Jason Stipp: How do you incorporate gold and why do you incorporate in gold in your portfolio? What role does it play?
Matthew McLennan: Well if you think about what we try to accomplish at First Eagle, our first and most important goal is to avoid the permanent impairment of capital. We're looking out to the long term, we're trying to preserve the purchasing power of our clients' capital, and we do that primarily through the ownership of enterprise, investments in stocks or subordinated debt.
But acknowledging the fact that we are investing across the world in the man-made financial architecture, if you will, we'd like to have a small amount of our portfolio invested in a potential hedge against that architecture and gold plays that role.
Gold is a universal alternative to the man-made monetary system. It's been used as a money for millennia, and so when people have least faith in the man-made financial architecture, gold tends to be a decent store of value. In fact, it has had some of its peak real values over the last century at times of systemic distress, and that makes it a useful potential hedge for our portfolios that are primarily invested in enterprise.
Stipp: What factors might cause the gold allocation to move up or more down. Do you have certain levers were you will have more invested and less invested?
McLennan: Well, we don't super-actively trade the gold portfolio. It's there as a very long-term investment. So if you look at the deferred purchasing power that exists within our portfolio today, we have some cash that we will tend to deploy through the business cycle when distress provides us opportunity to buy good businesses at good prices.
And gold, we take a somewhat longer-term perspective on. Gold is there across the systemic cycle, which tends to be more generational in nature. So you shouldn't expect to see us trade actively around our gold position. It's really there for the low-frequency tail event, and we try to keep it around 10% of our portfolio, so that it's a material hedge. If it's less than 5%, it starts to become not that material. If it's more than 15%, it starts to become a directional view on gold, and we don't own gold because we have a directional view. We own gold for the very reason that we don't know how the future is going to play out, and it is our potential hedge against that "left tail" state of the world. And so that's really how we think about the sizing of gold.
And one thing I would say just to sum up the gold and the sizing, is that clearly, as the price of gold has gone up in real terms over the last decade, we've made sure that the exposure hasn't become outsized. And so, selectively, we've trimmed a little here or there or we've added in portfolios where it became low because of inflows, but we've tried to maintain around that 10% level, and you probably only see a change if there's a change in the environment.