Warren Buffett recently remarked that you can't value gold like an oil company
or farmland, so we should forget gold and buy equities. But he misses the
point. Gold doesn't produce value because it is value; in other words, gold is
money.
It's sad to see Mr Buffett go to the dark side. But, as I'm about to show, he's
losing company when it comes to his views on gold.
It's difficult to fathom why a professional money manager - someone who looks
at markets all day long and tries to make money for his clients - doesn't see
the in-your-face arguments for buying precious metals. It's borderline
irresponsible. You may think that's a strong statement, but I ask: what would
you do if you were responsible for investing other people's money and found
yourself in the following investment environment:
The US government had printed more money in the past two
years than at any other time in world history. Then, they printed more.
Government spending exceeded revenues by obscene margins, and, in the most
recent year, the US ran a budget deficit of US$1.4 trillion.
Interest rates were at 40-year lows.
Runaway entitlements and social discord remained unresolved in many major
European countries.
Raising taxes and cutting spending to reduce the debt burden were politically
untenable, leaving inflation the easy and likely solution.
The economy was weak and showed signs of weakening further.
Financial markets were tenuous, and the stock market as a whole was vulnerable.
Gold, in spite of being the top-performing asset of the past decade, was
roughly $1,000 below its 1980 inflation-adjusted high. Silver was even further
undervalued.
What asset would be a wise and time-tested holding for this kind of
environment? Think about it: gold is designed exactly for these kinds of
circumstances. Any casual glance at history will bear this out. So, yes,
"irresponsible" comes to mind when you're handling other people's money and
ignoring the very asset that is ideal for the current economic and monetary
climate.
There are others, however, who "get it". And they make my list of the Twelve
Gold Bugs of 2010:
1. Peter Thiel, Clarium Capital
Management . At the end of the
second quarter, Clarium had no gold holdings. But that changed in Q3: the firm
put $11.4 million into GLD (the SPDR Gold Trust ETF), buying about 100,000
shares.
2. Julian Robertson, Tiger
Management . With no prior gold
exposure, the chairman of Tiger invested a whopping $247 million in GLD in Q3,
buying about 2 million shares.
3. Chris Shumway, Shumway
Capital . His first-ever gold purchase
occurred in Q3 when he put over a quarter-billion dollars into GLD - more than
2.1 million shares.
4. Dan Loeb, Third
Point . The firm made its first gold purchase
last quarter, putting $15 million into GLD, about 115,000 shares.
5. Steve Cohen,
SAC Capital . Already invested in GLD and four
gold mining companies, the firm placed over $9 million in four new gold stocks
last quarter.
6. Highbridge Capital Management. With seven gold companies
already in the fund, Highbridge recently put $11.4 million into two more gold
stocks.
7. Howard Marks,
Oaktree Capital . The firm increased its
investment in two gold companies by an additional $6 million.
8. John Paulson,
Paulson & Co . If you don't know the name,
Paulson made a fortune betting against the housing market and financial
companies in 2008. Now, his single largest holding is gold. His fund also has
large positions in seven gold mining companies. Mr Paulson believes in gold so
much that he started his own gold fund earlier this year, investing a
quarter-billion dollars of his own money.
9. Russia. The Central Bank of the Russian Federation has been
steadily buying gold since the autumn ofl 2007. It added 600,000 ounces of gold
to its official reserves this October, with year-to-date purchases now totaling
4.6 million ounces. Russian's gold reserves now stand at 24.9 million ounces -
breaking into the top 10 globally.
10. China. The Chinese
government doesn't publicly disclose what it is
doing with its reserves, so how can I put them on
the list? Because its announcement last year
revealed it had been buying gold all along and had
increased its gold reserves by 75%; because it's
widely believed the country is currently buying
all of its own gold production; because government
officials have publicly encouraged their citizens
to buy gold and silver; because the country has
disposable income growth of 15%, but gold demand
growth of 26%; because China's commerce minister
recently stated, "Doubtlessly, if the yuan is set
to become an international currency like the
dollar or euro, China has to get a huge gold
reserve to support it, and a reserve of 1,054
tonnes is far from being enough." I could go on,
but it's clear that the Giant from the East is
extremely bullish on the yellow metal.
11. Doug Casey, Casey
Research. A longtime gold bug, Doug
insists a mania still lies ahead since the common
man has not jumped on board. As you may know, my
boss is heavily invested in small mining
exploration companies and said earlier this year
that he expects to see a life-changing rally in
them. It's perfectly normal for the juniors to
cyclically run up 1,000%, he says, with the
leaders increasing 10,000%.
12. Peter Schiff, Euro Pacific
Capital . Peter believes
in gold so much that earlier this year he started his own bullion dealership.
We always caution our readers to watch out for the dealer that starts pushing
numismatic coins, but what I like about Peter's Euro Pacific Precious Metals is
that it sells only bullion, and only at reasonable prices.
In addition to miners and ETFs, I believe investors should allocate at least
one-tenth of their net worth into physical gold (and silver), and Peter has
created a reliable way for average investors to do so. Also, starting a bullion
dealership when gold is already selling for four figures means Peter thinks the
gold bull market has a long way to go.
None of the individuals on this list think the gold price is too high. They're
buying for the future, to both protect and grow assets. They don't believe
economies are as stable as reported, and they recognize the implications of a
world floating on fiat currencies. They also believe governments' attempts to
"fix" the problems will not only fail, but make fiscal conditions worse.
As for me, I think quantitative easing will "work" - I think the Federal
Reserve will meet its goal of inflation, but that it will spiral out of control
for the reasons I outlined above. The Fed is neither omniscient nor omnipotent,
as it tries to claim, and this situation will quickly snowball.
Printing money, as the Fed is relentlessly doing, is not just supportive for
gold, it makes owning the metal a requirement for the foreseeable future. This
reckless pursuit of dollar abuse will have disastrous consequences. It will
destroy the US dollar, weaken the US economy, and cripple the US government's
influence in the world. Gold is your number one protection against those
inevitabilities.
I hope that this Christmas, you'll become a gold bug, too.
This article was written by Jeff Clark of Casey Research exclusively for
Peter Schiff's Gold Report. To be the first to read the latest precious metals
market analysis from Peter Schiff, the Aden Sisters, and Casey Research, click
here for a free subscription to Peter Schiff's Gold Report.
Peter Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets.Euro Pacific Capital commentary and
market news is available at http://www.europac.net
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