By Jeff Clark
Warren Buffett recently remarked that you can't value gold like an oil company or farmland, so we should forget gold and buy equities. But he misses the point. Gold doesn't produce value because it is value; in other words, gold is money.
It's sad to see Mr Buffett go to the dark side. But, as I'm about to show, he's losing company when it comes to his views on gold.
It's difficult to fathom why a professional money manager - someone who looks at markets all day long and tries to make money for his clients - doesn't see the in-your-face arguments for buying precious metals. It's borderline irresponsible. You may think that's a strong statement, but I ask: what would you do if you were responsible for investing other people's money and found yourself in the following investment environment:
The US government had printed more money in the past two
years than at any other time in world history. Then, they printed more.
Government spending exceeded revenues by obscene margins, and, in the most recent year, the US ran a budget deficit of US$1.4 trillion.
Interest rates were at 40-year lows.
Runaway entitlements and social discord remained unresolved in many major European countries.
Raising taxes and cutting spending to reduce the debt burden were politically untenable, leaving inflation the easy and likely solution.
The economy was weak and showed signs of weakening further.
Financial markets were tenuous, and the stock market as a whole was vulnerable.
Gold, in spite of being the top-performing asset of the past decade, was roughly $1,000 below its 1980 inflation-adjusted high. Silver was even further undervalued.
What asset would be a wise and time-tested holding for this kind of environment? Think about it: gold is designed exactly for these kinds of circumstances. Any casual glance at history will bear this out. So, yes, "irresponsible" comes to mind when you're handling other people's money and ignoring the very asset that is ideal for the current economic and monetary climate.
There are others, however, who "get it". And they make my list of the Twelve Gold Bugs of 2010:
1. Peter Thiel, Clarium Capital Management . At the end of the second quarter, Clarium had no gold holdings. But that changed in Q3: the firm put $11.4 million into GLD (the SPDR Gold Trust ETF), buying about 100,000 shares.
2. Julian Robertson, Tiger Management . With no prior gold exposure, the chairman of Tiger invested a whopping $247 million in GLD in Q3, buying about 2 million shares.
3. Chris Shumway, Shumway Capital . His first-ever gold purchase occurred in Q3 when he put over a quarter-billion dollars into GLD - more than 2.1 million shares.
4. Dan Loeb, Third Point . The firm made its first gold purchase last quarter, putting $15 million into GLD, about 115,000 shares.
5. Steve Cohen, SAC Capital . Already invested in GLD and four gold mining companies, the firm placed over $9 million in four new gold stocks last quarter.
6. Highbridge Capital Management. With seven gold companies already in the fund, Highbridge recently put $11.4 million into two more gold stocks.
7. Howard Marks, Oaktree Capital . The firm increased its investment in two gold companies by an additional $6 million.
8. John Paulson, Paulson & Co . If you don't know the name, Paulson made a fortune betting against the housing market and financial companies in 2008. Now, his single largest holding is gold. His fund also has large positions in seven gold mining companies. Mr Paulson believes in gold so much that he started his own gold fund earlier this year, investing a quarter-billion dollars of his own money.
9. Russia. The Central Bank of the Russian Federation has been steadily buying gold since the autumn ofl 2007. It added 600,000 ounces of gold to its official reserves this October, with year-to-date purchases now totaling 4.6 million ounces. Russian's gold reserves now stand at 24.9 million ounces - breaking into the top 10 globally.
10. China. The Chinese government doesn't publicly disclose what it is doing with its reserves, so how can I put them on the list? Because its announcement last year revealed it had been buying gold all along and had increased its gold reserves by 75%; because it's widely believed the country is currently buying all of its own gold production; because government officials have publicly encouraged their citizens to buy gold and silver; because the country has disposable income growth of 15%, but gold demand growth of 26%; because China's commerce minister recently stated, "Doubtlessly, if the yuan is set to become an international currency like the dollar or euro, China has to get a huge gold reserve to support it, and a reserve of 1,054 tonnes is far from being enough." I could go on, but it's clear that the Giant from the East is extremely bullish on the yellow metal.
11. Doug Casey, Casey Research. A longtime gold bug, Doug insists a mania still lies ahead since the common man has not jumped on board. As you may know, my boss is heavily invested in small mining exploration companies and said earlier this year that he expects to see a life-changing rally in them. It's perfectly normal for the juniors to cyclically run up 1,000%, he says, with the leaders increasing 10,000%.
12. Peter Schiff, Euro Pacific Capital . Peter believes in gold so much that earlier this year he started his own bullion dealership. We always caution our readers to watch out for the dealer that starts pushing numismatic coins, but what I like about Peter's Euro Pacific Precious Metals is that it sells only bullion, and only at reasonable prices.
In addition to miners and ETFs, I believe investors should allocate at least one-tenth of their net worth into physical gold (and silver), and Peter has created a reliable way for average investors to do so. Also, starting a bullion dealership when gold is already selling for four figures means Peter thinks the gold bull market has a long way to go.
None of the individuals on this list think the gold price is too high. They're buying for the future, to both protect and grow assets. They don't believe economies are as stable as reported, and they recognize the implications of a world floating on fiat currencies. They also believe governments' attempts to "fix" the problems will not only fail, but make fiscal conditions worse.
As for me, I think quantitative easing will "work" - I think the Federal Reserve will meet its goal of inflation, but that it will spiral out of control for the reasons I outlined above. The Fed is neither omniscient nor omnipotent, as it tries to claim, and this situation will quickly snowball.
Printing money, as the Fed is relentlessly doing, is not just supportive for gold, it makes owning the metal a requirement for the foreseeable future. This reckless pursuit of dollar abuse will have disastrous consequences. It will destroy the US dollar, weaken the US economy, and cripple the US government's influence in the world. Gold is your number one protection against those inevitabilities.
I hope that this Christmas, you'll become a gold bug, too.
This article was written by Jeff Clark of Casey Research exclusively for Peter Schiff's Gold Report. To be the first to read the latest precious metals market analysis from Peter Schiff, the Aden Sisters, and Casey Research, click here for a free subscription to Peter Schiff's Gold Report.
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