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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Comments

  1. 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.

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  2. 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 “cash in” early (as you are so more likely that others to recognise a peak). I have some shares that were gifted to me and even I have been tempted to sell them and buy gold. I researched it all (as I didn’t even know how I would/could sell shares) I am that naive to market/share trading. Then I started to wonder – as everyone should – what is in it for you to give this advice? No-one does anything for free… Do they?

    beginner
    May 1, 2009
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  3. 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 buy some more.
    Two things to bear in mind : first, current global gold production is about 80 million ounces per year. That’s just 1/75 of an ounce (0.4g) per person on earth, per year – so two ounces is easily more than ‘your fair share’.
    Secondly, the amount of dollars has exploded in the last 20 years: by contrast, the amount of gold bought for investment currently is currently only equal to about 0.05% of world GDP. To see a mathematical analysis of how much gold might rise, should (for example) 1% of US household assets be used to buy gold (not an unbelievable scenario, I think you’ll agree), see Doug Dillon’s article “There’s Just Not Enough Gold; Modeling A Dollar Flight To Gold”, available on http://www.kitco.com/ind/index_date_2008.html (Jan 17 2008).
    Don’t forget to buy a kilo or two of silver as well, though !

    Hoping that we all live long and prosper,
    Jim

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  4. 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.

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  5. 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 supply doesn’t keep up with the printing presses.

    But gold isn’t the only hedge against inflation!!!! in fact anything that’s not cash can be used as a hedge. Materials the world really will need going forward arguably have greater growth potential. Energy and materials (and you will find these stocks at a distinct discount to gold). So go hunting and find something that will survive the downturn and will provide you with a hedge as well.

    Tell me if im stupid..it’s sweet if i am.

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  6. 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 the IMF’s gold is worth in todays money? They were going to release 400 tonnes of gold, which is worth about $13billion. Still a significant amount though.
    If the IMF sold all of their 103 million ounces, that would be ~$93 billion worth (at $900USD).

    But as we know, the market freaks out over nothing at the moment, so perhaps it will dilute gold a whole bunch if the IMF ever sells.

    That said, I don’t see how this article’s title is relevant. So what if gold is bought by some successful investors. So were financial stocks. I bet they had their mits all over Lehmann and Bear Stearns too. Just because someone is considered successful now, does not mean that they will continue to be.
    I believe that the stubborn and ingrained investing strategies of many will be their financial downfall.

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  7. 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 economic destruction of some other kind) and life as we know it will come to an end, what use to you is gold?

    Surely there are more useful things you can use your dollars on now than gold coins or bullion?

    If you’re inclined to believe that things are going to get really bad, why not buy yourself some camping gear, tinned food and some guns and ammo? Take classes on surviving in the wild and maybe some board games to entertain the kids when power stations around the world lay derelict and have rendered their Nintendo Wii’s useless…

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  8. 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 now as a collectors item, as it is no longer used). Zimbabweans were panning for gold…to buy bread.
    In a world of high inflation (not necessarily hyperinflation), what do you think will preserve your wealth more? Assets like a car? Shares? Money in the bank? Real estate? Weapons? Or gold?

    In any inflationary environment, but particularly a high inflationary environment, assets will not necessarily appreciate in value at the rate of inflation. Some will exceed it, some will lag behind. That is a point that some people miss when they think getting a loan before high inflation is a good idea, expecting that inflation will erode the loan.

    The other positive for gold is the idea of confidence in fiat money. If people lack confidence, they go to gold (or barter). Gold may well achieve bubble status if confidence in fiat money erodes, perhaps until some future point in which another non-gold solution is enforced.

    Ultimately you can ask yourself this question: In an inflationary world, would you rather be someone who owns some gold, or no gold?

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  9. 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 gonna happen for most . The much touted gold / energy / agriculture portfolio split – which I might well follow – is about wealth preservation in the first instance.

    While there may be a statistical correlation between gold and oil prices, it is a fairly weak one I understand.

    Coffee Addict
    May 5, 2009
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  10. Excuse the above grammar. Patience is my trading strategy for low volume juniors.

    Coffee Addict
    May 5, 2009
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  11. 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.

    Coffee Addict
    May 5, 2009
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  12. 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? Given its rarity I can see the value in holding some of this stuff….But what would I know!!!

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  13. 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.

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  14. “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 with.

    Are true gold investors -who buy for wealth protection as opposed to speculation- doing so to enable them to buy stuff when currency becomes worthless? If so how does that work? Is the plan to take one of your gold bars to the market with you along with a hammer and chisel and chip off bits and pieces of gold to merchants to pay for goods?

    I would like an explanation of how gold is planned to be used by those anticipating economic Armageddon. Cheers.

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

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  16. 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 is fiat money. Basically this money is accepted as a form of payment as people trust it’s worth. They trust that they will be able to exchange their money for things of approximate worth (prices of items naturally fluctuate due to supply, demand, opportunity cost, etc)

    When all trust in a currency is lost (eg through hyperinflation), the currency becomes worthless.

    Now the question on whether gold would be a currency comes down to exactly this: Trust. And it is pretty trustworthy. Because we know that gold cannot be ‘created’ easily like fiat currency, and that it is a stable element that cannot be easily destroyed. Therefore, besides its intrinsic value as jewelry (which is a factor), gold has value as a ‘measure’.

    If we consider the environment of hyperinflation for instance, people will lose trust in their fiat currency. It will become worthless (and therefore useless). If you have no national currency at all, what can you do if you have to trade?

    – You can barter (and arrange service agreements, same thing really)
    – You can trade using other national currencies
    – You can trade using items of standard value

    For one, barter is pretty awful. The reason – if you have a car for trade, and you want to buy an apple…what can you do? Trade a tyre? The steering wheel? Without a generally standard measuring tool (currency), trade is tricky.

    Trading with other national currencies is viable. Unless they are also unstable/untrustworthy (which is likely).

    Items of standard value. Apples is not one of them. They don’t store well and it would be cumbersome to carry 5000 apples to buy a car. Plus people can easily create orchards and oversupply the apple market.
    So we need items that are a) hard to come by (rare), b) durable, c) portable, d) divisible, e) unconsumable (eg not apples), f) fungible (not unique, eg diamonds, pearls, art)

    Another thing to consider, re: divisibility is that new paper currency can be built ‘based’ on gold. Eg, a gold backed currency.
    For instance, Pete might have 1 ounce of gold. Pete takes that to an ‘institution’ of some sort (eg bank?) and the bank trades the gold for 100 ‘1/100 ounce’ gold notes. Those notes can be traded as normal, and also redeemed at the bank for solid gold (probably not redeemed for 1/100th ounce portions though). Using this system, the gold could be divided very flexibly. The trust involved is
    a) that the bank would actually let you redeem gold (and assume it doesn’t go crazy lending it…hooray for fractional reserve lending, etc)
    b) that gold continues to be a currency (very likely – it needs acceptance by only a few).

    I hope that helps :)

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

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

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

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  19. 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 fantasy spread by the business media propaganda outlets, is just a story of the man behind the curtain in the wizard of OZ.

    BTW – What is the US “Federal Reserve Note” Dollar backed by?

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  20. 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 will provide savvy investors with a bonanza.

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