David Einhorn, the hedge-fund manager who predicted the downfall of Lehman Brothers, 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 major gold miner 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.
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 chart below and you can see the fall-off of the dollar in recent years and the rise of 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... just look at the grey bars and you’ll see what I mean.
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 plow more of its gigantic currency reserves into 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.
As the dollar goes bust, who knows what will replace it? With gold, you don’t have to worry too much about the answer.
Sincerely,
Chris Mayer
For The Right Side
Important note: Gold is becoming popular in the mainstream. That means that there are lots of less than scrupulous companies offering ways to buy gold, often at vastly inflated prices. Be careful. If you’re looking for the best way to own gold, click here for The Fleet Street Letter’s latest report on how to protect yourself from the coming devaluation of sterling. Gold plays a big part – and you might not have discovered this way to own it.
Chris Mayer is the editor of Capital and Crisis and Mayer's Special Situations. This article first appeared in The Daily Wealth.
MARKET NOTES
China sees an economic comeback as early as June
BY SHIVVY ARORA
Earlier this week, China announced that its 4 trillion yuan (CNY) fiscal stimulus is positively feeding through to the economy.
The government-sponsored State Information Center (SIC) expects GDP to accelerate to 7% in the second quarter of this year.
The chart below shows China’s GDP growth from mid-2007 and includes the expectations for June 2009. You can see that the first quarter was at 6.1% and that this time last year, growth was booming at over 13%.
Anticipated Chinese growth pickup for the second quarter of 2009
It’s largely to do with the availability of credit. China’s four state-owned banks handed out a whopping CNY250 bn worth of new loans just last month. And that’s not counting approx. CNY400 bn from other financial institutions. According to the SIC, bank lending isn’t likely to decelerate hugely during the next two months.
This is putting a lot of liquidity back into the economy. Chinese banks are pumping money through to households, sparing it from the credit collapse facing other countries. “It’s probably the only country in the world with a big expansion in private credit,” says Ronald McKinnon, professor of international economics at Stanford University.
China’s economy is indeed recovering faster than the rest of the world. With bank lending soaring the way it is, we wouldn’t be surprised if it did indeed meet its 7% growth target for June.
The Daily Reckoning - Struggling to revive the Bubble Economy
BY BILL BONNER
London, England
Wednesday, 6 May 2009
Jeepers, creepers... where’d you get those peepers...
Jeepers, creepers... where’d you get those eyes...
Thank god for laser eye surgery! Now, the people who were blind to the biggest financial crisis in the history of the world can see clearly again. And what do they see? A recovery!
“Bernanke strikes note of hope on economy,” says the headline in today’s International Herald Tribune.
“The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday that the US economy appeared to be stabilizing on many fronts and that a recovery was likely to begin this year.”
Is this good news? Or what? ‘Or what’ is our bet.
Yesterday, the markets seemed to take a breather. Stocks fell slightly. Oil slipped a bit too. The dollar remained where it was... but still on a downward trend. And gold held steady... at $902 an ounce.
Can the feds now fix the trouble they never saw coming? Can the people who ran banks into the ground now run the banks that will help finance the recovery? Can the investors who bought trashy investments with borrowed money now recognize the good investments that are put in front of them?
Neither Ben Benanke, Tim Geithner, Hank Paulson nor Alan Greenspan could see it – but there was something clearly wrong with the Bubble Economy of 2001-2007. We said so many times.
‘Good riddance,’ we celebrated, when it keeled over
But now they struggle to revive it. Like a brain-dead codger on life support, they are bankrupting the next generation trying to keep it alive.
“We expect that the recovery will only gradually gain momentum,” Ben Bernanke forecast, trying to manage expectations, “and that the economic slaw will diminish slowly.”
Really? Oh the wonders of modern medicine. Now, with 20/20 vision, the Fed chief can look ahead and tell us what will happen next. If only he’d gone to the doctor two years ago!
Stocks are rallying all over the world. Economists are putting on their spectacles and looking to the future. Bankers are cashing their checks and laughing all the way home from work.
Read on…
To read the Daily Reckoning in full, click here.
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