The changing face of intelligence

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[Music]

Hello, I'm Alan Kohler, Founder of Eureka Report which is now part of Intelligent Investor and Finance Presenter and Columnist for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review.

And we are The Money Café. G'day, James.

How are you, Alan?

I'm very well. I just got off the phone interviewing Ryan Stokes, the CEO of SGH...

Great, excellent.

Who's put in a new bid for Bluescope Steel this morning, upped the price from $30 bucks to $32.35 and they've said that's their final offer, so that means that they're committed to that being the final offer, that's it then.

Well, Alan, best and final offer can be a slightly malleable term. When Seven was bidding for Boral it had two best and final offers, so you can be best and final a couple of times if you need to be.

As usual, these days, he needs the board to approve it, they have to agree to it and then he'll proceed, so I said to him, "Why the hell don't you just bid for it?" When I was young, that's what companies did, they made a takeover offer for another company, they didn't kind of muck around...

Go hostile...

Well, I said, "This is pretty hostile, let's not pretend it's not hostile, they've rejected it and they don't want to be taken over, so of course you're hostile, just make the takeover..." He said, "No, we need to do due diligence." Then I said, "Does that mean that you want to know some stuff about the company that isn't public?" and he said, "Yes, that's right." And I said, "But that puts you in the position of being an insider. You're going to be the buyer knowing stuff that the sellers, the shareholders of Bluescope, don't know. Why is that fair?" You tell me, James, why is that fair?

Well, I guess the seller is willing to allow that to happen in order to get a better price for their business, that would be the argument.

You mean the seller's board...

The seller's board.

Each individual shareholder is the seller...

That's true.

And they don't get to decide anything, they're in a contest or in a transaction against somebody who will know stuff that they don't know.

Yes, they'll know stuff about the business that they own. I guess if you extend it that way, Alan, the owner of the business is always in that position of not knowing as much as their board representatives, for example.

Only if they get to do due diligence, the buyer gets to do due diligence, which means they get to look at stuff that isn't public.

Yeah, but what I mean though, Alan, is the management and the board are always in possession of that information, so I guess the owners are putting their faith in their representatives on the board to keep representing them in an appropriate way. I guess that's how you get around that.

Anyway, I think the market's gone to $29-dollars-and-something. Obviously, the punters don't reckon that they're going to get it.

There's two big punters that matter here, Alan. AustralianSuper is the biggest shareholder and the second biggest shareholder is L1 Capital, which is a big fund run out of Melbourne. They've both said they want something like $33 bucks. It's not the biggest increase, I'm not sure it's going to win the day, but let's see.

I said to Ryan Stokes, "Why are you chiselling them, why don't you just give them what they want?" [Laughs]

That's not the SGH way. They like to do the right thing by their shareholders and get a good deal where they can, they're very good at it over the years too.

That is fair enough. What did you think of BHP's result this week?

Cracker.

Cracker.

I think there's sort of two things going on inside BHP, one's the operational stuff, they just run this business really, really, really well. Their performance on costs and production every year, year in, year out, is excellent.

Do you think they're a better business than Rio Tinto?

Yeah, much better.

Much better?

From an operational perspective, Rio Tinto would say that they're still trying to catch up to what BHP is doing and I think the thing about BHP's performance is it's over five to seven years now. They've done an excellent job on the operational side. Obviously, BHP had a big tilt at Anglo American to try and get their copper business in the last few years, that didn't come off. But what we're seeing is copper prices are exploding, BHP's the biggest copper producer in the world and they're saying they can grow a lot more, particularly over the next 10 years, but even beyond that with just the internal portfolio they already have. I think on Tuesday it was a result that sort of brought together five years of pretty hard work by Mike Henry and he certainly was up and about after this result and the shares popped in a way that's very unusual for a big company like that.

Do you think we should start thinking of BHP as a copper company?

Absolutely. Copper's now more than half the earnings in BHP. The centre of BHP's universe, really for the last 30 years, 40 years, has been the Pilbara in Western Australia and the iron ore business. The geographic centre is somewhere in the ocean between South Australia and South America, particularly the big copper mines they've got in South America are going to be the heartbeat of this company for the next couple of decades. The iron ore business - iron ore prices have held up really well over the last couple of years, in the face of the Chinese economy's problems with infrastructure spending and particularly property spending. BHP said as much yesterday. China's demand for iron ore is holding up because China's exporting a lot of steel to the world, either as actual steel or as electric cars.

I guess my question is, how long is the rest of the world going to accept this avalanche of cheap cars and cheap steel from China. We're already hearing rumblings about steel tariffs in Australia, there's talk of tariffs in Europe... If those tariffs were to come in and China was not able to over-produce steel and dump it on the rest of the world, then the iron ore price is coming down sharply. BHP recognises this, that's why they've moved into copper. Just think of the ramifications of federal and state budgets if the iron ore price was to really retreat. It's been very high for a long time now.

If other countries put up trade barriers against China steel and Chinese cars, won't they have to buy Australian iron ore instead? Doesn't it all come down to demand for steel rather than whether it's China or somebody else that ends up having to make it?

Yeah, but I guess what I'm saying is that the demand for steel in China is artificially inflated. China doesn't need to produce as much steel as it does, it's just producing that steel and chipping it around the world to keep its growth figures up around 5 per cent.

I understand, but presumably if it doesn't ship so much steel around the world, then the countries that currently buy it will have to make it themselves, unless they stop using steel.

Yeah, but I think there's too much steel in the world, there's definitely too many electric cars in the world.

Is that right? There's too many electric cars?

For the markets that want them, I mean you can go to parts of Australia and find thousands of electric cars parked in areas where they're not selling.

Yeah.

It's an interesting sort of balance, but copper's definitely the name of the game now.

And I keep reading that there's going to be a massive copper shortage in five years' time.

Yeah, 2035 is - I think BHP said yesterday, "We need to produce another 10 million tonnes of copper around the world," and there's no signs of that happening.

Is that right, is that what he said?

Yeah, another 10 million tonnes of copper by 2035.

They're sitting pretty then.

Absolutely, that's why the price is going up and they're doing well.

Part of the reason there's going to be a copper shortage is AI - he says segueing beautifully.

[Laughs] Well, I've had a few family members tell me about your fierce argument with Matt Comyn, Alan. Maybe you should tell the readers about that?

A week ago, early last week, an article appeared on a website that looked exactly like it was on the ABC website and it looked like an article - it wasn't written by me, it had somebody's else's byline, a female byline, and the article was about an argument that I apparently had with Matt Comyn on the set of 7:30 during an interview and he stormed off, he threw his microphone down and stormed off. The article was a couple of thousand words long and there were pictures of me and Matt Comyn having this argument. There wasn't a video of it, but there were pictures and it was an AI fake. A lot of people wrote to me saying, "Is this true, is this was happened?" And I had to say, "No..." So I used that as a lead into an article on Monday about AI...

It was a great article.

There was a few other things, some bloke named Matt Shumer published an article named, 'Something big is happening'. Last count, it's been viewed 80 million times, this article, so suddenly Matt Shumer's a big star now.

It's an interesting article. Shumer's an investor and AI entrepreneur, so he's talking his own book, that's for sure. The article's very light on much data, it's more this guy's feelings, but he's making the point that he's a software engineer by trade and basically AI has replaced his job. Particularly in the last four or five weeks, the advancements in the AI models, particularly from Anthropic, theirs is called Claude, and also from OpenAI, have come along so far that basically we don't need computer coders anymore. That's an exaggeration, but that's the sort of general idea of this article. It says things like, "Basically, this is the most important year of your working life because you need to decide whether you're going to sink or swim in this AI world," and it also very explicitly says, "Get your financial house in order, you shouldn't be taking on any debt because this is about to rip through the economy!"

It's sort of the AI, doomy stuff we've heard before, but it's been amplified, I think, by this shift in markets where investors are looking at software businesses that have been huge winners for them for the best part of 15 years and they are thinking, hang on, is AI going to totally destroy or replicate what that software business does and basically put it out of business? This has become the biggest narrative on markets very quickly, we're seeing over the last six months software valuations are down 25 per cent, some of them are much worse than that. Every member of the Magnificent Seven in the US are now down year to date.

Except Google, isn't it? Or Alphabet?

Yes, sorry - oh, I think they're all down now year to date, but in the last little while Alphabet has done very well, you're right. So you've sort of got this dual AI fear now, the bears are worried that AI is going to wipe out all the software companies, but they're also still worried that there's too much investment being thrown at AI because the amount that the Googles and Microsofts and Metas of the world are spending is just skyrocketing. It's a fascinating moment and then besides that, you've got everyone worrying about their job and deep fakes and is Alan going to start boxing on with Matt Comyn in the Metaverse?

So the world has changed, it isn't the case any longer that we can say, "The world's going to change..." or, "It is changing..." It has changed.

It has changed, yep.

In a very significant way. I read something else after Matt Shumer's article that basically said quite articulately, "Human beings are no longer the most intelligent creatures on the planet." Obviously, intelligence has been human beings' secret sauce, that's why we dominate...

That's been our thing!

It's been our thing, intelligence. Suddenly, there's now these things that are more intelligent than us and that's a big deal, right? The other way to look at it, is the cost of intelligence has fallen to zero. In some ways, in every industrial revolution, the core of an industrial revolution is the declining cost. When the first industrial revolution happened, the cost of producing garments collapsed; then there was the railways, that reduced the cost of transport; electricity reduced the cost of heating and light; the internet reduced the cost of communications almost to zero... That's another factor of what's going on now, is the cost of intelligence is heading towards zero. Suddenly, you can subscribe for ChatGPT for $20 bucks a month and get basically the same sort of level of intelligence, the volume or whatever or intelligence as a room, thousands of people and whatever they cost per hour.

So that's a big factor in what's occurring. The problem for the stock market is, investors - nobody really knows how this is going to play out, nobody's got any idea anymore.

Nobody's got any idea, so it's very hard to take a stab at what a software company is going to be worth, it's just so hard to work that out.

In some ways, it's best to be on the sidelines.

Yeah, maybe.

I see a report today from a broker saying, "Technology One is a buy now because it's come down enough and there we are, it's now in value." Really? I mean, who knows?

Who knows? Yeah, it's very difficult for investors. To the broker's point though, there is opportunity in this because some of these things will find their way and some software companies will harness AI and improve their products with it, some won't. You're really got to sort through all this, it's a tough time to be an active investor.

Yeah, I was talking to someone who's in the AI business this morning and talking about whether it's going to be a winner takes all business or not, as the internet was with Google, basically covering all the search. It's always felt to me like AI won't be a winner takes all because it's so competitive, there's so many of these models being produced and they're all competing like mad with each other and they're quite specialised. Then you think, this guy said to me, "Well actually, Google's Gemini is really good. Gemini's amazing." So everyone's talking about ChatGPT and Claude, but actually Gemini's very, very good and the reason Alphabet's share price is going up is because Google's kind of fully integrated, it's got everything. It's making the chips, it's doing everything now, so maybe Google does win, I don't know.

Maybe. [Laughs]

But the thing is, nobody knows. Claude seems to have computer coding wrapped up, so I don't know.

It does, but there's a great interview that the CEO of Anthropic, Dario Amodei, gave and he sort of made the point, "We could make a miscalculation about how much we should spend in one year over the next decade and that could just bankrupt the business."

Did he say that?

These thigs are still pretty finely balanced - yeah.

Heavens above!

It's an amazing world. Recency bias in this of course, Alan, but I can't quite think of a story quite like this.

There's no doubt about it, in my lifetime there's been nothing like this and it's rapidly becoming an economic story, really. I don't think it's a technology story anymore, although obviously it is as well, but it's clear to me know that the economy is going to have to be restructured in some way. I don't know how and I don't think there's any Government that's really getting its head around what are they going to do...

I think you can sort of see where this is going. If there is a spike in unemployment, there doesn't even have to be necessarily a big spike, there'll be calls for regulation and to slow this down. I just don't see how that's possible. History says that technological changes don't get slowed down because that's not the way competition and capitalism works.

That's right, because it's also a matter of national sovereignty as well. You can say that we should slow it down, but some country's going to do it, namely China. If Google or Anthropic has a problem with regulation in the US, it'll shift to the Bahamas or whatever. It will be like tax avoidance. You can say companies and rich people ought to pay their full rate of tax, but Cook Islands or the Bahamas are always going to say, "Come here and you don't have to pay tax."

Maybe, yeah. Should we do some questions?

I just want to mention something about the Coalition's change up. This is a business or money podcast, we're not The Politics Café, but I just don't think enough is mentioned when these kind of things happen, when somebody gets knocked off as leader, I don't think enough is made of the salary. What happened to Angus Taylor was he got a pay rise from $300,000 a year to $442,000 a year, that's a big pay rise. He's got a family, he's probably got a mortgage. All of us are trying to get promotions and pay rises all the time, right? This is just what you do.

Well, that's one way to think about it.

Look, I'm not saying he's entirely motivated by the salary, of course not, but I just think that we wrongly completely ignore salaries in this.

Fair enough.

A back bench MP gets $239,270 bucks a year which is okay, I mean it's probably decent, but most of these people could earn much more and part of the reason they want to get in the ministry, whether it's a shadow ministry or the main ministry, is because they get another $100,000. Then if they become leader of the opposition, it's another $140,000, thanks very much.

Well, I didn't know those figures, Alan, you've enlightened me, that's for sure. Is the change of leader going to help the Liberals at all?

Who knows? I think the Liberals have got far more fundamental problems than Sussan Ley's character, really. They own nine out of 88 urban seats in the country. They can't get back into Government unless they win back the urban seats that they lost to the teals. The reason the teals got those seats is because of climate change. I'm not a pollster or a political analyst, but in my view, the Liberal Party will never be a serious contender for Government again unless they come up with a proper climate change policy. Either they recruit the teals into the party by having a proper climate change policy or they take the seat back off them for the same reason. They certainly won't get there by carrying on about tax and opposing the change to the capital gains tax discount. What an absolute debacle, Christ.

We don't know for sure what Chalmers is going to do with the capital gains discount in the budget, but clearly they're thinking about changing it because the kite's up in the air.

It is.

Either they're going to halve it to 25 per cent which is what Shorten wanted to do in 2019 and '16, or go back to CPI adjustment maybe. Apparently, Angus Taylor is going to absolutely oppose it.

I think the budget looms as a pretty big moment. Some budgets are pretty boring, I think this budget needs to do something for Labor and it definitely needs to do something for the Coalition, they need to use it as a springboard to say, here's our plan. But Labor's really got to - the pressure's on Chalmers to come out and Albanese to do drive some reform that actually might take a bit of pressure off inflation and allow the economy to grow more than its current speed limit. I think this is a really big moment. If you're Albanese and Chalmers, the opposition's a rabble, this is the first budget after the election, here's your chance, this is the moment. Anyway, we'll see if they grasp it in that way.

Yes, I'm not holding my breath.

[Laughs]

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We've got far more questions than we can possibly answer, as usual, so we'll have to pick and choose a bit.

Thanks to all the listeners, we love them.

What do you think, you want to start?

I'm going to start with Andy because he does make a point, it's a bit of a passive aggressive point, he says, "Considering you are all "journalists" of some description..."

That's in quotes, "journalists" in quotes.

"...Perhaps you could do some research on the effects of climate change on the economy and business. Some questions to start us off, which companies are investigating the effect of a 2 degree increase in temperature on their bottom line? What are companies doing to ameliorate these effects and protect their share prices? Is there any research published in peer review economics journals? Perhaps meta analysis along these lines. Maybe spend five minutes talking about what is possibly the biggest ever risk to corporate profitability."

Well, I'm in furious agreement with Andy, I think that there isn't anywhere near enough being done among both companies and Governments to think about what are you going to do when the temperature goes to 2 degrees above pre-industrial age? Because that's what's going to happen. Apparently, according to the scientists, it's going to be catastrophic. 2 degrees above late 19^th century average temperatures is really bad.

In terms of which companies are thinking about this most, Andy, my view would be the insurers because they're dealing with one of the outcomes of climate change in their businesses all the time. Suncorp's result was out on Wednesday morning, I think they had 10 natural peril events just in the December H, which is a pretty extraordinary amount when you think about it and Steve Johnston, the CEO there, says, "We're spending millions on climate mitigation at the moment, we need to be spending billions. It's that simple." There's a lot of pressures on the budget, but this one is falling by the wayside, so I think there are definitely companies out there thinking about it, Andy. Possibly the biggest ever risk to corporate profitability, that's a fair point, but I guess it's a bit like the AI discussion, it's just difficult to play through what that looks like in 5, 10, 20 years' time and how you should price that. I think a lot of people are just ignoring it, basically.

Because they can't be sure what's going to happen, although you can be pretty sure.

But Andy's right, the conversation around this has changed. Three years ago, every corporate presentation started with something on ESG. I don't see much of it anymore.

That's right, everyone's worried about AI.

Yeah, that's right.

It's a bit more of a pressing problem, but I think bubbling away underneath it all is climate change and I think Andy's right.

Yeah.

Carla says, "Thanks for the podcast. My husband and I have an SMSF with shares, cash, land and Charter Hall trusts..." so, well diversified, good on you! "We're in our mid-70s, planning to wind up the super fund and change to an industry fund which is a very interesting and unusual thing to do. Can you please give us advice regarding choosing a fund?" The answer is, no.

[Laughs]

My advice would be, have a look at their returns over the past 12 months, five years, 10 years, because although the past returns don't, as they always say, guide to future returns, it's all you've got, really.

The other thing I would look at, Carla, is go through a few of the funds and look at their sort of target allocations for their balanced option. There is some differences, I was looking the other day, one of the big funds has, I think it's 35 per cent of the balance fund in international equities, one has 23 per cent at the moment. One has 5 per cent in private equity, one targets 10 per cent. Those are quite substantial differences, so I think you do want to be - if you're going to jump in the balanced fund or whatever option you're going to take, you want to understand what you're getting into, that's the general advice we could give.

I agree.

James says, "I've been following the ongoing debate about inflation and interest rates and I'm struck by how narrow the public conversation can be. James says, there's not enough focus on the supply side and says, we need to look more at seller's inflation, which occurs according to economics professor, Isabella Webber and her work in concentrated markets where companies can lead price rises rather than merely responding to higher costs. It makes James wonder, why is this angle taken more seriously in policy? Once upon a time, big companies had to appear before the price justification tribunal to justify significant price increases. My question for the show, should Australia revisit something like that tribunal or a modern equivalent, particularly in highly concentrated sectors to test whether price rises are genuinely cost based?"

Well, it's interesting, the Prices Justification Tribunal, I thought was great and it was absorbed by the ACCC eventually and I think the ACCC is now not really engaged in that kind of activity. I'm just trying to remember, the Prices Justification Tribunal, the deal was, if you had a turnover or a certain amount, I think it was $20 billion, you had to go to the PJT before you put your prices up to get them to tick it off. I think that's fine. Let's do that, because we don't do it anymore, we used to do it and we don't do it now. It was interesting the other day, the ACCC pulled over Coles, you wrote about that didn't you, James?

There's this court case going on at the moment where the ACCC's taken them to the Federal Court over their discount approach strategies. I guess we do get a bit of that action...

But it's always after the event.

Do we need a body to set prices?

No, you've just got to justify them, that's all. Some prices are kind of regulated, electricity companies have to go along to the energy regulator and ask if it's okay to put their price up, don't they?

Yeah, it's a tough one.

Some prices are regulated, some are not. I mean, I think there are some industries in Australia that are very concentrated such as supermarkets and they do have a lot of power.

James makes the point, "The corporate sector would howl with protest." And I think that's right.

Yes, they would.

But yeah, maybe there's merit to it.

There is.

What about Mike's question, Alan?

It's pretty long, but I'll try to summarise it. "Am I missing something?" He says. "Given it is frequently stated that, one, demand for housing is outstripping suppl, putting up prices and making it difficult for young people to enter the housing market; two, Australia has insufficient skilled plumbers, electricians, carpenters, etcetera...; and three, productivity growth is too low, would it not make sense to restrict immigration to those categories required in the building industry and other sectors required to increase productivity; two, conduct short training programs to assist immigrants with unrecognised qualifications; three, limit immigration into low productivity sectors such as nail painting and delivery riders?"

This is an argument that NAB Chief Executive Andrew Irvine's made before. We want immigration to continue, population growth is good for the economy, but if we've got a problem like the housing shortage, why aren't we directing more of the immigration towards that sector and doing things like, as Mike suggests, faster recognition of skills or testing of skills or direct importing of skills? I think there's probably something to that, isn't there, Alan?

There is in theory, but the trouble is that, firstly, the biggest component of our immigration program is foreign students and they are recruited by universities and colleges using agents, largely in countries whose trade qualifications are not recognised in Australia. We've got this body called the Trade Recognition Council or whatever it is, in Australia and they kind of determine, among other things, they determine whether a country's trade qualifications can be recognised in Australia. During the big wave of immigration that happened in the 50s and 60s, most of the immigrants then came from Europe and the trade qualifications admittedly in Greece and France and so on and the UK were recognised and still are, in Australia.

So they came out and they were tradies immediately, but the trouble is that most the immigrants now are from countries whose trade qualifications are not recognised. There would have to be a shift in the - and the trouble is, I think there are good reasons for not recognising the trade qualifications in some of those countries, because their buildings fall over.

Well, yeah.

It's complicated, right?

Of course, it's complicated, but Governments should be able to chew gum and walk at the same time, shouldn't they?

The trouble is, if they don't have the foreign students as being the biggest component of immigration, which is what it is now, then the Government would have to pay for the universities, right? Because the universities are funding themselves with foreign students at the moment and so what would happen is the universities would all go broke and they'd have to sack everybody and they wouldn't be able to do any research anymore and so that would be a massive change to the tertiary education sector in Australia, which nobody's really up for. Also, the hospitality sector would fall over if there weren't any migrants and backpackers and fruit-pickers...

It's true that we don't have enough tradies coming, but if we shifted from what we have now to tradies, then the fruit doesn't get picked and the meals wouldn't get delivered...

Alan, surely there's a halfway house.

...And the fingernails wouldn't get painted, imagine that!

Surely we can have the best of both worlds, surely there's a bit of grey. I'm going to go down to David's question, he's been helping his mother renew her car insurance, he won't name the company she uses, but they advertise a lot and their name rhymes with 'chewie'. "After a year of no claims, she got her comprehensive car insurance renewal notice, the premium went up by 9.1 per cent and her excess went up by 10.4 per cent, while the value of her modest 2017 car went down by 10 per cent, seems crazy. My question is, do wealthy or even moderately well off people bother with such insurance policies, or do they just self-insure in the unlikely event of an accident? It seems the majority of people unlikely to make a claim are subsidising the minority of people who make regular claims. I'm sure you know plenty of rich people, can you do a survey?" I don't know anyone who self-insures their car, I must confess.

No, I don't and I certainly don't do it myself because that's just too hard.

I can give David some help, from speaking to Suncorp's CEO. He says inflation, it's 3.8 per cent, in the insurance game it's running at about 4 per cent higher than that so that's sort of 8 per cent. There's a couple of problems. On the motor side, we've got labour is still expensive, specialist panel beaters is still expensive, parts is still expensive and that's being exacerbated at the moment because we've got a whole bunch of new Chinese car brands in the country that haven't really established their supply chains, it's expensive to get the parts for those businesses.

Apparently they don't send out parts with the cars?

Yeah...

If you crash your Chinese EV, you've got to get the parts from China.

Yeah, that's adding to cost, so that's a bit of an unexpected one. Then on the home insurance side, there's two big ones, plastic pipes bursting and creating water damage that goes throughout a home ands the other one's lithium batteries which in the event of a fire are exacerbating the damage. The average house now has 26 lithium batteries in it, Alan, so that's become a problem.

Really?

We're paying for that.

I'm just trying to think, have I got 26 batteries in the house?

Well, when you consider all your phones and other rechargeable devices, even aside from your Ryobi whipper snipper, or whatever it is.

If the house catches fire, all these lithium batteries that I've got blow up, do they?

They tend to make the fire worse, yeah.

Geez.

There you go, that's what's happening, it doesn't feel very fair, David and now I think - what are our health insurance premiums going to go up by? Some large number as well above inflation - I think it's 4.5 per cent.

Apparently, when we're all sitting in the back seat of self-driving cars, there'll be no more accidents, apparently, because they won't bang into each other anymore.

Dave's mum will be fine then.

Yeah, it'll be great.

Hold on! 4.4 per cent is the rise in...

It'll be great and if you're in a self-driving autonomous EV, insurance costs will be very low because it won't have any accidents, apparently.

There you go.

Alan says, "AK, do you have a line of merch?" The answer is, no, I do not.

Need to get one.

Yeah, maybe we should.

We could get T-shirts with "That's finance."

Or "Money Café" T-shirts.

Yeah, "Money Café" T-shirts.

Number two, he says, "I see people lining up around the country to buy physical gold. Why are they buying physical gold? Is there not an online electronic way to own the exact same gold and if so, why are these people still opting for the physical gold option? My hunch is that people are buying physical gold because it can potentially skirt around capital gains tax, what say you on the topic?" Firstly, I don't think you can skirt around capital gains tax by buying a bar of gold. I think that if it goes up in price and you make a capital gain, it's taxable. Yes, you can own a gold ETF which tracks the price of gold and it's exactly the same thing, right James?

It is, yeah, that's the other option. But some people just want the physical shiny stuff.

They do.

The Government can't get it and in this sort of debasement trade where you're trying to have a store of value completely outside the hands of governments and central banks, what better than owning the gold and sticking it in your safe or above your mantle piece or wherever you decide to stick it?

There was another question which remarked upon my rant recently - I don't know if it was with you, James - about how physical gold, the price is set according to the derivatives market, so even if you buy physical gold, you're still speculating on the futures market.

Yeah, in a way.

You are, because I rang up ABC Bullion and said, "How do you set the price? When someone comes into your shop and says, "Please sell me an ounce of gold for $5,000 bucks or whatever it is, how do you set the price?"" And the answer is, they set it off the futures market and the spot market and the spot market never results in physical transfer of gold because it's a two-day delivery and nobody ever delivers the actual gold on the spot market. Both spot and futures markets are speculative on paper.

Yeah, there you go.

Even if you buy physical gold, I would suggest speculating.

Life's a speculation, Alan, isn't it?

Yeah, that's very deep, James.

Very deep, great note to finish.

Thanks very much, everyone, for listening to today's episode of Money Café with James Thomson, it's been great. I'll be back next week with Stephen Mayne. Send in your question to themoneycafe@eurekareport.com.au. Until then, I'm Alan Kohler, Founder of Eureka Report and Finance Presenter and Columnist for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at the Financial Review. Talk to you soon.

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Got a question for next week? Please send it to themoneycafe@eurekareport.com.au.