July 6, 2022

Explosive Gold Rally Is Imminent Based On Bearish Sentiment and Fundamentals

You know the world is changing when the head of the world’s biggest bond fund recommends gold as his first asset choice.

In this week’s Barron’s Roundtable, Bond King Bill Gross affirms his bullish view on gold due to his assessment that central banks will continue to suppress interest rates by purchasing vast amounts of government debt with printed money.  Gross notes that the financial system is now longer operating under free-market capitalism when the Fed is buying a “remarkable” 80% of debt issued by the U.S. Treasury.  Massive deficits are being funded with printed currency on a global scale never attempted in the past and sooner or later, according to Bill Gross, inflation will blow past the central bank’s targeted rate of 2.5%.

The really big risk comes when huge holders of U.S. debt such as China and Japan become disgusted with U.S. fiscal and monetary policies and decide to dump their treasuries as inflation decimates the value of their holdings.  Bill Gross tells Barron’s exactly what could go wrong and which gold investment he likes the best.

The big risk is that the Chinese would rather own something else. Investors can choose between artificially priced financial assets or real assets like oil and gold or, to be really safe, cash. The real risk to the financial markets is the marginal proclivity of investors to put their money in real assets, or under the mattress. Thus, my first recommendation is GLD — the SPDR Gold Trust exchange-traded fund. It has a fee, but it is an easy way for investors to buy a real asset.

Lots of things go into pricing gold, but real interest rates [adjusted for inflation] and expected inflation are two dominant considerations. Gold probably won’t move much from current levels unless real rates decline more or inflationary expectations rise from the current 2.5% to 3%, or higher. That’s what gets gold off the dime. It is a decent hedge. It doesn’t earn anything, but not much else earns anything either.

Pounding the table even harder than Gross, Fred Hickey, editor of the High-Tech Strategist, tells Barron’s that an explosive rally in gold seems imminent based on the massive bearish sentiment towards gold.  Long term, Hickey sees gold hitting at least $5,000 per ounce, a target that Gold and Silver Blog also sees as a very reasonable future price target.

Hickey: I am recommending gold, as I have done for many years. I will continue to do so until the gold price hits the blow-off stage, which is nowhere in sight. I am excited about gold because sentiment is so negative. Gold could have a sharp rally at any time. The Hulbert Gold Newsletter Sentiment Index went deeply negative last week, indicating that gold-newsletter writers are recommending net short positions. When that happens, gold almost always rallies. The daily sentiment index for gold is at a 12-year low. Short positions by large speculators have doubled in the past few months. Sales of American Eagle coins hit a five-year low in 2012. Yet, the environment for gold couldn’t be better. We talked today about massive money-printing by all the major central banks. Real interest rates are negative. These are the best possible conditions for a gold rally.

Felix said gold could rally to the $1,800-an-ounce level, and I agree. If it breaks that, it will go to $2,000 or more. As long as we have unlimited quantitative easing, we have the potential for unlimited gains in the gold price. Gold could go to $5,000 or even $10,000. You can buy gold through the GLD or IAU, as we discussed. This year I recommend physical gold. You can buy American Eagle coins, or gold bars. Everyone should have some physical gold, and almost no one in the U.S. does.

Hickey also says that the price of gold is nowhere near a “blow off stage”, despite constant mainstream press reports of gold’s imminent collapse.  For further discussion on this see The Gold Bubble Myth and Why There Is No Upside Limit For Gold and Silver Prices.

It Should Be A Very Merry Christmas For Gold Investors

In an interview with Bloomberg TV, Greg Smith, chairman of Global Commodities, is forecasting $2,000 gold by Christmas.

Long term investors in gold would have a very merry Christmas since a price of $2,000 would equate to a 2012 price gain of over 25% from gold’s opening price on January 3, 2012.

From today’s closing gold price, a $2,000 per ounce price by year end equates to a gain of $241 per ounce or 13.7%.  Aggressive investors have many different ways to leverage gains on a potential run up in gold by year end.  For example, a position in Pro Shares Ultra Gold (UGL) would yield a gain of about 27% if gold hits $2,000 by year end.

The UGL does not hold physical gold but rather invests in futures, forward contracts, options and swap agreements designed to yield gains of 200% of the daily performance of gold bullion.  Last summer when gold soared to an all time high, the UGL returned twice the gains of  the SPDR Gold Shares ETF (GLD).  Keep in mind that leverage works both ways – if gold declines, an investment in the UGL would produce twice the losses compared to holding physical gold or shares in the GLD.

Courtesy: yahoo finance

 

 

There Is “A Limited Amount of Gold, An Unlimited Amount of Paper Money”

Legendary bond king investor Bill Gross, who presides over the world’s largest bond funds makes a compelling case for owning gold in an interview with Bloomberg TV.  Lead manager of influential Pacific Investment Management Company (PIMCO) since 1987, Bill Gross reputedly made $200 million in 2011.

The PIMCO Total Return fund has produced a fat 9.5% return for investors over the past five years, trouncing the returns on the S&P 500 and the vast majority of competing bond funds.  Total funds managed by PIMCO total a staggering $1.8 trillion.

PIMCO’s success has in large part been due to Bill Gross’s ability to accurately assess the macroeconomic picture.  Bill Gross’s bullish position on gold is not something to be lightly discounted by investors.

According to Bill Gross, the bullish outlook for gold rests on the endless expansion of credit by central banks.  Gold has a considerable store of value that paper money does not and there is a “limited amount of gold, an unlimited amount of paper money.”

When world central banks engage in a long term period of money printing and start writing checks in the trillions, it is best to have something that’s tangible and can’t be reproduced like gold. Gross expects that central banks, which have trillions of dollars in reserves, will continue to expand their holdings of gold rather than invest in 10 year government bonds that pay a paltry 1% interest.

How To Avoid Financial Fraud In The Gold Market

By Vin Maru

Financial Alchemy and Fraud In Gold

The gold bull market is alive and well as the summer doldrums come to a close and gold accumulation and trading starts to heat up going into the fall.  As the gold bull market matures and it draws more attention from investors all around the world, it does open up the doors for fraud.  By now we have heard many stories and accusations about manipulations by central planners, bullion banks, short-sellers and futures traders.  The regulators in the West have largely ignored these accusations and have looked the other way when it comes to oversight and creating a fair and legal market place for precious metals.

Financial Fraud in the Gold Market

When it comes to opportunity for fraud, the East is not innocent either.  Last month, police in Central China rounded up 33 people suspected of illegal gold-futures trading.  The case involved 5,000 investors and at least 380 billion Yuan ($59.62 billion) in which the suspects claimed to be agents of overseas companies dealing in London gold with the promise of huge returns.  They promoted investments in Loco London gold and charged exorbitant consulting fees without warning investors of the risks of these transactions or having a signed detailed contract.  This had been going on since October 2008 in a low key operation using private bank accounts, mobile phones and online messaging services.  Several suspects were caught and detained since March 2, 2012 while more arrests are expected to be made across China as the investigation continues.

As observers of the precious metals market, we know that many Eastern central banks are accumulating physical gold.  It is in their best interest to accumulate the physical metal and diversify out of toxic Western paper assets that were sold to them by the western financial puppet masters.   It is obvious that Western cartels like Goldman Sacs and JP Morgan are great at creating and selling financial instruments of mass destruction.

One only has to look at the CDO market or the mortgage backed securities sold in the past decade.  These paper products were backed by mortgages from over inflated real estate bought by people who could not afford to buy property and were thus set up to fail.  Another example is the derivative market which is reportedly over $600T worth of contracts used for “hedging” all the toilet paper assets sold by Western institutions.  This includes derivatives and “insurance” products to protect from default or significant changes in valuation on assets such as government bonds, interest rates & credit default swaps and most other paper assets.  There is no way these contracts are backed by any real asset and when they are called to perform, the system will collapse.  This is most likely why they changed the name and structure of the recent Greek default on bonds; they cannot afford to trigger the derivative time bomb.

Any observer of the financial markets can see that the derivative market is just an insurance scam being sold as a hedging tool for paper products.  They cannot and will not every pay out on derivatives because the cascading effect would bring down the system.  Yet the paper pushers are still selling these “contract assurances” in volumes in order to create a “financial hedge” of the entire system.    When push comes to shove, planners may not let Goldman or JPM collapse because they are TOO connected to fail and they are the ringleaders in pushing paper products for the world to buy in their pump and dump scams.

Masters of Alchemy – Turning Paper in to GOLD

This past week, it was reported that George Soros was unloading investments in major financial stocks and started investing back in gold by way of GLD.  We always question the choice of investment vehicles used by large fund managers.  As a investor in the gold sector, why wouldn’t anyone stick with the physical metal vs. an ETF such as GLD which is supposedly backed by gold?  There have been lots of questions around GLD and its physical holdings, which was primarily sold by JP Morgan, one of the many bullion banks with a questionable short position in the precious metals market (Silver in particular).  If the past decade is any indication of paper manipulation (and they are known to have a track record for selling paper products which turn out to be fraudulent), why would anyone buy an ETF like GLD from these Masters of Financial Alchemy when they have the proven ability to turn paper into gold?

When looking at GLD and the many other “un-backed” gold trading vehicles being sold into the market, these products are very questionable on how much gold they have held on storage or available for delivery.  Even if there was significant amounts of gold, with the lack of good auditing practices, who knows how much is really owned by the fund.  Much of it could be used as collateral, hypothecated, leased out or swapped in contracts by the issuers of these products.  When called to perform and deliver the gold, expect questions of ownership and scandals much like MF Global or PFGBest.  This is the nature of products created by the Wall Street paper pushers; everything should be questioned eventually.  But for now and most of this bull market, GLD will not be questioned or audited.  It will be used as another tool for selling an ETF in a particular asset class, one that will become more and more in demand as the bull market for gold evolves.  This ETF will be used by the likes of all major trading houses, funds, sovereigns and investors because it is a trading vehicle and a proxy for gold, and it could be used for hedging purposes much like the derivative market.

Going back to why Soros would invents in such a fund:  Our suspicion is that Soros is reducing exposure in financials because they have structural problems and have many questions surrounding the assets they hold.  While a $50M withdrawal is not much for a fund his size, a purchase of $130M in GLD is significant.  His strategy is probably to take these funds and go long on GLD as a hedging tool for the exposure he still has remaining in financials.  Soros is just being smart and realizing that he must hedge using gold, even if it has to be with GLD.  He knows the paper pushers need GDL as a tool for hedging, so do not expect it to collapse anytime soon.   This means more than likely that the “Masters of Financial Alchemy” such as JPM Morgan and Goldman Sacs will continue to sell paper with promises of gold backing and it will get accepted by the market as “Good as Gold”. We at TDV, however, know better.

At this point, it is a very wise move for anyone who doesn’t have any exposure to gold to start getting exposure immediately.  If you have not taken this necessary step to protect your assets and hedge against any potential financial storm that may be brewing, you are placing yourself and any remaining assets at risk.  Owning the physical is always suggested as a private investor, but if need be look at GLD as a trading and hedging vehicle.

In a strange and ironic way, we need GLD to continue its paper scams as it still legitimizes gold as an investible asset class.  The more GLD grows and continues to gain attention, the stronger and longer this bull market will last in precious metal.   As much as we realize that GLD could be a scam and owning the physical is the prudent thing to do, we cannot discount the need for GLD as a tool for hedging.  There is no way the physical market for gold can absorb demand coming from central banks, pension funds, sovereigns and the general investing public all at the same time.  It would make gold reach sky high prices in very short order which would not be healthy for a strong and long gold bull market.  Unfortunately, we need GLD and more gold ETFs around the world.  There is way too much fiat paper floating around and much more coming, the physical market couldn’t absorb this amount of funny money coming into the physical sector.  As much as I hate to say this, GLD is a necessary evil for the longevity of this bull market.   There is many more reason why we need more gold backed ETFs and products such as GLD mentioned above, however using this ETF as a hedging tool is a very important one.

In the near future we will look at additional reasons for owning gold through the various ETFs as a tool for trading and hedging.  We will also explore the various options available for owning paper or physical gold in the numerous ETFs around the world.  This information will be made available on our blog to everyone interested in evaluating gold specific ETFs. If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Buy The SPDR Gold Trust – You Don’t Argue With Paulson and Soros

Despite the correction in gold prices since last summer, investors in gold ETFs have increased their stakes.  Worldwide holdings of gold ETFs are now at a record 2,417 metric tons according to Bloomberg News.

The SPDR Gold Trust (GLD) is the largest gold ETF and has returned a lustrous annual return of 18.4% since the fund’s inception on November 18, 2004.  The GLD currently holds 1,258.15 tonnes (40.45 million ounces) of gold in trust valued at $64.8 billion.  The all time record high holdings of the SPDR Gold Trust was 1,320.47 tonnes on June 29, 2010.

The slight decline from record gold holdings of the GLD do not represent a lessening of gold demand by investors.  Numerous competing gold trusts such as the iShares Gold Trust (IAU) which holds $9.3 billion of gold bullion have simply given investors a wider choice of options and expanded the overall market for gold ETFs.

Word that two of the world’s most successful investors have increased their stakes in the SPDR Gold Trust highlight the fact that the bull market in gold is far from over.   Billionaires John Paulson and George Soros, both long time investors in the GLD , both recently increased their holdings.

Courtesy yahoo finance

While Paulson has increased his massive stake in the GLD over time, Soros attempted to time the market.  In the first quarter of 2011, Soros sold 4.7 million shares of the GLD which brought his holdings down to a token 49,400 shares.  Subsequent to his sale, gold soared about $500 per ounce higher to $1,900 during August 2011.  Short term trading is difficult for anyone, including one of the world’s most successful investors.  Since the fundamental reasons for owning gold have only become more compelling, small investors would be best advised to hold long term instead of trying to trade a temporary price pullback.

Courtesy kitco.com

According to Bloomberg, Paulson and Soros Add Gold As Price Declines Most Since 2008.

Billionaire investors George Soros and John Paulson increased their stakes in the biggest exchange- traded fund backed by gold as prices posted the largest quarterly drop since 2008.

Soros Fund Management more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30, compared with three months earlier, a U.S. Securities and Exchange Commission filing for second-quarter holdings showed yesterday. Paulson & Co. increased its holdings by 26 percent to 21.8 million shares.

Paulson, 56, who became a billionaire in 2007 by betting against the U.S. subprime mortgage market, lost 23 percent in his Gold Fund through July as lower bullion prices and slumping mining stocks contributed to declines.

Still, prices have rallied for 11 consecutive years, gaining more than sevenfold, as investors snapped up the metal after government and central bank stimulus programs boosted speculation that inflation would accelerate. The metal is up 2.4 percent this year.

“People expect prices to rise in the third quarter since historically it has been proved that it’s one of the best periods for gold, and investors who see easing coming in from various central banks are either increasing or holding on to their positions,” Donald Selkin, the New York-based chief market strategist at National Securities Corp., which manages about $3 billion of assets, said by telephone.

Paulson’s increased stake in the GLD should come as no surprise.  In a previous post during July, it was noted that Paulson remained steadfastly bullish on gold with a $4,000 target.

Precious Metals Storage – Everything You Need To Know But Probably Don’t

By Nick Barisheff:

Worldwide economic uncertainty has created a growing interest in precious metals as a way to preserve wealth. Today, global risks for investors include currency devaluation, sovereign debt defaults, bond market collapses and stock market losses, all underpinned by ever-increasing government debt.

For protection from impending economic Armageddon, investors are turning in increasing numbers to the traditional safe haven of precious metals. Unfortunately, many today don’t know how to purchase or store bullion, and consequently may find themselves as vulnerable to financial collapse as those who didn’t purchase any bullion at all.

This increased interest in precious metals as portfolio insurance has spawned a new generation of precious metals-based financial products, many of which are paper proxies or derivatives of bullion. There are even unregulated markets for the exchange of “digital gold.”

A clear case for transparency

In 2007, former Bank of Canada Governor David Dodge gave a speech entitled “A Clear Case for Transparency”  to the Canada-UK Chamber of Commerce. “…[I]investors will have to take on more responsibility for diligent research,” he said, “so that they can better understand the nature of their investments and demand greater transparency where it is now lacking … they must do their own homework and make a concerted effort to understand what they are buying.”

Most investors do not read the fine print of the agreements they sign with respect to financial investments; they make assumptions, but do not definitively know if they own actual bullion. Some are attracted to certain bullion investments because of low premiums and low storage fees, but when was the last time Wall Street and the major banks gave the investing public a deal?

Investors who don’t do their homework may be dismayed to find that their safe haven asset has proved to be anything but. These same people perform rigorous due diligence when purchasing a home, car or boat, demanding that they have clear legal title to the asset in question. The same attention to detail must be paid when investing in bullion.

The most important concept to understand is that a financial institution CAN sell an investor’s bullion if the agreement states that it can. Banks are not raiding allocated accounts; rather, they are following the provisions of the contract, in which the bullion is not allocated despite an investor’s assumptions.

There does appear to be cause for concern regarding the transparency of bullion products. As reported by the economic news website ZeroHedge, financial services giant Morgan Stanley paid out $4.4 million in June 2007 to settle a class action lawsuit brought by clients after the firm charged them to “buy and store” precious metals, but did neither .

Similarly, a class action lawsuit filed in New York’s federal court accuses UBS Financial Services of misleading silver investors, and charging them storage fees for metals that were never purchased, let alone allocated or stored for them.

A larger problem has been brewing for several years now, that of exchange-traded funds (ETFs). These are generally viewed as a low-cost panacea that replaces almost any investment strategy, including the purchase of gold bullion, and they are giving investors a false sense of security.

False sense of security for ETF investors

ETFs started as equity index vehicles, in which brokers acting as Authorized Participants borrowed shares from institutions, hedge funds, mutual funds or their clients’ margin accounts to contribute to the Origination Basket of shares. They received ETF shares at Net Asset Value (NAV) in exchange, and sold them to investors at NAV – keeping all of the money. This is standard practice, as brokers have always been able to borrow shares from clients’ margin accounts for the purpose of shorting or for lending to other brokers.

Essentially, many ETFs hold assets that have been borrowed. Because there are no specific prohibitions to prevent the same practice from being used in precious metals ETFs, the same methodology is likely being used. Many investors are attracted by the low management fees offered by precious metals ETFs, but few understand the problems that may arise when more than one person has claim to the same asset.

ETF-based financial crisis could make 2008 look like child’s play

This ETF structure will work during normal market conditions. However, it may result in losses and disputes if the Authorized Participants, acting as market makers, become insolvent or step aside during a precipitous decline. If a bank or brokerage firm becomes an insolvent Authorized Participant, either the lender of the assets or the ETF shareholders will suffer losses. During a market crash, existing holders may be unable to sell their ETF shares.  Although this possibility was considered remote when ETFs were created, the recent and recurring failures of banks and brokerage firms make these concerns far more real .

The bottom line on ETFs is that they are tracking vehicles with multiple claims/counterparty risks on their assets as well as their shares. As debt-based stress on the global financial system continues to build, the flash-crash of 2010 may well have foreshadowed an ETF-based financial crisis that will make the subprime mortgage crisis of 2008 look like child’s play.

Own bullion with clear title

When we at Bullion Management Group sit down with clients seeking to own bullion, we present them with our Precious Metals Pyramid Chart. Moving up the pyramid increases risk; moving down the pyramid increases safety. A portfolio’s foundation should consist of physical bullion owned outright. Farther up the pyramid are proxies of bullion in one form or another that are more risky and often less liquid; in other words, the opposite of a safe haven asset you can count on in times of financial stress. Bullion should always meet two criteria: It should not be someone else’s liability, and it should not be someone else’s promise of performance.

To establish a physical bullion portfolio foundation with metals that are stored on an allocated and insured basis, one that will protect against what could be called ethical mayhem in today’s financial sector, investors must, as Governor Dodge advised, make a concerted effort to understand what they are buying. While reading legal documents and prospectuses is tedious, the truth is in the fine print and investors must do their own due diligence, and beware of complex investment structures.

Demand documentation that transfers title directly to the purchaser

For a bullion product, be it a fund or actual bullion bars, to earn its place as the foundation of a portfolio, the bullion purchaser must demand documentation that legally transfers title of specific, physical bars directly to them. Do not accept IOUs, paper proxies or derivatives. It is important to read the purchase documents carefully to ensure they convey legal title. Only after the purchaser has legal title can they enter into a binding custody agreement for bullion storage on an allocated, insured basis. In that agreement, the purchaser must be able to identify all terms and rights concerning insurance and secure, allocated storage.

Proper insurance and allocated storage in a credible, guarded vault costs money, so steer clear of bullion products promising low fees. If the deal appears too good to be true, the physical bullion may not exist. What the investor may have is paper bullion that will not offer protection when it is most needed; they may simply be an unsecured creditor of the dealer. It is hardly prudent to be tempted by low storage fees that will save a fraction of a percentage point while risking an entire bullion holding. Short cuts and penny pinching are inadvisable strategies for any asset intended as an ultimate safe haven of wealth protection.

Home storage not worth the risk of invasion or physical assault

Many people think that storing their bullion at home is a good way to economize on physical bullion storage fees, but be aware that any sizeable amount of home-stored bullion will not be covered by a household insurance policy.

Keeping a modest—and secret—stash of small-denomination gold or silver for barter purposes is recommended in the event that ATM machines aren’t working, or a ‘bank holiday’ is announced. This may seem like an excess of caution until you consider that, earlier this year, the Bank of Italy authorized the suspension of payments by Bank Network Investments Spa (BNI) without first advising depositors .

Unless absolute secrecy is maintained, home storage means putting yourself and your family at risk of a home invasion. There has been an increase of home invasions in England during Asian wedding season, when gold gifts are stored in homes, and street gangs and professional thieves are only too happy to relieve people of their precious metals .

Even in peace-loving Canada, a British Columbia man lost his life savings of $750,000 in silver bars to knife-and-gun wielding thugs who arrived at his door disguised as police officers. When he let them in, the ‘officers’ forced him to open his vault and stole the silver . For any sizeable amount of bullion, home storage is clearly not worth the risk.

Many precious metals dealers do not trust banks for storage, and prefer private vault facilities. They may rethink this approach on reviewing a British case where authorities raided three private safe deposit box centres, and opened 6,717 private boxes . The owners of the boxes were required to provide proof of the contents of their box before their possessions were returned. Most could not do so, and much of the cash involved went missing while other items are in dispute. The ensuing litigation will likely last for decades; in the meantime, those who stored bullion in their boxes have been relieved of their metal, and may only receive compensation in the amount of the value of the bullion at the time of the raid.

Another consideration is that safe deposit box contents cannot be insured, and there is no proof that anything is actually in the box. Investors who are still interested in private vaults or safe deposit box centres should perform due diligence on the financial condition of the operator and the owner of the vault, since stored assets may be at risk in the case of a private vault’s insolvency.

Storing bullion at home, in a safe deposit box or in a private vault is another form of false economy, wherein investors put their safe haven asset at risk to save a small amount in storage fees.

LBMA bullion in LBMA member vaults

Another important aspect of due diligence for a proper foundation of wealth preservation is the assurance that your bullion is in the form of Good Delivery bars, and stored in the vault of a London Bullion Market Association (LBMA) member.

The LBMA is a wholesale, over-the-counter market for trading gold and silver. Its members include the majority of the bullion banks that hold gold, plus producers, refiners, fabricators and other traders throughout the world.

The reason for insisting on LBMA bullion is that it assures the purchaser of the quality and fineness of the bars. Once gold is outside a chain of integrity such as that of the LBMA, it may need to be re-assayed before it can be sold. This prevents gold-plated Tungsten bars from entering the chain of integrity. Re-assaying is time consuming, engenders extra cost and once again defeats the purpose of a safe haven store of wealth that offers efficient liquidity.

We constantly hear stories of discount bullion, or bullion sold at no premium to the spot price. The likelihood that this is pure bullion from an ethical source is slight to none.

In case of fire, you need an extinguisher, not a picture of one

Bullion demand is clearly growing as both sovereign nations and the world’s largest financial institutions buckle under the burden of unserviceable debt, leaving helicopter-loads of new money printing and associated currency devaluation as the only way out.

Investors can protect their portfolios by purchasing physical bullion. Just as with any large asset purchase, demand documentation that confers legal title to the bullion you are purchasing, review a written custodial agreement that specifies insured, allocated storage without giving the custodian the right to deal with the bullion in any way, and insist on Good Delivery bars.

When the next financial firestorm erupts, you need real, physical bullion and not a paper proxy; just as in a fire you need a real fire extinguisher, not a picture of one.

Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author, speaker and financial commentator on bullion and current market trends.  His first book, $10,000 Gold: Why Gold’s Inevitable Rise is the Investors Safe Haven, will be published in the fall of 2012. For more information on Bullion Management Group Inc. visit: www.bmgbullion.com.

John Paulson Remains Bullish On Gold With $4,000 Target

John Paulson, hedge fund titan, seemed invincible in the opening days of 2011.  Based on a huge bearish position in mortgage bonds, Paulson’s hedge funds earned an astonishing $15 billion during 2007.

Paulson’s winning streak continued for three years and by the end of 2010, Paulson’s success had attracted huge amounts of new investor money.   By the end of 2010, the amount of money under management in Paulson’s funds had swelled to  over $32 billion.  During 2010 Paulson personally made $5 billion and had become an investment legend.

No one, least of all John Paulson, could have imagined the disaster that was ready to unfold during 2011.  Paulson’s two largest funds got crushed during 2011 with the Paulson Advantage fund down 36% and the Paulson Advantage Plus fund down a staggering 52%.  Bad bets involving financial stocks and a large investment in Sino-Forest, a Chinese timber company, proved disastrous during 2011.

Although Paulson is well known for his long term bullish bets on gold this did not save him during 2011.  Despite a 10% increase in the price of gold during 2011, Paulson’s positions in gold stocks contributed to his losses  as gold shares dramatically underperformed gold bullion.

In a wide ranging interview with Bloomberg Businessweek, Paulson explained why 2011 turned out to be the year of pain for both himself and fund investors.

The firm had made four major mistakes, according to Paulson, “overweighting long event equity,” underestimating Europe’s debt crisis, overestimating the U.S. economy, and some plain-old terrible stock picking. “Our performance in 2011 was clearly unacceptable,” he wrote. “However, we believe 2011 will be an aberration in our long-term performance.”

Despite the huge losses of 2011, Bloomberg notes that Paulson still registered gains of $22.6 billion for investors over the lifetime of his funds, the third best in the hedge fund industry.

Paulson told Bloomberg that he considers 2011 an “aberration” and expects his long term strategies, including his large bet on the gold market to rack up large gains going forward.  During an interview in October 2010 at the University Club in New York, Paulson predicted that the price of gold would hit $4,000 per ounce.

Paulson explained his view on gold during the Bloomberg Businessweek interview as follows:

“We view gold as a currency, not a commodity,” Paulson says. “Its importance as a currency will continue to increase as the major central banks around the world continue to print money.” He adds that as the market keeps shuddering, demand for gold will stay high, and soon enough all of his depressed gold holdings should shoot up. He also thinks that anyone in Greece, Italy, and France should pull all their money out of the banking system and purchase gold bars before the Continent collapses.

Although Paulson remains committed to gold long term, he did substantially reduce his holdings in the SPDR Gold Shares ETF (GLD) during 2011.  At March 31, 2011, Paulson’s funds held 31.5 million shares of GLD valued at $4.4 billion but by the end of 2011, the position had declined to 17.3 million shares valued at $2.85 billion.   In Paulson’s latest Form 13-F filing with the SEC at March 31, 2012, Paulson’s position in the GLD remained unchanged from 2011 year end holdings.

GLD - courtesy yahoo finance

In hindsight, Paulson should have gone “all in” on gold during 2011 as he did with his bearish mortgage bets in 2007.  Gold closed at $1388.50 on the first day of trading in 2011 and closed the year at $1,531.  Had Paulson been 100% in gold bullion or the GLD during 2011 his portfolios would have increased in value by about 10.3%.

2011 Gold - courtesy kitco.com

Gold and Silver Bullion Coin Sales Rise In March

Production figures from the U.S. Mint for March show a sharp increase in the sale of both gold and silver bullion coins from the previous month.

Total sales of the American Gold Eagle bullion coins increased in March to 62,500 ounces, up from 21,000 ounces in February.  Total sales of the American Silver Eagle bullion coins totaled 2,542,000 ounces in March, up from 1,490,000 ounces in February.  Sales of both bullion coins for the first quarter of 2012, however, declined from the prior year.

Sales of the American Gold Eagle bullion coins totaled 210,500 ounces for the first quarter of 2012, down 29.7% from the 299,500 ounces sold in the first quarter of 2011.  Total sales of the American Silver Eagle bullion coins amounted to 10,139,000 ounces during the first quarter of 2012, down by 18.4% from the 12,429,000 ounces sold in the prior year’s first quarter.

The all time record year for sales of the American Gold Eagle bullion coins occurred in 2009 with 1,435,000 ounces sold.  The all time high record for sales of the American Silver Eagle bullion coins was in 2011 when a total of 39,868,500 one ounce coins were sold.

Gold Bullion U.S. Mint Sales By Year
Year Total Ounces Sold
2000 164,500
2001 325,000
2002 315,000
2003 484,500
2004 536,000
2005 449,000
2006 261,000
2007 198,500
2008 860,500
2009 1,435,000
2010 1,220,500
2011 1,000,000
2012 210,500
Total 7,460,000
Note: 2012 totals through March 31, 2012

The amount of physical gold bullion purchased purchased from the U.S. Mint over the past 12 years remains relatively small compared to the amount of gold invested in the two largest gold trust ETFs.  The SPDR Gold Shares ETF (GLD) is the world’s largest physically backed gold exchange traded ETF fund with current holdings of 41.4 million ounces of gold.  The iShares Gold Trust ETF (IAU) currently holds 6.2 million ounces of gold.

The total sales of gold and silver bullion coins detailed above do not include U.S. Mint gold and silver numismatic coin sales which are directly sold to the public.  American Gold and Silver Eagle bullion coins are only sold to a network of authorized purchasers  who in turn resell the coins to secondary retailers and the public.  The U.S. Mint decided that using  Authorized Purchasers to sell gold and silver bullion coins to the public was the most efficient means of selling the coins to the public at competitive prices.

Shown below are the U.S. Mint sales figures for the American Silver Eagle bullion coins since 2000.  Sales totals for 2012 are through March 31st.

American Silver Eagle Bullion Coins
YEAR OUNCES SOLD
2000 9,133,000
2001 8,827,500
2002 10,475,500
2003 9,153,500
2004 9,617,000
2005 8,405,000
2006 10,021,000
2007 9,887,000
2008 19,583,500
2009 28,766,500
2010 34,662,500
2011 39,868,500
2012 10,139,000
TOTAL 208,539,500

Gold Stocks Remain Frozen In Time

Investors in gold mining stocks have had a tough five years.  Since 2008, the price of most gold stocks have remained frozen in time even as gold bullion has doubled in price.  Is the disparity in price performance between gold stocks and gold bullion a bullish set up or another false dawn for gold stock investors?

Gold - courtesy kitco.com

The PHLX Gold and Silver Index (XAU), which is comprised of 16 major gold and silver producers, is no higher than it was during the last quarter of 2007.   The large cap gold stocks represented by the Market Vectors Gold Miners ETF (GDX) have shared the same fate with no gain for the past five years.

GDX - courtesy yahoo.com

Beginning in 2011, the divergence between the price of gold bullion and gold stocks has widened even further.  Comparing the SPDR Gold Trust (GLD) to the PHLX Gold and Silver Index, we see that gold has dramatically outperformed gold stocks by a factor of five since early 2007.

XAU vs GLD - courtesy bigcharts.com

At this point, gold stocks are incredibly oversold and, in addition, represent sound fundamental value based on the price of gold bullion.  Given the notorious volatility of gold stocks, a move by gold above its high of last year could be the spark that ignites a huge rally in the gold stocks.

John Hathaway of the Tocqueville Gold Fund (TGLDX), who has produced fabulous investment returns over the past decade, had this to say in his latest Investment Update.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

Disarray in Europe is, in our opinion, a slow motion version of the global market meltdown in 2007. It appears to us that the U.S. Fed is once again acting as the lender of last resort to European central banks in their efforts to save the euro. As in 2007, U.S. sovereign credit will be substituted for failing credits, in this case, peripheral European states. The fig leaf to justify such action on the Fed’s part is sado-fiscalism, or extreme austerity packages administered by technocrats. Tough restraints on profligate public spending, which has become a way of life in all Western democracies, will not go down easily. These measures are deflationary and will be ultimately met by howls of protests from mobs demanding renewed money printing and deficit spending. In our opinion, the fundamentals for gold are stronger than ever because the outlook for paper currencies is dire. The difficult correction of the last four months has shaken out all but the strongest holders, a perfect set-up for advances to new all-time highs in 2012.

Over the past ten years the Tocqueville Gold Fund has had an average annual return of 24%, far exceeding the 3% return by the S&P500.   The top ten holdings and percent of total assets of the Tocqueville Fund are listed below.

TGLDX Holdings

Gold Remains The Best Alternative To Paper Money

Two examples of the frustrations that some gold investors have gone through in the past year offers a valuable lesson to long term gold investors.

  1. During 2011, despite being heavily invested in gold, John Paulson’s Gold Fund wound up losing 11% of its value.  This despite the fact that gold bullion gained $142.50 during 2011, closing the year at $1,531.00, up 10.2% (see How Did An Investment Pro Lose Money Investing in Gold?).
  2. Investors in the $4.4 billion Vanguard Precious Metals Fund (VGPMX) which holds almost all of its assets in a diversified portfolio of precious metal mining stocks dropped by a stunning 27.4% last year, declining from $26.71 on January 3rd to $19.39 on December 30, 2011.

In both of the above cases, the declines in value were primarily due to the large under performance of gold stocks to gold bullion during 2011.  Nonetheless, nothing stings more than picking the right asset class only to somehow wind up losing.  An investor bullish on gold and investing completely in gold stocks would have had a disastrous year.  An investor with a large position in gold, diversified across gold mining stocks, gold bullion and gold ETFs would have performed substantially better.

Although gold stocks can often outperform gold bullion, many investors may lack the expertise to pick the best gold stock or gold mutual fund.  The best strategy for most small gold investors is to buy physical gold bullion at regular intervals with a commitment to a long term holding period.  Over the years, I have seen far too many uninformed investors who want a position in gold wind up trading speculative junior gold stocks, often times resulting in large losses.  Gold mining stock prices can be volatile and even when an investor selects quality gold stocks, the temptation to liquidate a position during  price weakness often results in losses.

The gold investor who has purchased gold bullion consistently over the past decade has been amply rewarded and there is no reason to expect this trend to change.

Meanwhile, John Paulson remains committed to gold and recently told Bloomberg News that he personally owns over half of the $1.2 billion Gold Fund he manages.

John Paulson, the hedge fund manager seeking to rebound from record losses in 2011, told investors his Gold Fund will outperform his other strategies over five years, according to a person with knowledge of the matter.

The billionaire, at a meeting yesterday at the Metropolitan Club in New York, said the metal is the best hedge against currency debasement as countries inject money into their economies, said the person, who attended the event and asked not to be named because the information is private. Paulson also cited gold as a hedge against the euro currency, as a breakup may occur, and an eventual increase in inflation.

The manager told clients his own money comprises 55 percent of the Gold Fund’s $1.2 billion in assets, the person said. The fund, which can buy derivatives and other gold-related securities, declined 11 percent last year after the metal slumped 14 percent in the final four months.

Europe’s sovereign-debt crisis may continue to affect bullion in the near term, Paulson, whose firm manages $23 billion, said this month in a year-end letter to investors. The metal serves as the best long-term alternative to paper currencies, he said.

“We remain excited about the outlook for the Paulson Gold Funds over the next few years,” he said in the letter. “We would argue that the potential upside in gold outweighs the potential downside.”

In addition to his Gold Fund, Paulson also holds a large position in the SPDR Gold Trust (GLD) ETF, valued at $2.9 billion.  As of February 24, 2011, the SPDR Gold Trust holds 41.3 million ounces of gold valued at $73.4 billion.