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What does a hot-shot Wall Street trader see in physical gold? And why would he be adamant about holding it?

Jared Dillian, former head of ETF Trading at Lehman Brothers, is an acclaimed financial author and investment strategist at Mauldin Economics. He first discovered gold in 2005 when the launch of the SPDR Gold Shares ETF (GLD) drew his attention to the yellow metal.

“It was a cool idea, this way to securitize gold,” Dillian said in a recent Metal Masters interview with the Hard Assets Alliance. “But I didn’t know anything about gold. And I’m like, ‘Who wants gold? Why would you want that?’”

Once he started looking into precious metals versus paper money, he quickly became bullish on gold: “An ounce of gold will buy you a nice suit today, it bought you a nice suit 20 years ago, it bought you a nice suit 200 years ago… Dollars have depreciated over time; pretty much any fiat currency has. So when I look at gold, I don’t look at it like, it’s going to go up and I’m going to get rich. It’s actually not a trade—it’s the furthest thing from a trade. It’s a way to maintain your purchasing power over time.”

The All-Weather Investment

Dillian, who grew up in a poor town in eastern Connecticut, was only 27 when he started working as a trader at Lehman Brothers. Three years later, he was running the ETF desk and trading a billion dollars per day on a regular basis.

Being used to the typical New England thrift, he admits that he didn’t fully understand that world until after he left it in 2008. “You know, I would bring in a can of beans for lunch, with a can opener, and open the can of beans, and bring a plastic fork and eat beans for, like, 49 cents.”

This attitude also informs Dillian’s stance on gold: “It’s hard to predict what governments are going to do, so it’s smart to hold some all the time. It’s really an all-weather investment.”

The Fed’s Playing It Fast and Loose

He believes we’re seeing signs that inflation is creeping up—asset inflation, that is, which the Fed deliberately ignores. “Central banks today say there is no inflation. There’s no inflation of toys or TVs or haircuts, but there is inflation of houses and Amazon stock and Treasury bonds, and lots of financial assets.”

The reason for this predicament, he says, is the Fed’s ultra-loose monetary policy, which has kept real interest rates at negative levels for a very long time. “I would call that irresponsible central banking, and we’re dealing with it today, still.”

There’s no sign, Dillian insists, that at least developed-world central banks are learning from the dire experiences of the recent past. “They’re actually kind of getting worse.”

Trading Gold vs. Investment Gold

He advises investors to own both “trading gold” like mining stocks and ETFs, and “investment gold” in the form of bullion that they just buy and hold: “10 to 15 percent is probably a pretty good guideline.”

Even if you’re bullish on gold, though, you shouldn’t get too exuberant, Dillian warns, because a price spike is almost always associated with a financial or political crisis. “Remember, gold is not a trade that’s ever going to make you happy… I hate to say it, but it’s a hedge, it’s an insurance policy. You just do it.”

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