Edgar Allen Poe’s most widely circulated story
was ‘The Gold Bug‘ where William Legrand appears to go insane after being bitten by a bug
he thinks is pure gold and embarks on a search for mythical
treasure. Paul T. Jones II of Tudor Investment Corporation has
approximately $11.57B under management and has earned $1.22B year-to-date in
2009.
Mr. Jones is a serious money manager who makes
serious money. In the 2009 Q3 report he
wrote, ‘I have never been a gold bug. It is just an asset that,
like everything else in life, has its time and place. And now is that
time.’
20% UNDERVALUED
On page 17 he writes,
Our proprietary econometric model, which evaluates
the impacts of inflation, M2 growth, and real rates on the price of gold,
suggests – under our baseline macro scenario – that gold is 20%
undervalued over the next 24 months. Our modeling work highlights the
importance of real rates and inflation to the price of gold.
Mr. Jones is not alone with the Ancient Metal of
Kings and is flanked by John Paulson with over $4B in gold investments and
David Einhorn of Greenlight
Capital who understands the risks of GLD and reported to shareholders
that ’We made modest changes to our macro hedges. First,
after extensive investigation we switched our entire GLD exchanged traded
fund position into physical gold’. Interestingly Mr. Jones
devotes 9 of 23 pages discussing gold like it is some forgotten mystery of
finance. In some sense it is because if you want to learn the truth out
money you have to learn it on your own.
Mr. Jones’ valuation of gold is eerily similar
to my call of $1,300 earlier on Business News
Network of Canada. $1,300 times 80 percent is
$1,040. While Mr. Jones does not assume the title of a ‘gold
bug’ having such company is encouraging.
GOLD SUPPLY
On page 18 he recites,
Despite a three-fold increase in worldwide metal
exploration expenditures, new mine production has remained stagnant at 80
million troy ounces over the last decade. In addition, new mine
production is marginal in terms of available supplies. As a result, any incremental demand for gold
must be met through sales from current owners. They just
aren’t making that much of it anymore. … The recent advent of
physically-backed gold ETFs has increased investment demand from a new
investor class. … The trailing 12-month ETF accumulation has “bought”
the equivalent
of 25% of new mine production consistently since the beginning of the year.
… This represents a remarkable change of direction for a market that
has been accustomed to absorbing
substantial volumes of gold sold by central banks over the last
decade. … More importantly, there is huge potential for more buy-side
interest to emerge from central banks. Total international reserve
assets have quadrupled over the last decade, primarily from the accumulation
of global money. However, the percent of total reserve assets held in
gold has declined markedly [emphasis added].
For reasons stated earlier I appreciate his use of
the word ‘equivalent’ and also the ” around the word
bought.
GOLD MARKET DISEQUILIBRIUM
Mr. Jones is, like most of us, merely on the prowl
for a good investment. But there is no market more out of balance in
the history of the world than the gold market. The closing act of this
centuries old play began with the fat old lady singing (Bank of England dumping
the crown’s reserves). There is even massive fraud alleged.
But you do not spend a lot of time swimming with the vampire squids of
Wall Street or in private equity without encountering rigged markets.
Indeed, a nimble outsider can book some good profits by breaking or
riding cartels.
But the more I investigated the gold market the more
I learned it is easily distinguished from potash, pork bellies or even oil
with OPEC. In this case, the price is being suppressed and not
supported and this was being done not by users but by owners.
Dr. Greenspan even testified in 1998
that, ”Nor can private counterparties restrict supplies of gold,
another commodity whose derivatives
are often traded over-the-counter, where central banks stand ready to lease gold in increasing
quantities should
the price rise.” Thus, we had a market that was undeniably rigged
and that rig was officially sponsored and denied.
But if you own tremendous amounts of an asset then
why run a cartel to keep its price down? Like a shark that smelled blood in the water I honed in on
GATA’s beacon of gold bleeding central banks.
With books like Dr. Vieira’s masterful and
meticulously footnoted 1,700+ page Pieces Of Eight and GATA’s dispatches and
conferences I learned the macro picture. Gold is real money, poses a mortal
threat to the fiat FRN$ based monetary system, and the
bank’s legal monopoly to issue legal tender currency is inifinately more valuable than the price of a portfolio
asset.
This legal counterfeit monopoly allows for
confiscation through inflation which is a form of taxation without representation
and without due process of law and in violation of the United States
Constitution. Because this is done only under color of law consequently
Federal law has no intelligible answer to What is a Dollar?
As Ludwig von Mises wrote,
It is impossible to grasp the meaning of the idea of
sound money if one does not realize that it was devised as an instrument for
the protection
of civil liberties against despotic inroads
on the part of governments. Ideologically it belongs in the same class with
political constitutions and bills of rights.
Indeed, fiat currency and fractional reserve banking
are the heart of the State and its health is war, carnage and death.
Therefore, these centuries old tools of fiat currency and fractional
reserve banking are both barbarous and relics that allow special private
interests to profit from nefarious activities.
GOLD PRICE SUPPRESSION SCHEME
With meticulous documention
by the Gold-Anti Trust Action Committee the environment was
clear. The gold market is rigged. The rig is used to prop up a
monetary system that is immoral and in conflict with the Supreme law of the
United States. The rig is merely a means to that end but it is integral
and indispensable. Also, the deeper you dig the more integral it
appears to be. The Achilles heel appears to be physical delivery.
Consequently, the worldwide monetary system is a
confidence game built on an illusion and if the people lose confidence in the
illusion then the system does not collapse but evaporate. The easiest
way to undermine the fraudulent illusion is by telling the truth and letting
real money run free. As truth will cleave its own way and because of
the complex systems we rely on for ordinary life this inevitable event of
currency collapse could be very disruptive. It became time to prepare
for survivalism
in the suburbs. This would likely result in tremendous social,
political, geo-politicial and geo-strategic
changes.
GOLD BUG FEEDING FRENZY
And so the process that many of us have undergone is
happening now to many others. With advances in telecommunications and
the Internet the idea of sound money is spreading faster than fabricated H1N1
growth rates. Major money managers like John Paulson, David Einhorn and now Paul Jones are being bitten by the gold
bug. As I wrote about over a year ago in The Derivative Illusion,
My strategy is to acquire gold on a consistent
regular basis with a constant percentage of proceeds from cash-flowing
assets. When you own an unencumbered ounce of gold your wealth is
sovereign. Hoard it. Humanity’s
gold lust has been dormant for nearly a century and when it awakens it will
be extremely vehement and go viral. Those who own gold know
of what I speak. The yellow metal seems to call out to the inner
conscience and resonate with our DNA. The result will be that the
pitiful garrets of the central banks will be overrun as The Great Credit Contraction continues.
What is happening is a sea-change. Fiat
currency and fractional reserve banking are going to be replaced by commodity
currency with 100% reserves through services like GoldMoney. It is like an iceberg flipping.
While no one knows exactly how this will play out
and hopefully the machine does not
stop but the transition happens in a rather orderly fashion and without
too much chaos, disruption of ordinary life, destruction of property or loss
of life. The issue is not that there is not enough gold but that there
is too much worthless paper and the first rule of panic is to do it first.
While Mr. Jones is late to the feeding frenzy on
the central banks’ physical gold he has still arrived before almost
everyone else.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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