Concept

Positional Assets

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Positional Assets

A distinction introduced by Matthew McLennan of First Eagle Investments to reframe the debate about which assets are truly “safe” over long time horizons.

Fixed-principal assets (Treasuries, cash deposits) guarantee principal and coupon in nominal terms. Their apparent safety rests on government creditworthiness. But they have one crucial flaw: their supply is unlimited. Governments issue more debt whenever they run deficits. By John Cochrane’s Fiscal Theory of the Price Level [?source], the government’s real asset is its taxing capacity — a fixed real quantity. If debt grows faster than taxing capacity, the real value of each unit of debt must fall. Short-term Treasuries appear risk-free but, over long periods, have consistently failed to keep pace with the growth in the government debt stock — meaning they erode real purchasing power.

Positional assets derive their value from fixed supply rather than cash flow. Examples:

  • Gold: ~200,000 tonnes above ground; the entire stock would fit inside the centre court of the US Open, cubed; new mining adds ~1.5% per year. Chemical inertness means it is never consumed and never rusts — it is innate and scarce. Demand from central banks, private investors, and jewellery buyers competes for a fixed stock; real value has historically tracked nominal wealth growth.
  • Prime real estate: a vacant block in a great city or on a great beach; supply is fixed by geography. Participates in the real income growth of people who want to build on it.
  • Art and iconic brands: supply fixed by the artist’s death or brand history; compete for the pooled wealth of collectors and consumers.

The paradox

Traditional finance theory values assets by discounting future cash flows. An asset with no cash flow today has, under this framework, no value today. Positional assets expose the limit of this framework: their value is real and demonstrable, but it accrues from scarcity, not yield. McLennan’s formulation: “one has to be open-minded to the possibility that an asset that doesn’t have cash flow today can have value today if people are going to compete for it as part of their nominal pool of wealth.”

Businesses as a hybrid

A great business combines free cash flow (like a fixed-principal asset) and preservation of purchasing power (like a positional asset) — but all businesses face long-run fade risk as competitors erode their position. What varies is the melt rate. Businesses with a dominant market position (high market share, scarce real assets) have a slower melt rate and therefore behave more like positional assets over time. See Value Investing for the scarcity + margin-of-safety framework that operationalises this.

Gold’s specific advantages

  • Innate: does not need to be managed to maintain its properties; unlike Bitcoin (needs a community of miners) or sovereign paper (needs fiscal discipline)
  • Chemically inert: no industrial consumption; total above-ground stock grows only ~1.5% per year
  • Dense and mobile: easy to store; not landlocked to a single jurisdiction, unlike real estate
  • Long duration: the absence of near-term cash flows is the source of gold’s resilience to short-term business cycle swings

McLennan cautions that gold, like any asset, has valuation risk. Holding gold after a long bull run, when it is expensive relative to equities and debt, captures less of the hedge premium. The goal is scarcity + valuation margin of safety — not gold regardless of price.

Where mainstream views differ

Buffett’s critique: Warren Buffett has long argued that gold is inferior to productive assets because it generates no cash flow, no dividends, and no earnings growth. His frame: compare gold to a farm (productive income over time) or a business; gold cannot compound. McLennan’s rebuttal is implicit rather than direct — he does not claim gold outperforms equities over full cycles; he claims it is a better long-term store of value than paper claims issued against a depreciating government balance sheet.

Cash as the safe asset: The conventional financial planning wisdom is to hold cash as the “risk-free” asset for short-term needs. McLennan accepts this for truly short-term purchasing power but argues that cash held for longer periods — where the option value of deployment in a crisis is what matters — competes poorly with gold, because the growth rate of government debt has consistently exceeded the yield on short paper.

Real return of gold: Critics note that gold’s real return over very long periods is approximately zero — it preserves purchasing power but does not grow it. McLennan does not dispute this; preservation of purchasing power, not superior total return, is his claim.