Gold, Real Assets, and Portfolio Resilience: A Conversation with Peter Grosskopf

Vanessa Hui (00:06):
Welcome to another episode of Forthlane Features where we dive into the world of global wealth and asset management. I'm your host, Vanessa Hui, chief client Officer at Forthlane Partners, and today we're focusing in on one of the most talked about assets of the past year. Gold with the price of gold recently surpassing $3,000 for the first time and surging 40% over the past 12 months. People are asking, what's driving this rally? Is gold still a good investment? And in a shifting macroeconomic landscape, how should one think about the role of gold or more broadly real assets in a portfolio? Well, I couldn't ask for a better guess to help me tackle these questions. Joining me today is Peter Grosskopf, a global leader in the world of gold and precious metals. Peter, welcome to Forthlane Features. Thank you so much for joining me as a guest today.
Peter Fritz Grosskopf (01:05):
Good morning, Vanessa, and thanks for having me.
Vanessa Hui (01:07):
Good morning. I know that you're in the middle of your day in the office, so thank you again for carving out the time. So Peter, you've spent 12 years as the CEO of Sprott leading its growth from 5 billion to 20 billion of a UM. Beyond that, you serve as a director of the World Gold Council and Agnico Eagle, and you're the chairman of both SCP Resource Finance where you advise mining companies globally and Argo Digital Gold, a company that is revolutionizing how investors can access gold. But I want to take it back. Let's start at the beginning of your career. What set you down the path to becoming a global expert in gold and precious metals, and would a younger Peter be surprised by where your career has led you to today?
Peter Fritz Grosskopf (02:00):
Well, going back to the beginning, I left business school and I joined a small brokerage firm here in Toronto as a derivatives futures and options trader, and most of the traffic and investment at that time in commodities was in gold. So gold and silver were immediately part of my training ground and I started by trading futures and options on Comex for those precious metals and it kind of just went from there. I then went back to school, got my MBA and started on the mind finance team at RBC Dominion Securities and spent most of the next 20 or so years as an investment banker covering mostly the resources sector in Canada.
Vanessa Hui (02:55):
All right. So Peter, just a few days ago, gold hit a historic price milestone surpassing $3,000 per ounce, and over the past 12 months, gold is up 40%. Can you start by just sharing your thoughts on what are the key drivers of this strong performance?
Peter Fritz Grosskopf (03:13):
Yeah, I think it's that gold's being accumulated now by a wide range of investors. Going back again to the seventies and eighties, it was mostly kind of a gold bug that was interested in gold primarily to protect against inflation That broadened out with both the introduction of hedge funds and institutions and then to the ETFs which brought in retail investors in size. I think now Gold's much more accessible and is used by many investors to anchor their portfolios, including central banks that use it as a foreign exchange reserve asset. So it's just so much broader of an asset class and I think accumulation by all parts of those investor bases is driving gold higher.
Vanessa Hui (04:06):
Something we talk a lot about at Forthlane is the headwinds that a traditional portfolio of equities and bonds, and if you add in private equity and real estate, kind of the more typical ways that ultra high net worth investors are investing in Canada, that type of investment is challenged. Can you speak on that and specifically how that has played into the strength of gold in the last little while?
Peter Fritz Grosskopf (04:36):
Yeah, I agree with you. In general, the 60 40 portfolio is challenged now and in particular because both sides of the portfolio have become increasingly dependent on government support. And so starting with the monetary accommodation that was provided by the Fed in the 2000 NASDAQ crash and then the housing crash and then again during covid markets have been accustomed to easy money and that has created this reliance on low calf rates from many of those asset classes. So they're all correlated, they're all dependent on government support and gold sits outside of that as an anchor to a portfolio. So I agree that's part of what's driving everyday investors, everyday portfolios, endowments and other investors that never consider gold before into the market. Now,
Vanessa Hui (05:38):
Can you talk a bit more about how gold specifically, you mentioned it's an anchor, but how does gold contribute to being an inflation hedge in a portfolio?
Peter Fritz Grosskopf (05:51):
Well, it's known as an inflation hedge, and what's traditionally been thought of is that when commodities are running commodities benefit from inflation, they're priced in US dollars and as commodity price inputs go up, generally the price, the commodity complex gets dragged up and gold is kind of the king of the commodity conflicts in that way. It's not always the case. Gold's a bit of a chameleon, it can react very well when the US dollar is pressured. It can also react very well when the US dollar is having a flight to safety, gold can do well with low rates and it can do well with high rates. So I think we need to get away from this traditional notion that gold's only going to do well if inflation's hot. It's true, but I think gold also reacts now to the fact that government debt and deficits are building up these risks in the system and gold is an insurance product against those risks.
(07:06):
Well, for 50 years since the Nixon shock and Bretton Woods, central banks around the world have been able to print fiat currencies by creating debt and imbalances have built up, recessions have been put off, crises have been overfunded and therefore averted or cut short, the debt's not going away and much of the economic growth might have been because the debts were built up in the first place. So you've got this point at which A, the debts cannot be repaid, and I think we're well past that point. I think we're well past what they call the Minsky moment for deficits, which is they're just going to keep growing. It doesn't matter what the government does, they're going to keep growing.
(08:13):
That's point number one and nobody's cared about that, which has surprised me to a bit. But then there's a second point, and this point is more important. This is the point that Ray Dalio and Howard Marks and others are starting to talk about, which is the point at which people refuse to finance the deficits. And what happens then? What happens when the bond vigilantes start to say, we run all this endowment money and we're not given the government anymore money because you're not a good creditor anymore. And that point is rapidly approaching and that's when the government loses control of the long boundary. That's when the economy starts to reset to its normal level of activity. The problem is that you've got this coiled spring that has contained these risks to a point where everybody's comfortable with them and you've got this massive amount of dislocation that can happen if the risks are properly priced. So when does the coiled spring release, that's what gold is showing us now, gold is showing us that a lot of smart money believes there's the chance for a big reset, and that's what real assets can kind of drive you through like a big tanker through a choppy sea. It just keeps forming. People need these things and gold provides protection against irresponsible government behavior, which in my view is only increasing, not withstanding the US efforts to cut their deficit.
Vanessa Hui (10:12):
Right. So with gold prices at where they are right now, would you say is it too late to invest or is there still room to run for gold?
Peter Fritz Grosskopf (10:24):
Well, it depends if you're asking that question in the short run or the long run. I think in the short run you do need to look at things like sentiment indicators and whether gold's overextended or not. And I do think it's become so popular and had such strong performance that you need to be careful that it could have a small pullback. I would see that as a buying opportunity in the long run. I don't think there's any change to the factors that are driving gold higher. If anything, the risks continue to build with debt and deficits and stocks still being overvalued by historic measures. So I think gold has got another kind of easy thousand dollars in front of it in the next three to five years.
Vanessa Hui (11:11):
Okay. So that's I guess the bull case for gold in the next three to five years, but let's talk a bit about the bear case for gold in the next three to five years beyond just the short-term pullbacks.
Peter Fritz Grosskopf (11:23):
Well, the bear case is that you get a very, very strong US dollar. The bear case is that you get a crisis where gold and everything else that's liquid gets sold in the early stages of that crisis, the Bear case is that the US and other countries get their fiscal house in order, they stop running deficits, the austerity actually works, and there's less pressure on the Fed to lower rates or to print. And I don't think any of those bear cases are very likely. I just don't think austerity is a word that's in the politicians' lexicons right now. I think that the efforts that Trump and his team are making to reduce the US deficit are not going to be successful. Ultimately, there's too many parts of that deficit that are non-discretionary. So it doesn't matter how much they cut in Washington. I think paradoxically the only effect will be that the US economy will slow more than expected and that you'll need even more monetary accommodations. So they're in this checkmate right now, the fed's in a corner, and I think it's going to erode its credibility and I think it's going to drive more and more investors into gold as a hedge to the credibility of the monetary authorities that have had 50 years of having the game played their way and winning.
Vanessa Hui (13:02):
And I mean 2010 to 2020 wasn't a great period for gold. What is different now? What are the key things that are different now?
Peter Fritz Grosskopf (13:12):
Well, they brought out all the ammunition during that time and this whole kind of negative interest rate and monetary accommodation on quantitative easing and all these jargons came out very similar to the Anne Rand book, Atlas Shrupp. When people that don't have money and that want power and that are in power have the ability to get that power, they'll think of programs that have fancy acronyms to give themselves a win. And that's what they did during that time. And gold got hurt because everybody thought that it would work and did it work? It worked. In the short term, it's always great to bring future discretionary spending up in time and give people credit card debt and other forms of debt that allow them to spend more in the short term, but in the long run, it always creates a bigger problem.
Vanessa Hui (14:19):
What do you think was the catalyst for just the recent increase and enthusiasm we're seeing from central banks building up their gold reserves?
Peter Fritz Grosskopf (14:30):
Yeah, that's really interesting and it is happening and it's a factor in the gold market. So I think because the US dollar use swift against Russia and put a lot of countries on notice that it was going to be the boss in the financial markets and use the US dollar as a weaponized way to basically export US policies. A lot of banks are saying, well, we can't hold US dollars and US treasuries as reserve assets to the degree that we did before. So this is just a gradual shift into more liquid, high quality other assets, and gold is the perfect recipient of those dollars. So they're all building their reserves now in gold.
Vanessa Hui (15:20):
So for those looking to gain exposure to gold, can you break down the different ways to invest in how investors should think about each?
Peter Fritz Grosskopf (15:28):
Sure. Well, the main is precious metals themselves, the physical and contrary to popular belief, you don't need to own those via ETFs or in the security system. You can own those positions through asset managers and you can store directly with vaults very cheaply. The benefit of that is gold has a reasonable volatility. It outperforms fee currencies in most years, and it's very liquid. You can liquidate your gold holdings in two and a half seconds. So we can help people do that. And at the World Goal Council and in other places, they're devising better and better ways to hold gold all the time. So that's kind of super secure, super liquid, I would call it a cash equivalent, and yet something that can beat cash pretty consistently. Then you've got the equities and I would break equities into lower risk equities that are dividend payers, large gold companies or royalty companies, and the more emerging equities, which is where you can get much more performance, but you take more risk. And I would say that on the former, you can easily pick an ETF, you can hold large liquid gold holdings through the GDX or you can pick your favorite stocks.
(17:12):
If you have a high conviction around those like I do with Agnico, those stocks can perform extremely well and decent gold markets, the juniors, you need an expert. And I do not think that individuals who know nothing about the mining business should go around picking junior mining stocks. I think that should be dealt with through professionals like the boutique that I work with, SCP and like portfolio managers that know those markets well. And then the last thing that you can do is you can either participate with professional investors in special arrangements with gold companies like Credit Plus, like convertible to ventures, financings that are professionally run and that have confined downside and that have the ability to participate on the upside of those projects. So that's pretty complicated discussion. I'll leave it to the pros there. I mean, we do have access to that at Forthlane, and I would say other external managers do as well. And I know that Forthlane Farms monies out to those qualified managers.
Vanessa Hui (18:34):
If you could actually spend a little bit of time talking about the Forthlane enhanced real assets fund and the vision for that as a strategic shareholder in Forthlane, we're really lucky to have you advising us as we build out that fund. If you could talk to us about how that is going to be the composition of that fund and how it's going to be a diversified approach to investing in gold.
Peter Fritz Grosskopf (19:00):
Yeah, well, it's a perfect intro. We just talked about the various things you can do to invest in the asset class and that real assets fund is going to be an amalgam of those strategies. So mostly liquid, mostly precious metal, mostly physical, a hundred percent back precious metal. And then the balance of the portfolio would, and you could put other commodities in that allocation as well, all liquid either through ETF or through direct physical holdings. And then the balance of the portfolio would be more active and there would be active managers that could be selected for specific expertise. For instance, private equity or private debt in the sector, and then direct high conviction holdings in these credit lifestyle instruments or in equities that are either very liquid through ETFs or high conviction equities. And when you put that all together, I think you get great performance, reduced volatility, reasonable liquidity, and definitely a high alpha component that those specialty investments can add. So I'm excited about that. I've never had the opportunity to put that together in one fund before.
Vanessa Hui (20:33):
We're very excited as well. So let's zoom out. You mentioned other commodities. Can you talk a bit about how investors should think about other commodities like oil and base metals in today's pretty unique macroeconomic environment?
Peter Fritz Grosskopf (20:49):
Sure. Well, it's pretty traditional. My view's pretty traditional and that that commodities can create outstanding investment opportunities. But in the context of a cyclical market, so commodities do spike with inflation and they do spike with economic activity and they do get overbuilt and they do get underpriced when the cycle is down. And so taking a 10,000 foot view, having expertise to invest in those commodities like we do at Forthlane, you can play the cycles and you can play the incredibly undervalued opportunities that come out of those cycles and yet still have, that's a great part of a real assets portfolio. So a great example is energy. Energy can easily go three to four X from bottom to top. And when you're positive on the oil market and oil is undervalued, you can get exposure through either oil itself or through large cap producers or through specialty instruments like royalties. And you can buy a package of those. And I believe that's kind of what Wayne at Forthlane has the expertise to do is to pick the right package at the right time. And in our area in minerals, it kind of gets into specialty minerals. So minerals for the energy revolution and decarbonization specialty minerals that are needed to be sourced by the US particularly and that are in short supply right now. So minerals are also a great way to play hard and hard assets and real assets and the commodities sector.
Vanessa Hui (22:55):
Great, thanks. You've touched on this a little bit, but you've seen a lot of cycles and beyond golden commodities, beyond some of the things you just mentioned. What are some of the ways that you've personally thought about diversifying your portfolio? Maybe that includes your beautiful place in no Sara, but
Peter Fritz Grosskopf (23:17):
Well, to touch on that, I think political diversification for families is important and I know a lot of our families are looking at that, but talking about assets, I have looked, I'm very overweight in real assets. I believe that that's a safer, more interesting place to invest than the general markets. I'm not a big fan of government bonds and I'm not a big fan of the general equity markets just because they've had so much support from easy monetary policies. So I stick to hard assets, I stick to real assets and within that context, I do like agriculture farmland and it is very hard to invest in that. You've got to find a qualified fund basically.
(24:16):
I've looked at all sorts of other things. I've looked at everything from diamonds to real estate and real estate can be a good real asset. Infrastructure can be a good real asset, especially if it's related to essential commodity. So these are things that I know Wayne looks at and takes very seriously as well. I would trust somebody like Wayne to get me my allocation because I don't have the time to look at agriculture funds, for instance. Each one of them needs a lot of work and a lot of diligence. It's a great market right now. That market is surprisingly suppressed by Trump and his policies and grain prices and a whole bunch of other things. So there are great times to consider that as an enhanced real asset portfolio.
Vanessa Hui (25:15):
Peter, something you and I talk a lot about is just the headwinds facing the Canadian dollar. Can you talk about thinking through diversification in terms of currency that a family should hold?
Peter Fritz Grosskopf (25:29):
Sure. Well, unfortunately, the Canadian dollar has had a lot of downside, experienced a lot of downside in the last year or two. Part of that is because our fiscal situation and economic situation deteriorated substantially against the US and other countries. And part of it is because the Trump trade tirades and et cetera. So what I would say is this no family that has the ability to diversify should think that keeping their dollars in one currency only is a wise strategy. It is a risky strategy. I mean, you can point to Canada where investors have lost 30% of their net worth compared to their American cousins as an easy example. That was not smart. It wasn't smart of me. I would been paid at Sprott and US dollars for three years and I didn't put nearly enough into US dollars. But even more diversified, a wealthy family should think of it as a global diversification. And attaching your net worth to one is a really risky strategy, especially if that currency is overindebted like Canada is and overly dependent on the certain policies that aren't going to be successful in the long run. So I mean, people need to diversify their currency.
Vanessa Hui (27:06):
That's something that we do think a lot about at Forthlane, a typical client who has a portfolio with us, we hold about 50% of their portfolio in US Dollar, and that's purely because we are so focused on bringing global managers to our clients who are denominated in USD, but we really saw the benefit of having a strong USD exposure last year in our 2024 returns. Alright, Peter, before we wrap up, I want to ask you a question that I intend on asking all of our guests and this question is, what is one lesson you've learned early on in your career that has stuck with you and continues to guide you today?
Peter Fritz Grosskopf (27:48):
Well, because I started as a commodity straighter, you'll have to indulge me in that. I think that when it is the same comment that I think Warren Buffet has made, invest when others are scared and sell when others are greedy. And it is the cardinal rule of commodities investing that if you follow the crowd, you will get slaughtered. And if you are willing to be brave, you will be well rewarded. And that to me always seems like the best way to invest is to be ahead of the trend. That's what we did at Sprott when we built Sprott up. And I think that's what we're doing at Forthlane is to be ahead of something that others are not doing yet. And if you just follow what's worked in the last year or two, and this is the terrible thing about the investment business is most people do that. Most people look at the last year I've heard it said that the strongest human emotion is envy. People look at their peers and they look at the markets in the last two, three years and say, I did well or I didn't do
Vanessa Hui (29:07):
Well.
Peter Fritz Grosskopf (29:08):
That's not the way you make money,
Vanessa Hui (29:10):
That's not the time horizon.
Peter Fritz Grosskopf (29:13):
And early on in commodity finance I was taught you've got to look two years ahead and think about what might be in shortage then. So that's what I would say my lesson was.
Vanessa Hui (29:30):
That is a perfect way to end. It's been a real pleasure. Peter, thank you again for making time for us.
Peter Fritz Grosskopf (29:36):
Thank you for having me
Vanessa Hui (29:37):
And sharing all of your expert insights.
Peter Fritz Grosskopf (29:40):
Okay, have a great day, Vanessa.
Vanessa Hui (29:43):
Thank you.