Voima Weekly #15 – Alternative Assets, Modern Portfolio Theory, and Gold

Photo created with GPT.

I joined Kauppalehti’s Markkinaraati program on Thursday to discuss alternative investments together with Samu Lang, CIO of Aktia, and Mikko Hyppönen from Sensofusion.¹ Gold had been selected as one of the so-called “alternative” investments among a colorful mix of others — and that became one of the main topics of our discussion.

Alternative investments are, according to one view, everything that isn’t traded on an exchange. Another way to see them is as assets that fall outside Harry Markowitz’s Modern Portfolio Theory. Markowitz published his theory in the 1950s, at a time when investing essentially meant choosing between stocks and bonds.² His idea was simple: risk can be managed through diversification, and the optimal portfolio lies in the balance between return and risk.

Gold was not part of the investment equation at the time – it was state money, not a private asset. In the United States, private ownership of gold was prohibited from 1933 until 1975. In 1944, at the Bretton Woods Conference, the U.S. dollar was pegged to gold at a fixed rate of 35 dollars per ounce, and central banks around the world had the right to exchange their dollar reserves for physical gold.³ The system laid the foundation for postwar monetary stability and established the dollar as the world’s reserve currency.

It’s important to remember that Markowitz’s theory was developed in an environment where the dollar was still tied to the gold standard. This meant the currency’s value could not significantly depreciate, as it was anchored to physical gold. The gold standard was abandoned under President Nixon in 1971, when the United States no longer had enough gold to cover its foreign dollar liabilities. Several countries — including West Germany, Switzerland, and France —demanded to exchange their dollars for gold, a move that would have emptied Fort Knox. Nixon had no choice but to end the dollar’s convertibility into gold. It was the most politely declared default in economic history. Only in late 1974 were Americans once again allowed to own gold. After the dollar was detached from gold, the price of gold in dollar terms rose by roughly 2,300%, before stabilizing through the 1980s and beginning a new ascent in the early 2000s.

Modern Portfolio Theory isn’t “wrong” — it’s incomplete. It was built for a world where money was stable, correlations were predictable, and risk could be measured in decimals. That world no longer exists. Today, when money itself is a policy variable, debt defines the market, and every asset’s price depends on central bank balance sheets, diversification becomes an illusion. The theory didn’t fail because the math broke down — it failed because the measure of value did. We have largely adopted the same approach to managing government deficits as Germany did before the war, or as Argentina and Turkey have done repeatedly over the past century.⁴

Gold, of course, is not an “alternative investment,” though I personally don’t mind how anyone chooses to classify it. In today’s portfolio structures — pension funds, university endowments, and sovereign wealth funds — gold still holds the status of an “alternative asset” because it is not priced based on cash flow (there is no discounted return), it is not part of a modern financial instrument (such as a stock, bond, loan, or derivative), and its return cannot be modeled using CAPM — the Capital Asset Pricing Model.

In the world of investing, gold is classified as an “alternative,” even though historically it is the very benchmark against which everything else is measured. It was the first global currency (used for over 2,500 years), the first universal measure of value (the same unit across all cultures), and the first hedge against inflation — long before the term even existed. If we talk about a true “core asset class,” gold is not the alternative. It is the monetary base of all wealth.

Modern Portfolio Theory does not account for inflation variability — the erosion of purchasing power — the growth of the money supply (M2, M3) and its impact on asset valuations, rising debt levels and public debt sustainability, political risk such as taxation, capital controls, or debt erosion, nor the changing correlations of real assets during crises.

All of these are structural variables of the financial system, yet Markowitz’s framework treats them as constants. When the monetary system is based on debt and money is created through credit, the returns and risks of all assets are governed by monetary policy and the credit cycle. In such an environment, the so-called “risk-free rate” (r_f) is not neutral but a political decision.⁵ Real returns can be negative even when they appear strong in nominal terms — if inflation eats away purchasing power faster than interest accrues. Correlations, in turn, shift every time a central bank intervenes in a crisis, whether through QE, ZIRP, or QT.⁶ Thus, Modern Portfolio Theory only works if money itself is a stable unit of measure — which is no longer the case in a fiat environment.

Gold, however, is not, in my view, a true investment instrument — it is the fundamental form of money, the base against which everything else is ultimately measured. Yet in modern finance theory it has been labeled an “alternative,” because the theory itself was born in the age of fiat currency and equity markets. Ironically, the real “alternative investment” is not gold — it’s the money we use every day.⁷

P.S. For the readers: I’ve received a great number of questions and topic suggestions over the past few weeks, and I’ll be addressing them in future Weeklies. I apologize for not having had the time to respond to every message individually, but I’m truly grateful for all the feedback, clarifications, and encouragement you’ve shared. Thank you.

–Marko Viinikka
Founder, CEO
Voima Gold Oy

1 You can find the podcast here: Kauppalehti
Kauppalehti is Finland’s leading business and financial newspaper, similar in profile to the Financial Times or The Wall Street Journal.

2 Harry Markowitz never set out to create a theory of finance. He was a mathematician who went to the University of Chicago to write a dissertation in philosophy. His advisor happened to ask whether he could apply logic to investment decision-making — and from that question, modern portfolio theory was born.

3 In 1944, the United States held about 20,000 tonnes of gold — more than any country in history. It was the backbone of the system. But by 1971, that backbone had thinned: the dollar-denominated promises had multiplied far beyond the amount of gold backing them.

⁴ Political economy inevitably drives governments toward a soft default: deficits are structural (aging populations, rigid spending commitments, weak productivity), while tax hikes and spending cuts are politically toxic, and debt restructuring remains taboo. As a result, policy shifts toward fiscal dominance and financial repression — real interest rates kept negative, domestic savings “captured” through regulation and directed into government debt, central bank balance sheets expanded, and, when necessary, yield-curve control and exchange-rate management employed. It is the same logic Germany followed in the 1930s and that Argentina and Turkey have repeatedly chosen since: debt is resolved over time, through inflation — not all at once by recognizing losses

⁵ The symbol rx (commonly written as r_f) denotes the risk-free rate — the return an investor earns without taking on credit risk. In modern finance theory, it forms the foundation of the equation: E(Ri) = r_f + βi (E(Rm) − r_f) where E(Ri) is the expected return of an investment, E(Rm) is the expected return of the market portfolio, and βimeasures its sensitivity to market movements. In theory, r_f is a “neutral” starting point — in practice, it is anything but. The central bank determines it through policy rates and asset purchases, while governments rely on it as a structural pillar of the financial system. When debt levels become excessive, the so-called “risk- free rate” no longer measures risk — it measures the cost of keeping the system alive.

⁶ QE (Quantitative Easing) refers to monetary expansion — the central bank purchases large amounts of government bonds and other securities to increase the money supply and lower interest rates. In practice, it is a modern, digital form of money printing. ZIRP (Zero Interest Rate Policy) means a zero-interest-rate policy — the central bank keeps its policy rate at or near zero for an extended period to sustain borrowing and prevent the economy from stalling. QT (Quantitative Tightening) is the opposite process — the central bank reduces the size of its balance sheet by selling previously purchased assets or allowing them to mature without reinvestment. It withdraws liquidity from the system and tightens financial conditions.

⁷ Currency = that which flows. Money, then, is movement — not permanence. And that is precisely why gold — which does not flow but endures — is its opposite.

Disclaimer: Voima Weeklies are the personal writings of the undersigned. They do not necessarily represent the official view of Voima Gold Oy or any other company, nor do they constitute investment advice or a recommendation to purchase securities.