Gold Bought by Some of America’s Most Successful Investors

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“The value of gold, as the only true ‘hard currency,’ is coming to the fore, as evidenced by the investment choices of some of the world’s most seasoned investors.”

AngloGold Ashanti Ltd. Chief Executive Officer Mark Cutifani

For the first time in a couple of decades, some of America’s most successful, big-name investors are buying gold. David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time. And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis.

Paulson just plunked down $1.3 billion for an 11% stake in AngloGold. He’s also got a big position in Kinross Gold.

Peter Munk, the 82-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold’s broadening appeal. “I have had more phone calls in the past six months than ever before – from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions,” he says. “I am not saying George Soros, but people of that caliber have told me they are buying gold.”

You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world’s greatest investors may be the leading indicator for a quick 116% climb – to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.

Why? The biggest reason is that the value of the dollar looks about as brittle as a 90-year-old’s hip socket. And if you worry about the value of the dollar – or any paper currency – then gold is a good alternative.

In fact, gold has held up well while most everything else has taken a beating over the last year. On a recent conference call with investors, First Eagle fund manager Abhay Deshpande points out that gold is at a new high in just about every currency apart from the U.S. dollar and Japanese yen. “It has performed its job for everyone in these countries,” he says. “It has held its value.”

Take a look at the nearby chart and you can see the falloff of the dollar in recent years and the rise of gold.

“But there have always been worries about the value of the dollar,” you say. “That’s not new.” True. What is new is a global financial crisis unlike anything we’ve seen in the post-World War II era. And that crisis has brought with it serious doubts – the most serious in decades – about the dollar’s ability to keep its top perch in the aviary of world currencies. As that doubt increases, gold gathers new fans.

As I write, the headlines are abuzz with China’s proposal to replace the dollar as the world’s reserve currency. (The U.S. Treasury secretary, in a weak moment, said: “We are quite open to that.” He took back those words, but the hammer had already hit the nail.) China and other countries hold a lot of dollars. And they are not too happy to see the U.S. government handing out bills like after dinner mints. America’s $2 trillion (and ballooning) annual deficit and ballooning national debt causes them to wonder about the value of all the paper they hold.

They are not the only ones worried, as I noted up top. Many top investors are already buying gold.

It is easy to buy gold today with gold exchange-traded funds (ETFs). They are like mutual funds that hold gold. As investors pile into these ETFs, the ETFs’ gold holdings also go up. It’s one way to see the dramatic increase in demand for gold in just the last few quarters. (See chart below.)

So we have to ask: At $900 per ounce, are all the fears baked in or are we on some new history-making path?

I have a good friend who advises institutional clients on investing. As he reminds me, the really big money hasn’t started buying yet. There are no big pension funds or endowments with significant gold holdings. That could change. If so, the gold price will go wild.

“Gold is a small market,” Munk notes. Munk’s career spans 60 years and he knows the gold market as well as anyone. Says he:

“Let’s say a small percentage of the world’s central banks – or simply the United Arab Emirates itself – do not believe President Obama’s pledge that he will halve the U.S. deficit by the end of his first term. They shift some of their dollar reserves to gold. It would not take many decisions of this kind to push the price above $2,000 per ounce.”

That’s how gold gets to $2,000 per ounce – just a bit of doubt turning into action. The mind boggles at what would happen if China decided to hold more gold! Gold could well hit $5,000! As long as President Obama, Fed Chief Bernanke and pals treat the dollar like confetti, gold should continue to gather new fans. And gold stocks should do even better.

Gold stocks are supposed to do especially well as gold rises. But that has not been the case over the last year and a half. Mostly, this was because mining costs were rising as fast as, or faster than, the price of gold – thanks in part to record-high energy prices. But as Deshpande points out: “These things have reversed in recent months as gold stocks became quite cheap relative to the underlying value of the gold in the ground.”

The case for gold and gold shares is a nice and clean setup, like one of those toy houses in the window at Macy’s on Madison Avenue. The world order will not always hinge around the dollar. Global finance will not always find its center on Wall Street. As Munk pointed out: “Look around Davos this year. So Goldman Sachs cancels its dinner party. In its place, a Kazakh company has a dinner party.”

As the dollar goes bust, who knows what will replace it? With gold, you don’t have to worry too much about the answer.

Regards,

Chris Mayer
for The Daily Reckoning Australia

Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.
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20 Comments on "Gold Bought by Some of America’s Most Successful Investors"

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Hasan Soyer
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For 6-7 month now I’m reading news about gold and the gold price. Predictions go from 5000$ per ounce to 250$ per ounce. What I know is gold was 800$ per ounce in 1980, which is today 2250$ inflation adjusted. So where is the deal? If things get worst, the IMF might sell some of it’s 2200 tons of gold. This would bring the gold price sharply down. Also central banks could sell gold to finance their debts.

beginner
Guest
I started reading the Daily Reckoning due to my interest as a first home buyer in Australia. I’m currently in the “wait or go now” position regarding the First Home Buyers Grant and advice on this site has formed part of my research. This research has expanded and I have been reading with interest your advice/discussion re. gold. After critically thinking about all the information I have read I have one question. Are you pushing gold so strongly because you have already invested in gold at a low price and would like to see prices rise so that you can… Read more »
Jim
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The two previous responders are right to “look before you leap” – you should always be cautious in money affairs – but I believe Chris is correct that the price is yet to really rise dramatically. If he thought that he had to ‘talk up’ the price he would just sell now, as would I: I first bought gold in June 2006 and have seen my investment rise 100%; Ive bought more in June 2008 and seen it rise 50% (I’m buying in Sterling). But I’m confident enough that we haven’t yet started on gold’s climb that I’m about to… Read more »
Greg Atkinson
Guest

At the end of the day it all comes down to supply and demand. The gold bulls tend to convey an image that gold is running out and the bears reckon there is enough gold for everyone. I tried to sort through some of the gold issues here: Investing in gold

I suggest that potential investors read up on the views of people who have some detailed knowledge about gold mining and they are rarely found in the financial sector. This will help investors get a balanced view of the supply side.

Oli
Guest
Funny that the guys here don’t really comment on what happened to gold after the recession finished in the 80’s…oh what’s that it got hammered down almost 1/3 of what it was? gee wonder what will happen to NCM and Lihir when that happens… To offer a contrarian point of view- most prospecting and drilling is now in gold. if the IMF releases more gold it’s going to sink hard core with some full on supply. old school So yeah gold has had a good run and might even in the next couple of years increase in value somewhat if… Read more »
Pete
Guest
Oli: Something to question is whether you believe that this is a return to the recession of the 80’s? And what is the difference between the policy of the Gov. (both U.S. and Australian) between the 80’s and now? (quantitative easing…where’s Volcker?…’lets spend our way out of trouble’…etc) Also, re: IMF selling gold – do you think that the IMF’s gold will go straight onto the spot market? Or perhaps into the hands of some large investors or sovereign wealth funds, such as China? Russia? The US Gov?(who can just print money to buy it). Do you know how much… Read more »
David
Guest
Why invest in gold? Under most circumstances I don’t get it? If it’s to take advantage of a potential future speculative bubble (who knows we could be towards the top of one now) fair enough, good luck. If you like the look of gold jewellery, and would like to ‘invest’ in a chunky gold bracelet, by all means go for it. Though, from reading many articles and comments on this site over the years some of us have different reasons for buying, or at least contemplating buying gold. If you believe that the world will be gripped by hyperinflation (or… Read more »
Pete
Guest
David: It seems that you might not understand the need for gold. Gold is the oldest form of currency. It is tried and true. When the currency you have becomes worthless, all you will have is barter, other currencies, and…gold. There are reasons for buying gold as you mentioned. a) cashing in on a speculative bubble b) jewelry c) wealth preservation A lot of people pretend to like gold for c), but in reality just want a). I am not exempt from that. However point c) still stands. Look at Zimbabwe. Their currency is worthless (well, its probably worth more… Read more »
Coffee Addict
Guest
Hi Pete I expect a short bubble in gold when (if) interest rate risk and inflation risk aversion get the better of the government bond markets. For the record I’m trying to rebalance my portfolio not withstanding the likelihood that anything coloured gold could double its price for a brief period. In doing the rebalancing has to be my trading strategy for some juniors with tiny trading volumes. I bought one of Dan’s oil picks and I’m doing some further analysis on AGS. Yeah … everyone would like to win the lotto doing this sort of thing but it ain’t… Read more »
Coffee Addict
Guest

Excuse the above grammar. Patience is my trading strategy for low volume juniors.

Coffee Addict
Guest

This my not be the right forum to post this but gosh aren’t the NZ courts lenient of on the All Black fraudsters and their elaborate pokie scam. By my reckoning the 275 hours of community service to work off a NZD 2m fraud delivers an hourly rate of $7272! It would be a different oucome in the US courts.

Actually I expect a huge upswing in this sort of fraud as formerly well to do individuals try to keep up lifestyles and appearances.

Tim
Guest
One subject I have yet to read anything about lately is the value of Platinum. There is talk of Oil, Gold and Silver doing crazy things, both good and bad, but little is to be found regarding Platinum. At $1100/oz what do people think about this expensive little fellow? I see a rather volatile price history but could it be worth sending a few dollars Platinum’s way in this current economic environment to accompany a bit of gold and silver bullion or is Platinum just a fancy looking metal for those who like the “bling” and “shine” in their cabinets?… Read more »
Greg Atkinson
Guest

Pete, Actually gold is not the oldest form of currency. Copper for one has many years on gold. Also silver was minted into coins before gold.

David
Guest
“Ultimately you can ask yourself this question: In an inflationary world, would you rather be someone who owns some gold, or no gold?” Pete: Morning Pete, I’d have to say own some gold ;) Why though? It would be because ‘everyone knows’ rising inflation = rising (or is it just staying still, or perhaps really going backwards…) gold price wouldn’t it? The argument that gold is the oldest for of currency, is tried and true and when the currency you have becomes worthless, all you will have is barter, other currencies, and gold is what I have a conceptual problem… Read more »
David
Guest

oh bother, the answer to this question has evaded me once more =(

Pete
Guest
Sorry David, sometimes my posts are a bit sporadic. My answers to your questions: Gold ‘can’ be divided up. It is just that it is hard to check its authenticity if you go into a shop and say “would you take this chiselled chip of my ounce bar?” That is when gold coins are handy (but they come at a premium for this reason). Silver is considered the general alternative for small transactions as it’s worth is less. What we need to consider is the need for money in general. What is money? Well currently the form of accepted currency… Read more »
Pete
Guest

Also here is a good article explaining the properties of good currency:

http://cij.inspiriting.com/?p=391

david
Guest

Thank you Pete, your answer is much appreciated, very well written and easy to understand ;) Cheers

JD
Guest
The IMF will not sell any gold, it is just pure BS. They might sell paper gold, but not physical gold. No gold will move from one location to another. When you can buy physical gold cheaply, then you can state that gold prices are falling. But the paper ETFs and the comex aka crimex, are managed by the likes of GS, JPM, and Wells Fargo, shorting the paper gold and silver to control the price of the physical precious metals for the US FED, there by propping up the US Dollar. That is how the system works. Any other… Read more »
Paul
Guest
People seem fixated on the price that gold may or may not rise to. It’s a worthy way to spend your time, but what is missed is that you don’t actually need gold to climb to $2000 and above in order to make great money. Even at $1000 per ounce, junior gold producers ramping up production and reducing total cash costs in the process will be achieving excellent margins of $500 per ounce or better. 100,000 ounces per year at a margin of $500 per ounce equals $50M cash pa. Unhedged, low cost miners ramping up production under sound management… Read more »
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