June 19, 2024

Value Investor Loads Up On Gold Bullion

Panicky investors may be dumping their gold, but one investor with a superb long term track record of value investing is loading up on gold bullion.

In a Fortune interview, Charles de Vaulx, who runs the IVA Worldwide Fund, explains why his $10 billion fund holds over 7% in gold bullion.

At the time of the interview, gold was selling at $1,900 per ounce and de Vaulx was bullish based on a “mistrust of policymakers, be they in the U.S., Europe, Japan, or even China.”  The inability of politicians to arrive at agreements in the face of a looming debt crisis gives gold an inherent value that paper currencies do not possess.  As to why he would still be buying gold after a sevenfold rise since 2001, de Vaulx said that “the paradox with gold is that even though the price has gone up so much, it is still under-owned.” (See Americans Remain Underinvested In Gold.)  The IVA Fund has invested only in gold bullion which is viewed as being “safer and cheaper” than gold mining stocks.

Regarding the U.S. dollar, de Vaulx thinks that over the long term, the U.S. will be forced to solve its massive debt problems through currency debasement and inflation.   Initially, the bursting of a credit bubble causes deflationary problems but ultimately the policies of the Federal Reserve will produce inflation.  Fed policies will accordingly result in poor returns for bond investors who have sought shelter in U.S. treasury securities.

The circumstances under which de Vaulx would reduce his gold positions would be if policy makers are able to institute policies that would encourage sound currencies or if the values of equities become “truly cheap.”

According to Fortune, de Vaulx launched his fund only three years ago.   Based on a long term track record of superior investment returns, de Vaulx was able to quickly attract $10 billion in assets.  Due to the recent panic sell off in the gold market, de Vaulx’s fund has taken a hit, but my bet is that de Vaulx is taking advantage of the situation by scooping up more gold at bargain prices.

The Road Map To Sound Money and Restoring the Dollar – Ron Paul’s Proposal

“Road Map to Sound Money: A Legislative Hearing on H.R. 1098 and Restoring the Dollar”.

Ron Paul’s efforts to restore a sound currency in the United States continued this week as hearings were held on his proposed legislation that would allow American citizens to chose from among competing currencies.  Ironically, the one man whose proposals could ultimately save the U.S. financial system from collapse, was completely ignored by the mainstream press who provided zero coverage of H.R. 1098.

H.R. 1098, introduced by Ron Paul in March is known as the “Free Competition in Currency Act of 2011”.  According to Ron Paul, “This bill eliminates three of the major obstacles to the circulation of sound money: federal legal tender laws that force acceptance of Federal Reserve Notes; “counterfeiting” laws that serve no purpose other than to ban the creation of private commodity currencies; and tax laws that penalize the use of gold and silver coins as money.”

Ron Paul noted that gold and silver have constituted sound money throughout history.  Loss of confidence in the dollar and profligate deficit spending by the government have caused people to flee to gold and silver as a store of value.  Paul noted that “Even central banks have come to their senses and have begun to stock up on gold once again.”

Presently, the use of gold and silver by citizens is being severely punished by the government.  Ron Paul cited the case of Bernard von NotHaus, creator of the Liberty Dollar, who was convicted of counterfeiting for creating his own gold and silver currency and another individual who was “convicted of tax evasion for paying his employees with silver and gold coins instead of fiat dollars.”

H.R. 1098, according to Ron Paul, would allow citizens to maintain the purchasing value of their money and prevent the government from conducting excessive borrowing which will enslave future generations with debt.

Testimony at the hearing for H.R. 1098 was given by Dr. Lawrence Parks, Foundation for the Advancement of Monetary Education, and Dr. Lawrence White, Professor of Economics, George Mason University.

Dr. Parks, who presented 63 pages of prepared remarks, opened by stating that the current monetary system is not in conformity with the Constitution, is dishonest and unstable and in the process of “blowing up.”

Selected excerpts from Dr. Parks testimony:

With no exceptions, the history of legal tender irredeemable paper-ticket-electronic money is that its purchasing power always approaches its cost of production: ZERO!

With gold-as-money, and without the banking system creating money out of nothing, the amount of financial leverage would be de minimis with no possibility of collapse. Because legal tender irredeemable paper-ticketelectronic money can be created without limit, there is no market based self-correcting mechanism to limit financial leverage. Especially at a time when those who engage in leverage do not bear the full risk of loss, but are able pass the risk on to the public through the banking system, whose balance sheet and liabilities are de facto guaranteed by the public, financial collapse is a certainty.

Many think that the Great Depression was a “market failure.” Mr. Greenspan has written extremely eloquently that the Great Depression was in fact caused by the Federal Reserve feeding too much credit into the banking system, i.e., enabling the banking system to increase leverage too much.

Dr. Parks notes that the price level of the U.S. was stable until President Nixon defaulted on the U.S. promise to redeem dollars for gold.

 

Dr. Parks says that because the U.S. dollar is the reserve currency of the world, when the dollar collapses, the global financial system will also collapse, plunging most of the world into poverty and war.

Dr. Parks admits that as a “practical matter, absent the debacle of a complete collapse, there can be no abrupt changes to our monetary system.”

The continual appreciation of gold against paper money suggests that the monetary system will not be reformed in time to prevent a financial disaster.   The ongoing debt crises in Europe and the U.S. also provide little hope that governments will diverge from their path of monetary disaster as they seek to cure too much debt with more debt.   The only survivors at the end of this mad experiment with fiat money will be those holding the eternal sound currency of gold and silver.

Gold Currency – An Escape From A Failing Paper Money System

Fed Chairman Bernanke’s statement that “gold is not money” seems to be an increasingly lonely position.  No less an authority than Alan Greenspan, his predecessor at the Federal Reserve, directly contradicted Bernanke by calling gold a “currency.”

In remarkably candid language, Greenspan spoke in Washington about the Euro ‘Breaking Down’, the European banking crisis and the deterioration of the fiat money system.

“The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system,” Greenspan said today in Washington.

A lack of confidence in euro-denominated debt is straining the region’s banks, Greenspan said. “That stuff has always been thought of as the ideal collateral and now it’s getting highly questionable,” he said in a question-and-answer session at the Innovation Nation Forum in Washington.

Greenspan also said that he did not think gold, which reached a record above $1,900 an ounce this week, was in a bubble.

“Gold, unlike all other commodities, is a currency,” he said. “And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.”

While Bernanke contemplates additional ways to debase the US currency his counterparts at other Central Banks are retaining gold to help manage debt and adding to their gold reserves at a record pace.  Meanwhile, before providing more bailout funds to insolvent member of the European Union, the German labour minister is demanding that gold be put up as collateral.

Central banks, net buyers of gold for the first time in a generation, are likely to retain their holdings even if they need to raise cash to counter an escalating debt crisis, according to Morgan Stanley.

“Once they’ve sold, that’s it, and buying back would be extremely expensive,” Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., said in an interview. “They would rather have the backing of a rising asset within their reserve portfolios than use it to reduce debt.”

“Under conditions of austerity we’re going to see a further deterioration of debt,” said Richardson, who has studied metals markets for 20 years. “Rising risk argues in favor of holding on to their gold reserves rather than selling them because they’ve only got one shot at selling.”

“The European central banks won’t sell their gold because while it may be a means to raise cash, it definitely won’t be enough to settle their debts,” said Duan Shihua, head of corporate services at Haitong Futures Co., China’s largest brokerage by registered capital. “Besides, none of the central banks believe in the currencies of other countries.”

Bernanke can deny reality and history by saying that gold is not money while he wildly prints more paper currency, but the rest of the world isn’t buying it.

$100 Up Days For Gold To Become Routine

Gold is a small part of most investment portfolios despite a decades long uptrend.  Investment advisers have either routinely dismissed gold as part of an investment portfolio or recommend only a token position as a hedge.  This is likely to change as gold gains recognition as a safe haven alternate currency.  As investors rush to establish positions in gold, $100 up days are likely to become a routine event.

The reasons for investing in gold are well known to readers of this blog.

The financial crisis that began in 2008 was not resolved and is now entering the end game phase.  Governments that propped up the financial system with trillions of dollars of debt have exhausted their borrowing capacity and now need to be rescued themselves.

Crippling levels of debts and deficits have suffocated economic growth necessary to service debt.

A panic is engulfing the global financial system as investors realized that governments are no longer able to contain the debt crisis.

All eyes are now turned towards the central banks.  Will the central banks allow the world to slide into collapse or will they “come to the rescue” with a massive rescue plan using printed money?  The price movement in gold has already answered this question.