I think a lot of people think that if they just buy an S&P 500 ETF that they're diversified. But then there are all these other asset classes that many portfolios would benefit from. That's the case really, isn't it?

 

David (5m 19s):

Yeah, it is. And I think one of the things to remember is that there are seasons and times. And within a business cycle, some assets perform better in a particular timeframe and perform worse than other timeframes. You mentioned, sort of, the protective nature of real things will, you know, in a deflationary environment or in a recessionary environment, global natural resources would tend to suffer, not do well. In an inflationary environment or in a growing environment where the products and question are being used to build stuff, obviously, natural resources have more of a play. And so you can look and say, okay, time specific interest should be paid to a variety of assets.

 

David (6m 4s):

I don't think investing is ever a one and done thing. So if you are seeking a diversified portfolio, you can be hands-off, you can take a passive approach. But to me, it's very important to remember the context that you're in. To illustrate that, we've come through the last 10, 12 years post global financial crisis with incredibly loose monetary policy on a global basis. It's something that was popularized here in the United States and export it and sort of a move towards financing growth. We've had a tremendous amount of leverage put into the system, corporate leverage. We've also seen liquidity in other forms, not just liquidity created in the debt markets, but liquidity created by central banks.

 

David (6m 51s):

And that has tended to almost hyperized growth. And it's a benefit if you own assets of any sort. But that's not always and it's not for all times. So seeing that there's something of a cyclical nature to the investment markets, what has been absolutely tremendous on the upside for growth, for profits, is not something that's constant. You know, go back to the decade of 2000 to 2010, 2012, about a 10-year period stocks in the United States moved sideways to down. It was basically as some have described it "The Lost Decade". You may have been benefiting from dividend income, but there really was no growth on offer.

 

David (7m 31s):

Lo and behold, there was another set of assets, hard assets that performed very well. Gold and silver performed incredibly well. I mean, in this period of time where stocks did nothing, gold and silver were up five to 700%. And that's just the physical metal themselves.

 

Phil (7m 45s):

Well, let's go through some of the hard assets as we refer to. And starting with precious metals, there's basically about four precious metals there.

 

David (7m 53s):

That's exactly right. So you have the white metals and the yellow metal. Gold has been sort of the king of the precious metals. And the part of that is its history as money. It's been considered money for 5,000 years on and off. There's been experiments with paper alternatives. And to date, in the fullness of time, those experiments have failed. But we come back to something that restores confidence when markets and financial systems have been put under pressure and that's gold as sort of the basis of old money. We'll see if that's the case going forward, but we've got a good track record so far, four or 5,000 years. The white metals, I would separate them out from gold because these take on a more industrial nature in the modern world where you have silver and then the platinum group metals, which are platinum and palladium.

 

David (8m 41s):

And today, silver and platinum and palladium are all industrial metals. Silver at one point had that same monetary dynamic, so gold and silver as money. And then the other precious metals never really as money never really has money. But I think in a metals portfolio, they do have a place.

 

Phil (9m 1s):

And some of these uses, the industrial uses for these metals have a lot to do with the move to renewables and their usage in renewable energy technology. Does that really help their value in the long run, do you think? Is that a tailwind?

 

David (9m 14s):

Yeah, I think it could be a headwind, it could be a tailwind. It depends, 'cause if you look at the platinum group metals, there is a case to be made that catalytic converters are a huge user of the platinum group metals for, you know, regular gasoline engines tend to be more palladium and for diesel engines tends to be more platinum. But there are a whole host of other sources of demand for platinum and palladium. That just happens to be a big one. So this phase out or move towards renewables, I think it's a very long transition. And a part of that is because you have to have adequate infrastructure to support things like electric vehicles and whatnot. So it raises the question of, you know, perhaps the most valuable metals to be investing in for that kind of a thesis are things like nickel and copper, lithium.

 

David (10m 2s):

In the global natural resources segment, you pick up almost a balance to any risk that you would have to the platinum group metals. When we allocate to precious metals in particular, we prefer to emphasize more gold and silver with a smaller allocation to the platinum group metals. And the reason is this, Phil, and this is not particularly in our managed portfolios, but if you're just looking at the tangible asset itself, which you might have stored in a vault, stored in the safety deposit box at home if you prefer, this is where the metals themselves play a role. You could designate them and give them a mandate. And that mandate would be insurance.

 

David (10m 43s):

The metals do well when other things aren't. When there's pressure in the financial system, particularly gold and silver do extraordinarily well when there's under-performance in the stock market. Again, like we talked about earlier that The Lost Decade of equities was a huge winner for both gold and silver. And also when you begin to have extremes of inflation and deflation.

 

Phil (11m 11s):

You referred to natural resources so let's move on to those. And this covers a whole range of sectors. There's industrial metals, there's agriculture, rare earths. Give us a little bit of an overview of natural resources and how they can play a part in a portfolio.

 

David (11m 26s):

Yeah. I think the things that drive a natural resource portfolio, if you're taking the 30,000-foot view, is demographic shifts or change where you've got almost a built-in increase in demand. So that's one of the things that is very significant. If you're looking at particular markets, then it comes down to shifts in technology. Which obviously, you know, 10 years ago you would have said, copper is going into housing, real estate is going to be a huge driver of copper demand. Today, you could say, actually now it's as much or even more so this notion of electrification and decarbonization.

 

David (12m 7s):

And as we move to a different model of being, there's increased demand for copper on that basis. So we have to have the grid in order to be able to do what we want to do with less carbon involved. Now there's a whole host of other things that go into that. What exactly is creating the electricity that goes into the grid? And that's, I think, where the, sort of, the sticky wicket within the global natural resources is because you could look and say coal is the most reliable and the cheapest natural resource that we have and that's why it's been used as energy. The default has been, the economics are compelling. The economics become less compelling if you start attaching some sort of a social cost. You know, that's what's being experimented with right now is figuring out what the long-term social costs are of carbon.

 

David (12m 54s):

But it's ubiquitous and it's cheap. Natural gas is another one of those things that fits into the natural resource segment and is a lot cleaner than coal and is very available and is typically quite inexpensive unless of course there's bottlenecks. Like we're seeing, even in recent weeks, with, you know, the threat of Nord Stream 2 and the pipeline not going through, not being finalized. And all of a sudden Germany is going to have to factor in higher energy costs this winter because Russian supplies of natural gas will not be flowing. But these are all natural resources that are quite intriguing. Within a natural resource portfolio, timber is quite fascinating to me.

 

Phil (13m 36s):

Please explain some more about timbers. It's great listening to you and learning so much about all of these, not so much forgotten but maybe overlooked areas that investors maybe should consider as part of their portfolio.

 

David (13m 48s):

Yeah. I mean, if you think about what you're buying when you're buying timber, it's not a stack of wood that you're going to go build with or burn or whatnot. You're buying something that's living and growing on its own devoid of management risk and whatever else. If you harvest this year because it's opportunistic to do so, wonderful. If the prices aren't attractive you don't have to harvest. But guess what is happening every day, Phil. Every year, really, every year you're seeing about a 7% growth to linear board footage. And that's just if it happens to be raining. You know, so this is where I love timber as a component within the global natural resources space. Obviously demand increases if you're building lots of stuff so if real estate's booming, demand for timber increases, demand for plywood and everything else tends to go higher and it's more attractive to cut your forest and replant.

 

David (14m 38s):

It's a hard asset with a cashflow. Very intriguing.

 

Phil (14m 40s):

Well, let's talk about real estate. How do you see real estate as being another hard asset that can make up a part of an investor's portfolio?

 

David (14m 48s):

Some of the greatest wealth created in the world has been through real estate. And I would say part of that is because there's some tax advantages to particular segments within real estate. Part of it, too, is that it's something that banks look at. And as a tangible asset, they're very interested in lending against. So we've seen the growth in lending against real estate or for the purchase of real estate because it has this tangible nature. You can have it appraised. It compares to the building next to it and it gives some certainty or some confidence to the person who's putting money on the barrel. The lender says to the borrower, if something goes wrong, I understand the asset in question, I can stub my toe on it.

 

David (15m 33s):

I can walk around it. I can take pictures of it. I can walk through it. I can rent it out.

 

Phil (15m 40s):

So these things have encouraged tremendous amount of investment in real estate. And a lot of the growth in personal assets that relate to real estate is because you can leverage a portfolio. That's also a place where there's a tremendous amount of danger because prices go up and prices go down, for the person who has debt associated with that portfolio you can lose it. I've seen countless real estate developers in the 50 years we've worked with people in money who've made fortunes and lost them and made fortunes and lost them. And the element that helped them make a fortune faster was debt and the element which caused their ultimate demise and bankruptcy was debt.

 

David (16m 21s):

We look at real estate portfolios or real estate investment trusts because we're dealing with just publicly traded assets. And we want portfolios that are not heavily leveraged. So under the worst of circumstances, they will still shine. We're also interested in things that have a unique element to them. Perhaps it's related to medical services or biotechnology. Perhaps it's related to storage or some form of logistics where you look and say, okay, the normal functioning of an economy, the vital functioning of the economy requires stuff in this space. We like that space because the stuff that goes through it is required, come rain or shine.

 

David (17m 3s):

So we're constantly asking the questions about where's the upside, but even more importantly, where's the downside. And you really do have to be careful, particularly with real estate investment trusts, to appreciate how those trusts are structured, how much debt is involved. Because that can obviously help you on the upside but wipe you out on the downside

 

Phil (17m 24s):

Earlier in the interview you referred to loose monetary policy which leads to inflation. What is loose monetary policy and what are your thoughts on inflation at the moment?

 

David (17m 35s):

So, you know, look at you and I, the money that we have is earned, saved and we can go out and do that over again tomorrow, earn and save. But it's not an infinite resource. And it's highly valuable to us because of the time that we put into it. If you look at a city, they can create more resources if they want to. And where they lack funding, they can go to the debt markets and borrow. But at the end of the day, there's still limits in terms of what they can borrow and spend and the total resources that they have. It becomes a little bit different when you're talking about a government, a federal government.

 

David (18m 15s):

The federal government has access to something that I don't have, you don't have, a municipality doesn't have; and that's a printing press.

 

Phil (18m 22s):

So the flexibility gained by having a printing press is that not only can you borrow but you can also print. You can create some form of value out of nothing. And you have to be careful because if you create too much of that stuff, then everything else that proceeded it in the creation process becomes worth less. You know, imagine the potency of a jigger of whiskey, a shot of whiskey, fairly potent on its own. Mix it into a bathtub full of water and you can barely tell that it's there. When you increase the amount of money in circulation that is an essence what happens. You end up diluting it. It loses its efficacy.

 

David (19m 0s):

It loses its ability to purchase what it once did. And so loose monetary policy is justifiable under emergency circumstances where liquidity is gone, there's not enough money to keep the gears of the financial system going. And it's just like so much grease in the gears; it keeps the gears going, you don't want them to grind to a halt. And so it's justifiable under emergency circumstances. But when loose monetary policy becomes the norm, then you do end up risking a major period of inflation. It's no surprise that in recent weeks we've seen the October inflation number come out at 6.2%.

 

David (19m 42s):

We're not alone in this. The other central banks around the world have done something similar. The Bank of England, the People's Bank of China, the Bank of Japan, the European Central Bank, they've created money out of nothing. Either to go buy assets or to stimulate growth to hand out to people to make ends meet in the context of a crisis. And again, while justifiable in the moment, there is a high cost to pay. Will they stop this? It remains to be seen, If they can, because there are consequences to it. It's like so many addictions that can be created. If you create an addiction, you find that there are consequences when you begin to experience withdrawal. And so easy money policies have been good for the bond market.

 

David (20m 24s):

Easy money policies have been good for the stock market. I mean, think about what we're doing here in the United States. The Federal Reserve is spending $120 billion a month to buy mortgages and to buy government bonds. They are an extra buyer in the market. When you have more buyers than sellers, the price of things goes up. Now we're talking about debt, mortgages and treasuries here. So the price of mortgage paper's gone up and interest rates have come down. That was by design. What happens to the mortgage market? What happens to the treasury market when they step away from $120 billion in monthly purchases? I think we begin to experience withdrawals. And I think this is where, again, we look at loose monetary policy and we say it's really only meant to be there during emergency circumstances.

 

David (21m 13s):

If it's there on an ongoing basis, I think something is going wrong. Or maybe the system is not as strong as its projected to be, as it's discussed to be. Otherwise why, sort of, this constant drip feed the life support system, so to say?

 

Phil (21m 30s):

David, that leads us very directly to the idea of gold as a hedge against inflation. And you've built a platform called Vaulted. Tell us about Vaulted and how people can use it.

 

David (21m 44s):

You know, today gold is considered a commodity but for millennia it was considered just basically as money. We don't treat it as money today. Today it's even difficult to spend dollar bills. You know, we'd rather have a debit card or credit card or use PayPal or Venmo, or, I mean, we're moving towards a very dematerialized world as it relates to money. But what that is doing is it's also tempting infinite creation of said money, infinite creation of said credit. And it's got the inflationary consequences, I think, in tow. Vaulted is very simply the way that people can save and gold ounces within the digital universe.

 

David (22m 24s):

This is real gold sitting at the Royal Canadian Mint in Ottawa, Canada. And you can own as much or as little of a kilo bar as you want. You can own $5 worth of a kilo bar. Or you can own 32 ounces, which would be a full kilo bar. And you can have it delivered to you, it's allocated, physical, deliverable. And so you gain the benefits of gold ownership and owning real money but without the hassles and headaches that have gone with the physical aspects of money. And yes, we're moving away from the physical aspects of money anyways. It doesn't mean that smart investors don't want an allocation to gold. So what have they gravitated towards?

 

David (23m 5s):

They've gravitated towards exchange traded funds, like GLD or SLV. And these are other ways that you can buy gold. You can't take delivery of it so that would be a drawback. But it's an inexpensive way to buy gold. What we wanted was a platform on your phone, on your computer, that allows you to have your savings. Anyone in the world, they can save in real money terms. If you're in Brazil right now, the inflation rate is 10.37%. If you're in Mexico, the current inflation rate is 6.24%. If you're in the United States, the inflation rate is 6%. The money that you have sitting at the bank is losing that much value in terms of what it can purchase because of inflation.

 

David (23m 49s):

Better to have something that inflation proves your savings and allows you to engage the financial markets on your terms. It's a financial asset, it's outside of the financial system. In this case, it's almost like having a bank savings deposit but without the drawbacks of those inflationary draw downs. I don't think we're done with this inflationary cycle. We had a gentleman who teaches at Johns Hopkins on our program a year or so ago to talk about the nature of hyperinflation. And he's projected that for the next several years. You could expect a minimum of five to 6% here in the United States. And if they don't change course in terms of the money printing tactics, it will go higher.

 

David (24m 32s):

That puts your savings at jeopardy and you don't have to have them in jeopardy. It's a very easy to use tool, vaulted is. Vaulted.com if you prefer an online portal. Otherwise go to your app store and download the app for Vaulted. And it's an inexpensive way to own conflict-free gold with the Royal Canadian Mint, deliverable allocated, I mean, I can go on and on. I think it's a great program and we've seen a huge interest in it in the month since it launched; we're about 24 months into that launch.

 

Phil (25m 5s):

David, we'll put links in the episode notes and the blog post so that listeners can find out more information. But just tell us now how listeners can find out more about you, as well, because you produce a lot of content and a lot of really interesting finance related content that listeners may find interesting and useful for their own learnings.

 

David (25m 26s):

Yeah, absolutely. So I'll direct you to a few places. The commentary that we've done, which I mean, we were doing podcasts before they were called podcasts, believe it or not. 15 years ago we engaged and started a weekly routine of talking about the financial markets. And just as we started the conversation by saying that we're interested in lots of things, we're interested in Middle East politics, we're interested in US domestic policy because all of these things end up having an impact on asset prices. So we bring that into the commentary and where we do not have answers, we'll tap a variety of experts who do. And it makes for a very, very lively conversation.

 

David (26m 8s):

But it's really our curiosity on display for 15 years. You can find that at weeklycommentary.com. So weeklycommentary.com links you to the McAlvany weekly commentary. We have some other resources which I think are invaluable. If you're interested in hard assets, we write up a summary at the end of every week. It's called Hard Asset Insights and that's on our wealth management website, mwealthm.com. It's an amazing resource. And I go to my own website every day.

 

Phil (26m 41s):

There's so much to learn there.

 

David (26m 44s):

Oh, well, every day what we've done is one of my colleagues, Doug Noland, has put together the very best articles from the world of finance and investing in one place. So the reason I do that is because it saves me hours of searching for the details. He's already put in the hours and it means that I can get right to the chase. So mwealthm.com, look up the Credit Bubble Bulletin, look up Hard Asset Insights, the Weekly Commentary, all of these things you can subscribe to for free considering public services. Get to know us through them, the way our minds work or don't work. But these are, I think, helpful resources for the curious investor.

 

Phil (27m 21s):

David McAlvany, it's been a real pleasure meeting and chatting with you. Thank you very much for coming on the podcast.

 

David (27m 28s):

Thank you for the opportunity Phil.

Stocks for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Stocks for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation.

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