04/30/09 Gaithersburg, Maryland “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
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The thing about betting against the dollar is it becomes as tormenting as watching a football game with Manchester United.The more you want them to lose, they always find a way to come out on top.
does gold hit these magic values before or after the collapse of the USD? Even DD Money Morning and G Dyer are all predicting that gold/silver have a downside so what is really safe from devaluation? and the more magical question is When? is all of this going to happen?
You can’t predict when the gold price will fly,but fly it will in the very near future.
If you miss the train, you’re stranded out in the cold.
You don’t want to buy in with the taxi drivers and the house wives or you’ll get creamed as well, because it will drop also like all bull runs.
Remember when it goes you make big profits with gold shares but only hold your buying power with the physical.
Good luck!!!
the economic logic for higher gold prices is sound but once massive gold market manipulation by the treasury and central banks is factored in, there is no case left…..gold has lost enormous value since 1980 when it last peaked and is today barely higher than it was then…..even at 2000usd it would fail to hold value….that pretty graph should be redone in constant dollars…we have heard this story about gold soaring for years if not decades…..when someone can make a cogent case for gold which also accounts for gold manipulation then i will listen….and even once the roof caves in the government will confiscate gold just as it did in 1933….
Any mass spike in the value of gold implies a coresponding drop in the us dollar. The conundrum here is, if the value of gold as denoted in us dollars would make the goldbugs rich, what then is the value of golds measure? If the “world” has no money,and if gold became the only money,the holders of gold would then become “dead meat” in the free market of lead.
oh, cut it out. what’s the point of owning the best currency? currency is still a terrible asset class. if it isn’t an earning asset, it isn’t an investment. simple as that.
Gold, yawn. EVery single person on the planet is talking about gold and having gold parties. The masses are seldom correct. Besides, even if gold rises to $2000, you gold bugs will hold onto it until it comes back down to $500 anyway.
With government printing presses working overtime to print more money, it seems obvious that the value of the dollar can only go down, while the market value of solid assets such as gold can only go up!
With this thought in mind, I have been purchasing gold and silver ETF’s. If the government decides to confiscate my gold and silver, where will that leave me? Will they pay me off in worthless dollars?