I keep waiting for the punchline where non-income producing gold is better than income-producing assets.
You've essentially said that Buffett was right all along by opting to use royalties as a proxy for income-producing assets. Royalty assets are a capital-heavy asset (it takes a lot of capital to buy the royalty) linked to the underlying gold commodity and there are lots of other income-producing capital-light assets with good moats that can fill in for royalty assets and likely do much better. Buffett has avoided commodity-linked royalty assets as you're probably aware and prefers capital-light assets with pricing power in an inflationary environment because they're better and not tethered to the commodity. You're slanted towards the upside pricing of the commodity in this essay but ignored the downside risk and temporal risk of weak commodity prices.
We did not mean to say that gold is better than income producing assets. The point of the article is that gold can be a good hedge. By definition, a hedge is 5-15% of the portfolio (and income producing assets the other 85-95%. If it was better than the allocations would be reversed.
Buffett has never bought PM royalties. Buffett's portfolio has both capital light and capital heavy assets. He is currently buying oil stocks which is a commodity. The point was Buffett does not like gold itself but buying a gold royalty is income producing and compounds which is what Buffett likes.
The other income producing royalty assets do not do well during market downturns as gold does. So, for example, say you owned Franco in January 2022 - you paid $175 and the stock is still trading for $175 while S&P is down 15% so you can buy more income producing royalty assets (say S&P global or Moody's) today by selling your Franco position. It is a hedge.
Lastly, we give an idea that may double and give a 15-25% IRR without gold prices going higher from here. But, we do show why gold is likely to go higher (M2 and real rates).
I enjoy reading this post so much.
Incredible post, thank you very much
I keep waiting for the punchline where non-income producing gold is better than income-producing assets.
You've essentially said that Buffett was right all along by opting to use royalties as a proxy for income-producing assets. Royalty assets are a capital-heavy asset (it takes a lot of capital to buy the royalty) linked to the underlying gold commodity and there are lots of other income-producing capital-light assets with good moats that can fill in for royalty assets and likely do much better. Buffett has avoided commodity-linked royalty assets as you're probably aware and prefers capital-light assets with pricing power in an inflationary environment because they're better and not tethered to the commodity. You're slanted towards the upside pricing of the commodity in this essay but ignored the downside risk and temporal risk of weak commodity prices.
Thanks for reading and commenting, Phil.
We did not mean to say that gold is better than income producing assets. The point of the article is that gold can be a good hedge. By definition, a hedge is 5-15% of the portfolio (and income producing assets the other 85-95%. If it was better than the allocations would be reversed.
Buffett has never bought PM royalties. Buffett's portfolio has both capital light and capital heavy assets. He is currently buying oil stocks which is a commodity. The point was Buffett does not like gold itself but buying a gold royalty is income producing and compounds which is what Buffett likes.
The other income producing royalty assets do not do well during market downturns as gold does. So, for example, say you owned Franco in January 2022 - you paid $175 and the stock is still trading for $175 while S&P is down 15% so you can buy more income producing royalty assets (say S&P global or Moody's) today by selling your Franco position. It is a hedge.
Lastly, we give an idea that may double and give a 15-25% IRR without gold prices going higher from here. But, we do show why gold is likely to go higher (M2 and real rates).