First Eagle's Case for Holding Gold

John Coumarianos: Another unique thing about all the First Eagle portfolios is that you will hold cash when you are not finding values the way some value investors will. But in addition to holding cash – I know you get this question a lot, but you also hold some gold, you have an attraction to precious metals. Give us – make the case for that, because it's not often that one sees the value investor own gold?

Abhay Deshpande: Yeah, you can almost take the value out of there. It's not too many investors that own gold.

Coumarianos: That's right.

Deshpande: First of all – and partly because gold is really not an investment, gold is protection or hedge against uncertainty.

For us, the uncertainty really lies in the monetary regime that's out there. And with the governments around the world in a race to debase their currencies, we want the protection against that. There are unintended consequences potentially down the road, and we want some protection there.

Gold as a monetary substitute has been a valid alternative to currency for thousands of years and it's no one's liability, no one can recreate it, and actually has no other use other than monetary substitute. And so, we hold the gold as a hedge. We can hold it in various forms. We can hold it in gold bullion, which we do. We can hold it in gold equities, which we do.

The proportion or the variation in terms of weighting between the gold equities and the gold bullion will change depending on where we can get the gold more cheaply--through the bullion or the equities.

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Coumarianos: So, it doesn't have – it's not tied to the industrial cycle, but it's a hedge against the debasement of fiat currency around the world basically?

Deshpande: Yes, and as much as there is an infinite supply of fiat currency available, gold being the opposite of that, it has an inverse relation and its value in a way is priceless.

Coumarianos: Okay, very good. You do have, of course, exposure to commodities that are tied to the industrial cycle--namely, energy companies. You own a trio of companies that are – that's connected; they are connected in various ways, Total, Groupe Bruxelles and Pargesa.

Deshpande: Right.

Coumarianos: And then you also own Petrobras, I believe.

Deshpande: Yes.

Coumarianos: So, yeah, I'll talk about the energy companies and how you value them because some value investors of course say, well, these are difficult companies to value precisely because they are tied to a commodity price?

Deshpande: Yes. I mean, I think because the starting point of analysis for most people is, what is your assumption for the price of oil? And here we can go down one of two roads. We can try to come up with some equilibrium price of oil or we can look at what the price of the stock is compared to the price of oil. In other words, you can discount using the current price of the oil to get to a value for the company and you can see if there is a variation between the price of the company and the intrinsic value based on the current price of oil, and sometimes there are big differences.

You know, Petrobras because of the overhang caused by a secondary offering, that overhang has depressed the stock price and has created a gap between price and value again. Total is less of a value story, but then through Groupe Bruxelles Lambert, GBL, it's called GBL, and Pargesa, we actually get it at a pretty significant discount.

So, Pargesa is a holding company controlled by Parjointco, which is itself a joint holding of Albert Frère who is sort of the Warren Buffett of Europe, and Paul Desmarais, who is the Warren Buffett of Canada. So, we own that vehicle which owns Groupe – GBL, which owns Total. And each of these holdings has a discount associated with it for no reason, no rational reason. And through that chain we get the Total then at the discount that we like.

Coumarianos: Right, so almost a double or a triple…

Deshpande: It's almost a double or triple discount…

Coumarianos: Discount, yeah, right.