Why a Value Fund Holds 15% Physical Gold Bullion
Gold as a paid-to-hold equity hedge: sized inside a 5–15% band, owned as vaulted bullion rather than derivatives, and swapped toward miners only when gold in the ground is cheap to gold in the vault.
Attribution. A 5-minute excerpt from a longer interview, opening mid-sentence. The two speakers are a value-fund portfolio-management team that is not named in the clip. Context points to First Eagle's Global Value team: the fund owns bullion directly, vaulted at HSBC in New York, and the gold-hedge idea "goes back to Jean-Marie", presumably Jean-Marie Eveillard. A web search did not confirm the guests, so no names are asserted. The interviewer is presumably Tobias Carlisle but is not named. Archived as channel output; the views are the guests', not Carlisle's.
One-line take: gold here is a hedge, not a bet: "We're not gold bugs. We're not making a call on gold." It works because gold and equities are uncorrelated most of the time but turn strongly inversely correlated when equities break. Unlike credit-default swaps or other derivatives, which charge an insurance premium every year, gold pays you to hold it: developed-world M2 drifts up ~7–8%/yr against ~1%/yr gold-supply growth, and gold has compounded in the high single digits since Bretton Woods ended. Sizing is a 5–15% band. Below 5% it hedges nothing; above 15% "we are gold bugs." Gold's run has pushed it through the top of the band several times, which made the fund a net seller of gold in recent years. It is held as physical bullion owned directly (no derivatives), topped up with a few percent in miners and royalty companies, which count toward the gold allocation. The miner/bullion split is set by one comparison: gold in the ground versus gold in the vault. There is no price target on gold; "we just like the gold behavior."
1. Key points
A macro-only clip (5:11). It names no securities. Gold bullion is a portfolio allocation, and the "gold mining or gold royalty companies" are never named. So there is no stock table and no "in plain English" section by design, and no ETF or miner proxy should be inferred. The fund's own vehicle isn't named either.
0:00 Why gold, not derivatives, as the downside hedge
- The house priority is protecting the downside. Years ago the team "converged on" gold as the portfolio hedge.
- Gold and equities are "uncorrelated most of the time", but "when something goes really wrong in equities, gold has historically embodied a strong inverse correlation."
- Credit default swaps or other derivatives would work too, but "you're paying an insurance premium year in, year out". With gold, "we get paid for holding that hedge over time."
0:40 The drift: M2 ~7–8%/yr vs gold supply ~1%/yr
- Developed-world M2 "tends to drift upwards by 7 or 8% per year"; the gold supply "only increases by about 1% per year. The good gold has already been mined."
- If gold holds its purchasing power, it should drift up by that ~6–7 point gap.
- In practice: since Bretton Woods collapsed in the early '70s, "gold has compounded in the high single digits." The relationship has held, but it is "not a straight line. It's a very volatile relationship."
1:28 Same destination, different path: gold's best decades are equities' lost ones
- Over 60 years gold and equities "got you to a pretty similar place over time, but they got there in very different ways." Equities have strong elasticity to risk and confidence; gold is the inverse.
- "Gold tends to have its best decades when equities don't do much": the '70s and the 2000s, both lost decades for stocks.
2:19 Sizing: the 5–15% band, and why they've been net sellers
- "We're not gold bugs. We're not making a call on gold. The gold is there to be a hedge."
- Below 5%: "it's not going to hedge anything because it's not material." Above 15%: "we are gold bugs. We're making a directional bet on gold."
- Gold's strength has pushed it "through that 15% upper bound multiple times", so they have been net sellers of gold for the last couple of years, trimming it back into the range.
2:56 Physical bullion, owned directly, plus a few percent in miners/royalties
- "We actually own the gold bullion directly in our fund. We don't use derivatives." It sits in a safe at HSBC in New York, making the fund "probably one of the largest private owners of gold in the US."
- They sometimes complement it with "a few percent" in gold mining or royalty companies (unnamed), on the logic that "if we can buy gold in the ground at a big discount to gold in the safe, that does make sense."
- Miners and royalties count toward the gold allocation, not the equity bucket.
3:54 No price target: exposure is a percentage, not a call
- The interviewer frames it back: a fixed percentage exposure makes them "relatively agnostic to actually the price of gold". What matters is gold's movement relative to equities.
- "Correct. We do not have an intrinsic value or price target on gold. We just like the gold behavior."
4:21 Gold in the ground vs gold in the vault: the miner/bullion switch
- The math: know how much gold is in the ground and what it costs to get it out.
- Gold in the ground "should always be cheaper" than gold in the vault, because a risk premium belongs on metal still "in the dirt."
- When it is very cheap in the ground, they tilt toward miners. When "you don't get paid for having the gold in the ground," they "heavily skew towards the gold bullion."
Key points extracted from the public YouTube clip (transcript in transcript.html) for personal study. Not investment advice; the clip names no individual securities. © The Acquirers Podcast for source material.