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GEORGE MILLING-STANLEY: A lot of people think that because gold doesn't have a coupon or a dividend, it's an asset without a yield. But if you go back to 1971, since that time on a compound annual growth rate basis, gold has returned 7.5%. It's an uncorrelated asset, not a positive relationship or a negative relationship. That means that it's giving you a level of diversification within the portfolio that few other assets can manage. [ MUSIC PLAYING ]

I'm George Milling-Stanley, head of gold strategy at State Street Global Advisors. If you can cast your mind back to the summer of 1972, and if it helps you to picture this, I had an afro at the time, a lot of things have changed since then. I was a reporter on a magazine in London, financial magazine. And the editor came to my door and he said, George, it's been 12 months since President Nixon closed the gold window, what do you think of that? And I looked up at him and said, I've the faintest idea what you're talking about. I don't know what that means. He said, good, because I don't understand that either. I just read it somewhere. But if you and I don't understand it, that means our readers don't understand it either. Go find out about the gold market and write me a story.

And here we are 47 years later, still chasing the same story. I've been involved in gold in a lot of different ways. Since then, I spent 10 years with the Financial Times writing about the gold mining industry, worked for a gold mining company, running something that we call gold market intelligence. Then I moved to this country to trade gold at Shearson, which gradually became Lehman Brothers. They closed down their physical commodity operations in the mid-1990s. I went to work for something called the World Gold Council, which is a promotional organization financed by the gold mining company. So, back to that area if you like. And most of what I was doing there was advising central banks on how they manage the whole reserve portfolio, but with particular reference to the role gold can or should play in the management of reserves.

And then after 15 years there, I set up my own little consultancy and thought I was gradually going to wind down until I was working three days a week, and then two days a week, and then suddenly no days a week. But State Street at the time was my biggest client. And they said we'd like you to come on board, set up a team around the world and transfer your knowledge to them and work yourself out of a job in the next five to 10 years. So, that's four years ago. I checked last week to make sure that the 10-year option still on the table on having the bull.

How do you think about gold allocations?

I think you really need to look at the whole portfolio. I think that's really where you start from. And I'm not suggesting anybody should have 100% of their investments in gold or even 50%. The literature, the reliable literature, the good quality stuff suggests that any portfolio could benefit from somewhere between 2% and 10% of the total as a strategic allocation. That's a pretty broad remit, if you like. Personally, I think that five makes a lot of sense for me, and probably for a lot of other people, too. We did a study, my team, my Gold Strategy Team at State Street, did a study two or three years ago, where we were looking not at a 60-40 portfolio because nobody has those anymore. We were looking at a global multi-asset portfolio with some exposure to obviously, to stocks and bonds, but also to real estate, commodities, managed futures, various other different things and we plugged in various different levels of gold into that portfolio. We started with 2% 5% and 10%.

And what we found was that at the 10% level, that was the biggest reduction in risk over the whole portfolio, and the biggest increase in returns. So, risk-adjusted returns were optimal at that 10% allocation to gold. That was the best Sharpe ratio that we found. And I don't walk into meetings and say to people, you've got to have 10% across all your portfolios otherwise, you're doing something wrong. What I say is, look, if you don't have any gold, try 2%. And you will experience empirically, the good things that a small allocation to gold can do for your portfolio. If you've got 2%, try five, if you've got five, why don't be brave and try 10 and see what that actually does for you. So, that's broadly I think, the reasons why people ought to be interested.

How does gold do this? Why does it succeed in reducing risk and increasing returns? I guess the first thing to say is that a lot people think that because gold doesn't have a coupon or a dividend, it's an asset without a yield. I'm sure you've heard that before. But if you go back to 1971, which is the beginning of the free market in gold, and also, coincidentally, the beginning of my experience of the gold market. Since that time on a compound annual growth rate basis, gold has returned 7.5%. That's actually not too shabby for something that most people think doesn't actually have a return. So, that's one thing- gold does give you an absolute return, or it has done for the last 50 years or so.

Secondly, gold doesn't really have a strong relationship with anything else in a portfolio, not a positive relationship or a negative relationship. It's an uncorrelated asset as the economists call it. That means that it's giving you a level of diversification within the portfolio that few other assets can match.

Third, gold is a huge market. It's very deep and liquid. It's dominated by the over the counter market, people to people, principal to principal, rather than the futures exchanges, which is where most financial assets are actually traded on the futures exchange. Gold's unlike them, completely different from them. So, a very, very deep and liquid market turning over according to the most recent studies in excess of 100 billion dollars a day. That's the whole gold market.

Now, that's dwarfed by treasuries, but then everything's dwarfed by the Treasury market. But it isn't that far behind Japanese government bonds. It's comfortably ahead of the UK gilts market or the German bund market, or any other government bond market you care to mention. So, I think gold earns its place in the mainstream on liquidity grounds as well.

And then finally, the overall impact on the portfolio. I've already mentioned the Sharpe ratio. I've mentioned that gold can help to improve risk-adjusted returns and that can be demonstrated. Gold also has thousands of years of a track record. You can't say that about every asset. You can't say it about Bitcoin for example. Gold has thousands of years of a track record as offering some protection against the unexpected whether your tail risk is macroeconomic in nature or geopolitical. So, its portfolio impact is beneficial. Those I think, are the main reasons why people ought to be interested if they're not.

What do you think gold's equilibrium price is?

I do look at everything through the prism of gold. But I tried to look at everything that's going on in financial markets and geopolitically as well because that can be very important in terms of moving the gold price. A little bit of history to try and give some perspective to where we are today. If you go back to 2001, the gold price was at $250 an ounce. It had been there for several years, with no great pressures to the upside or downside. It seemed given all the circumstances, that was a pretty good equilibrium level for the gold price back in 2001. But that was about the time that the emerging markets embarked on this extraordinary period of economic expansion and with a general sense of profitability, a general sense of wellbeing throughout all of the emerging market- led by China, but throughout all of the emerging markets as well.

And people in the emerging market countries when they feel prosperous, then they buy gold jewelry. So, they were increasing their purchases of gold jewelry for the next decade, from 2001 onward. And the gold price in consequence is going up very, very steadily. From 2001, the spring until the fall of 2010, gold went up on average $100 a year, so that by the fall of 2010, we've gone from $250 an ounce to $1,250 an ounce.

And it was at that point that the hot money speculators, the hedge funds, some of the trend following speculators, momentum traders noticed that gold had gone up $1,000 in just a decade, felt that it still had some momentum. So, they piled in. They bought gold ETFs. They bought gold futures. They bought gold mining stocks as a proxy for the gold price. And they even in some cases, were buying physical gold. And they took this market that's gone up very steadily based on sound fundamentals for a decade, it's gone up $100 a year on average, and they drove the price up $500 in just nine months.

Now, clearly, in any market when that sort of price surge happens, it's completely divorced from the underlying realities of the asset, gold in our case, and it's going to end in tears. The defendant, I mean, any price curve goes vertical like that, it's going to end.

There were a lot of people had a declared target of $2,000 an ounce. So, it was interesting to think of a new big figure in a market. Some people were saying $5,000 an ounce, and I think there were some other people even suggesting as much as $10,000. I was being very quiet on the subject at this point because I was starting to get worried. The faster we went up and the further we went up, the more I was starting to get anxious as to when all this was going to end. In fact, gold finished, just shy of the $2,000 market, it topped out at $1,895 an ounce. And that's when the early adopters of this speculative run started to take their profits.

It took the hot money another year and a half to make its final exit, I would date that final exit at the spring of 2013. And lo and behold, I think these were people who were still hoping for a less surge in the price to get through the $2,000 figure. And they're probably people who paid more than 1800 to get in desperately looking for some profit out of the thing. But they gave up the ghost. By the spring of 2013, the hot money has gone to play in other areas of the markets. And lo and behold, goes back at $1,250 an ounce.

So, in the almost six years since that point, we've isolated relatively narrowly around that $1,250 an ounce level. So, I would suggest that the evidence points to that being the new equilibrium level. So, an equilibrium level five times where we were at the beginning of this century. That's actually again, that's not bad growth, if you discount some of the speculative froth that got into the market in 2011.

And the editor came to my door and he said, George, it's been 12 months since President Nixon closed the gold window, what do you think of that? And I looked up at him and said, I've the faintest idea what you're talking about. I don't know what that means. He said, good, because I don't understand that either. I just read it somewhere. But if you and I don't understand it, that means our readers don't understand it either. Go find out about the gold market and write me a story. And here we are 47 years later, still chasing the same story. I've been involved in gold in a lot of different ways. Since then, I spent 10 years with the Financial Times writing about the gold mining industry, worked for a gold mining company, running something that we call gold market intelligence. Then I moved to this country to trade gold at Shearson, which gradually became Lehman Brothers. They closed down their physical commodity operations in the mid-1990s. I went to work for something called the World Gold Council, which is a promotional organization financed by the gold mining company. So, back to that area if you like. And most of what I was doing there was advising central banks on how they manage the whole reserve portfolio, but with particular reference to the role gold can or should play in the management of reserves. And then after 15 years there, I set up my own little consultancy and thought I was gradually going to wind down until I was working three days a week, and then two days a week, and then suddenly no days a week. But State Street at the time was my biggest client. And they said we'd like you to come on board, set up a team around the world and transfer your knowledge to them and work yourself out of a job in the next five to 10 years. So, that's four years ago. I checked last week to make sure that the 10-year option still on the table on having the bull. How do you think about gold allocations? I think you really need to look at the whole portfolio. I think that's really where you start from. And I'm not suggesting anybody should have 100% of their investments in gold or even 50%. The literature, the reliable literature, the good quality stuff suggests that any portfolio could benefit from somewhere between 2% and 10% of the total as a strategic allocation. That's a pretty broad remit, if you like. Personally, I think that five makes a lot of sense for me, and probably for a lot of other people, too. We did a study, my team, my Gold Strategy Team at State Street, did a study two or three years ago, where we were looking not at a 60-40 portfolio because nobody has those anymore. We were looking at a global multi-asset portfolio with some exposure to obviously, to stocks and bonds, but also to real estate, commodities, managed futures, various other different things and we plugged in various different levels of gold into that portfolio. We started with 2% 5% and 10%. And what we found was that at the 10% level, that was the biggest reduction in risk over the whole portfolio, and the biggest increase in returns. So, risk-adjusted returns were optimal at that 10% allocation to gold. That was the best Sharpe ratio that we found. And I don't walk into meetings and say to people, you've got to have 10% across all your portfolios otherwise, you're doing something wrong. What I say is, look, if you don't have any gold, try 2%. And you will experience empirically, the good things that a small allocation to gold can do for your portfolio. If you've got 2%, try five, if you've got five, why don't be brave and try 10 and see what that actually does for you. So, that's broadly I think, the reasons why people ought to be interested. How does gold do this? Why does it succeed in reducing risk and increasing returns? I guess the first thing to say is that a lot people think that because gold doesn't have a coupon or a dividend, it's an asset without a yield. I'm sure you've heard that before. But if you go back to 1971, which is the beginning of the free market in gold, and also, coincidentally, the beginning of my experience of the gold market. Since that time on a compound annual growth rate basis, gold has returned 7.5%. That's actually not too shabby for something that most people think doesn't actually have a return. So, that's one thing- gold does give you an absolute return, or it has done for the last 50 years or so. Secondly, gold doesn't really have a strong relationship with anything else in a portfolio, not a positive relationship or a negative relationship. It's an uncorrelated asset as the economists call it. That means that it's giving you a level of diversification within the portfolio that few other assets can match. Third, gold is a huge market. It's very deep and liquid. It's dominated by the over the counter market, people to people, principal to principal, rather than the futures exchanges, which is where most financial assets are actually traded on the futures exchange. Gold's unlike them, completely different from them. So, a very, very deep and liquid market turning over according to the most recent studies in excess of 100 billion dollars a day. That's the whole gold market. Now, that's dwarfed by treasuries, but then everything's dwarfed by the Treasury market. But it isn't that far behind Japanese government bonds. It's comfortably ahead of the UK gilts market or the German bund market, or any other government bond market you care to mention. So, I think gold earns its place in the mainstream on liquidity grounds as well. And then finally, the overall impact on the portfolio. I've already mentioned the Sharpe ratio. I've mentioned that gold can help to improve risk-adjusted returns and that can be demonstrated. Gold also has thousands of years of a track record. You can't say that about every asset. You can't say it about Bitcoin for example. Gold has thousands of years of a track record as offering some protection against the unexpected whether your tail risk is macroeconomic in nature or geopolitical. So, its portfolio impact is beneficial. Those I think, are the main reasons why people ought to be interested if they're not. What do you think gold's equilibrium price is? I do look at everything through the prism of gold. But I tried to look at everything that's going on in financial markets and geopolitically as well because that can be very important in terms of moving the gold price. A little bit of history to try and give some perspective to where we are today. If you go back to 2001, the gold price was at $250 an ounce. It had been there for several years, with no great pressures to the upside or downside. It seemed given all the circumstances, that was a pretty good equilibrium level for the gold price back in 2001. But that was about the time that the emerging markets embarked on this extraordinary period of economic expansion and with a general sense of profitability, a general sense of wellbeing throughout all of the emerging market- led by China, but throughout all of the emerging markets as well. And people in the emerging market countries when they feel prosperous, then they buy gold jewelry. So, they were increasing their purchases of gold jewelry for the next decade, from 2001 onward. And the gold price in consequence is going up very, very steadily. From 2001, the spring until the fall of 2010, gold went up on average $100 a year, so that by the fall of 2010, we've gone from $250 an ounce to $1,250 an ounce. And it was at that point that the hot money speculators, the hedge funds, some of the trend following speculators, momentum traders noticed that gold had gone up $1,000 in just a decade, felt that it still had some momentum. So, they piled in. They bought gold ETFs. They bought gold futures. They bought