Carrying forward re JIN and therefore gold:
I think it only makes sense to say that my interest in JIN is because of more than its position as a start-up producer. Some indication of my strategic view can be inferred from my original remarks. But I would never break the investment rules to such a degree on just a good-looking startup in any industry, whether here or overseas.
There is a huge divergence of opinion among professional investors as well as economists relating to US monetary policy (affected by fiscal policy), inflation and gold. These impact policies in other countries around the world. This is way too big and hot a topic to cover comprehensively in a single blog , but I should try to touch the main points. Note that the USD has been the sole international reserve currency for most of the period since WW2.
Many people believe, just from practical observation, that inflation is the result of too much demand chasing goods in shorter supply than for those who want them. Terminology gets a bit confusing here. Those who call themselves "supply siders" in the US also say they are "conservative" but by this they mean politically (eg, Republican). Let it just be said that conservative economics is more technically connected to the "Austrian school", which is more rigorous and not supply side. Supply in this sense means policies supportive of increasing the aggregate productive capacity of goods within the economy.
Feb 3, 2009
Prior to year end we all knew that massive strategic trader John Paulson was going to list a new gold ETF in early 2010. Knowing that he was already heavily positioned, you could take that a couple of ways. The most negative take would be that if the gold market started to move ahead again after flirting with a technical breakdown in January (..watch out, it's the most crowded trade in the world! - or so some say), he could use any appreciation to substitute other people's money for his own, keeping the physical position stable but thereby getting out without crashing the market - at the same time cashing in big time without any further material rise in price. Or he might not. Investments in Paulson ETF will require a minimum of $10 million and a 1-year lockup.
The heavyweight on the other side is Bill Gross of PIMCO, the largest bond fund in the world. Paulson's giant call in the past was multi-billion bet that sub-prime mortgages would collapse. Paulson as said he will put $250 million into the new fund. This, in effect, is a put against the USD.
Paulson's Gold Thesis:
Again excepted from the Time article, according to presentations from Paulson & Co., their thesis for gold is threefold. Firstly, they believe that the printing presses of money that have been working overtime in America and other countries will cause depreciation in paper currency. Secondly, they believe that demand for gold will increase, particularly as a reserve currency. In fact, they think gold could beome the primary reserve currency again as they have been looking at gols as currency, not a commodity. Thirdly, their belief is that demand for gold in general will be far greater than supply, causing prices to head higher. Overall, they see a very high probability of inflation in America's future and have selected gold related investments to hedge against this.
I have the same point of view on this. The US monetary base has expanded to an absolutely exponential degree. The correlation between the monetary base and money supply (the monetary base, when transformed through bank loans, becomes the money supply when placed in borrowers' hands) is very close, almost 1:1. In turn, unit money supply as also highly correlated to the GDP price index, nearly 1:1 again. So the main argument here is that the monetary base has expanded dramatically, yet the money supply growth has not yet expended. This is due to the fact that the velocity of money (the pace at which it changes from hand to hand and business to business) dropped furiously after the collapse of Lehman Bros. last year. Once money supply expands, look out for inflation!
Other countries have been following the profligate US lead. From late 2008 until Q2 early last year, while the US balance sheet expanded by 119%, the Bank of England expanded 127%, the Swiss National Bank's by 80% and the European Central Bank (ECB) by 39%. The rates have increased since then.
To those citing the 'crowded trade' or gold bubble argument, Paulson argues there has been a vast appetite for gold, particularly in the popular exchange-traded fund GLD. In comparison to GLDs $60 billion, the comparable pool of US money market reserves (which are capable of being moved instantly) was $3,850 billion. This implies a vast amount of room for savers to shift from very low money market rates into gold. But very importantly, he expects central banks to become net buyers of gold after decades of selling. We saw this with India in December 2009.
It appears more likely to continue in this direction than revert back to net sales. Some highly stressed banking systems like Greece - maybe even the US to some degree - could be sellers, but I would expect these volumes to be handled successfully by the market if they occur.
Even the highly-regarded Dennis Gartman tonight (Feb 8) grumblingly (he says he always hates to be positive on gold because it can mean bad things for other sectors) acknowleded that the technical price performance of gold during the current VERY shaky market looks impressive and he is staying long, mostly in actual gold and the GLD ETF.
As an aside, there is an element of suspicion that the amount of physical gold held by the GLD ETF and even by the US Treasury at Fort Knox is overstated. The Treasury, a known seller, has reported identical, unchanged hodings every month for nearly 2 years. There has been no actual third-party audit of the secret offshore holding by GLD. If significant under-reporting is a fact, in the event of a sharp price rise, this would be considered very bullish for the price. The point being that the missing portion might have to be purchased under duress and the supply available to the market may be significantly less than it is genearally stated to be.
So the crux of this argument revolves around money suupply. Historically, inflation has lagged money supply growth by 2 to 3 years. It says that when you have this kind of money supply growth, inflation is just around the corner. Gold has historically held its value and/or appreciated in times of inflation. Paulson selected the the gold equity strategy (along with some long-dated options) as having greater potential upside as the think gold equities will benefit most should gold prices stay flat or continue to rise.
I have held these views and a position in JIN for several years. Until lately, this was during a very slow gold price rise. Despite this, returns have been far above average. On the other hand, developments within the company itself have been very positive with an outstanding outlook over the next several years, regardless of this background. However, if you row you boat in the direction that the river flows, your work is easier and the distance travelled is greater.
The thing that changed the game from ordinary prospect for traders to a strategic investment opportunity was "quantitative easing". Once that at the US Treasury, history and a new direction was set.
Part 1 to the gold case - which is really about monetary inflation or deflation - has already happened in the unparalleled increase in the US Fed's increase in debt used to save the banks, auto industry, the economic stimulus, the wars and as of Feb 1, the new $1.3T deficit budget for the year just started.
The trick that those on seeing no inflation on the horizon while recognizing the negative Fed problem, is they maintain that as the economy eventually recovers and the banks begin to lend the vast liquidity available, monetary and tax policies will be deftly implemeted to avoid a roaring emergence of inflation and currency debasement. This is fine except for the fact that no government has ever been able to actually succeed in dampening the inflation. Paul Volker, Obama's key adviser in this regard, eventually snuffed inflation at the end of the '80s, but with 20% interest rates that caused a new recession.
The historical experience is seen by many as why the US government will not be any more successful in containing the problem that it has now created, than any other government. One could even reasonably question if indeed it actually expects to try, as distinct from talk. Without taking decades of no growth, it is hard to see another route left for the government is to make itself and homeowners whole again by letting inflation wipe out the debt. Of course, it is politically impossible to admit this or be seen to allow it. Hence the cries of "King Dollar".
We have not even touched on the subject of whether the rest of the world is prepared to see the US and King Dollar reign by itself again and what they seem to be doing about it..
What Paulson actually said last year in the Time article was that his gold fund's objective "is to outperform gold price in a rising gold price environment." They will pursue this by investing in gold equities that are levered to the price of gold, as well as derivatives on the price of gold. In additions to its other characteristics, JIN is a gold equity, unhedged and highly leveraged to the gold price.
SA reports that three private equity firms are on the shortlist to bid for Morgan Stanley's stake in China International Capital Corp. All are competing for the $1B-plus stake that MS bought for just $37M in 1995. The sale could get up to $1.5B.
At Davos, legendary currency trader George Soros (who once broke the Bank of England) made a statement strangely capable of being read two ways. The negative way hit the UK press immediately at the end of January while markets were in a funk. But in reality he was just stating a fact in his comment about gold as "the ultimate bubble". Historically this is true. Gold will not reflate before mortgages or land and financial speculation. He did not say the bubble was here now and was about to break. But the price did drop in a way to frighten many. Then only days later, on Feb 1 it rose strongly after Obama disclosed the massive size of unfunded spending in his scheduled announcement today of the new US budget.
If Soros had intended, unlike the panicky conclusion of the Daily Telegraph, to create a buying opportunity for himself, it certainly worked. Of course, I do not know whether he made a move at that time or not, nor do I KNOW that today's action is the re-establichment of gold's strong upward trend - at least not yet. But one thing for is for sure I stood pat in my position.
In the end, for practical purposes it is what the Fed DOES that counts. To date they have not 'talked their book', that is what they have been saying is not what they have been doing. But good ol' 'helicopter Ben' Bernanke has said specifically "I will not monetize the debt". Events outside the US, or the law of unintended consequences could force monetization regardless oof intent. At present, the contiuation of the Fed doing more of what they been doing looks more likely than any serious change for the better. This is also an US election year. Unemployment is an economic drag that is making the electorate both angry and irrational. More on this as events unfold.
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