Top analyst Tom Lee on gold’s black swan risk: Elon Musk becoming ‘the new central bank’

Speaking at a live recording of SoFi’s The Important Part podcast at WNYC, the Fundstrat cofounder and head of research raised his eyebrows and offered various thoughts on the asset, wowing the crowd and drawing smiles and laughs from co-panelist Michael Lewis, author of The Big Short, and podcast host Liz Thomas, head of investment strategy at SoFi. Not only is gold a “Lindy effect” asset, Lee said, but it’s also a “demographic” story, in Lee’s opinion, that has to do with nostalgia. All that, and he sees a “black swan” tail risk that involves Musk, the world’s richest man, discovering a new asteroid and becoming the world’s central banker.

In Lee’s opinion, gold is “probably a demographic story,” noting Fundstrat does a lot of demographic research, and it’s found “preferences skip a generation.” For instance, every 50 years you get another peak in RV, or recreation vehicle, sales. Noting the peak in RV sales during the pandemic, he said the last time sales were so strong was during the 1950s heyday of I Love Lucy.

“Kids don’t buy what their parents like,” he said, “but they buy what their grandparents like.” And gold, he concluded, was “really a big investment for the boomers,” whereas Gen X went into hedge funds and alternatives.

Lee said gold was comparable in size to the stock market, with data backing him up, gold having a total “above ground” valuation of $29 trillion to $34 trillion, which compares to the Magnificent 7’s roughly $21 trillion market cap.

“By the way,” he added, “it all fits in a swimming pool, all the gold in the world.”

Lewis commented his palms were starting to sweat, “just imagining” this idea. “Saliva starts coming to your mind,” he said.

Lee continued on, saying gold is a “Lindy effect” asset: something that, because it’s been agreed upon as a store of value for many years, is still accepted in that way. What could disrupt this? This is where it gets to Musk.

Gold’s black swan scenarios

One key risk for gold is the above-ground aspect.

“There’s a million times more gold underground than above ground today,” Lee estimated, nodding to estimates that most of the gold on earth is inaccessible. If gold gets too expensive, he argued it would create perverse incentives. “Like, literally, Mag 7 is just going to get into the gold mining business, right? Because you might as well just dig for gold. It’s more valuable than anything.”

Another key risk, he added, is gold is “all extraterrestrial,” nodding to gold’s origin as coming from meteorites smashing into earth. This suggests space companies could discover more gold floating out in space, he said. “SpaceX might do a mission to Mars and then run into a gold asteroid,” Lee told the audience. “And Elon Musk, if he… would own all the gold, he would become the new central bank.”

When asked about manufactured gold, Lee agreed that was the third risk: alchemy.

At any rate, Lee added, gold has probably “topped,” based on Fundstrat research. Fundstrat looked at 100 years of gold to stock market capitalization and it typically reaches 150% before falling back. Noting it fell 9% on Jan. 30, Fundstrat looked back and found only three other times gold had a single-day decline more than 9%, and all three times marked a peak.

“So I don’t know, but if history is a guide, it’s probably topped,” he said.

Then Lewis revealed how he came to take a stake in the gold trade, very profitably, through an old poker buddy from New Orleans.

The old poker friend

“When I own it, I think I’m long fear,” Lewis said about the yellow metal. “It’s an Armageddon trade.”

Lewis revealed that despite being a proponent of passive index fund investing, he accumulated a large gold position after a conversation with a former poker buddy turned fund manager, who he lost touch with for many years before reconnecting while reporting The Big Short. Lewis recalled seeing his friend’s collection of old Roman coins.

“He showed me the way the emperors debased the currency over time. And the silver content was less and less and less. And then he gave me a long argument for buying gold,” he recalled. “And it was so persuasive. Like, I don’t do that. I don’t buy gold. It’s insane. It’s like insane. But I couldn’t get it out of my head.”

Finally, three years ago, Lewis said, he “bought a bunch of gold.”

“And it’s just gone up and up, up, and up,” Lewis said, adding he felt so guilty and he wasn’t advising anyone to do this either, but he decided to invest this money back in his friend’s fund.

“And what he’s doing, and he’s much smarter about this than I am, is buying gold mining stocks,” he added. “It’s a cheaper way to buy gold.”

Lewis cited the “unstable political situation” and general global anxiety as his primary drivers for holding the metal.

“I don’t see any reason not to be scared,” Lewis admitted. “And I think fear is not a bad thing to be long right now.”