With the inexplicable recent reorientation by a traditionally very erudite, pragmatic and realistic Jim Grant (well, not that inexplicable) into what can only be described as pulling some serious wool over his readers' eyes, we decided to fall back to our other favorite newsletter writer: the inimitable Fred Hickey who writes The High-Tech Strategist. While we can not find enough praise for his work, it bears pointing out that whereas one may accuse Grant of selling out, such an accusation will be impossible of Mr. Hickey, who is a florid, objective and insightful as always, and maybe more so now than ever. His latest letter, Fighting the Fed, is a must read for all, and while we wish we had the copyright latitude to repost it in whole, we would like to at least share Fred's thoughts on gold (among many other things, some of which have made his readers serious money over the years).
Owning Gold Becomes More Respectable
When Paul Volcker employed his tough love solution by driving interest rates skyward nearly three decades ago, he squashed inflation and also squashed the gold bull market of the 70s, banishing the metal into a near 20-year bear market. Gold plunged from a peak of over $800 an ounce to well under $300 an ounce in 2000, right at the top of the 2000 stock market bubble. Gold has been propelled ever higher since by the Fed's extraordinarily easy money policies. At the bottom in 2000 there was absolutely no interest in holding gold (only internet stocks). It was a capitulative moment topped off by UK Treasury Chancellor Gordon Brown's decision to dump half (395 tons) of England's gold reserves at the rock-bottom average price of $275 an ounce. The only people left holding gold at that point were those derisively labeled as "gold bugs."
Thanks to the Fed, gold has been building up a head of steam ever since. Nevertheless, despite nine consecutive years, gold has remained disrespected and and under-owned, both by the public and by the professional money-managers. More recently, that has been changing. This past month I've read speeches from both billionaire John Paulson and David Einhorn, both of whom famously predicted (and capitalized spectacularly from) the collapse of the housing and credit bubbles. Both eloquently explained how they had never been gold bugs, yet both have made hold the core holding in their portfolios. This weekend the Wall Street Journal ran a full-pages story on how Paulson made billions from the recent financial market's crash. At the very end of the story, Paulson explained his new trade- betting against the dollar through billions of dollars of gold investments. Paulson stated: "Three or four years from now, people will ask why they didn't buy gold earlier."
Last week I also read legendary hedge fund manager (and billionaire) Paul Tudor Jones' third quarter letter to his hedge fund clients which included a detailed, 10-page appendix examining gold's current valuation. His conclusion: "In our opinion, the scope for increased investment demand over the coming years is much stronger than the potential from new supply. As a result, incremental new demand must buy gold from current holders. With a macro backdrop that suggests gold is undervalued, we doubt the transfer of gold from current holders to its new owners will occur at, or near, current prices."
These heavyweight endorsements of gold are making the rounds among the investment community. I've read them, and so have a lot of others. If I was a money manager underinvested in this category (that's nearly all of them), I know I'd have to begin to reconsider my stance on the precious metal. This process of discovery takes time, but the wheels are certainly in motion. The smartest of the smart money is now positioned in gold, awaiting sharply higher prices.
And some more:
When gold went over $1,000 recently a lot of gold owners expected a sell-off similar to what occurred in March 2008 and earlier this year. They moved to the sidelines expecting to buy back at lower prices. There were a litany of reasons the sellers used as excuses to lower their positions, including this one that I wrote about in last month's letter: "The last excuse to sell gold (and the bears have been flogging this for over a year now) was last month's formal endorsement by the IMF to sell 403.3 tons of gold. However, the gold is expected to be sold within the limits of the new Central Banks Gold Agreement which caps central banks' gold sales through September 2014. That assumes that the Chinese don't buy the whole 403 ton lot all at once, as I've heard they've offered to do."
As I write this it was just announced this morning that India had beat China to the punch, buying 200 metric tons in one fell swoop from the IMF. Bloomberg quoted Suresh Hundia, president of the Bombay Bullion Association today: The purchase is "not so much about India betting gold prices will increase but that the dollar will fall. They are looking to diversify their foreign exchange reserves."
The psychological barrier of $1,000 gold has been broken. That $1,000 number might as well be $100. There is no longer a limit to the upside. As you know, I've been waiting for the "crazy phase" part of the long, secular bull market to being. That's how secular bull markets work - eventually momentum takes over and there's a parabolic run to the top. It happened at the end of the last gold bull market. After rallying from about $250 an ounce to over $400 in September 1979, gold had some indigestion problems at that level and entered into a several week consolidation. Around Thanksgiving of 1979, gold was still trading at about $400 an ounce. By January 21, 1980 the price of gold had doubled to $850 an ounce. This was the blow-off top. The action was not unlike what we saw in tech stocks in 1999-early 2000.
I doubt that what we're seeing is the final blow off. I have no idea when it may come. It could be months or years from now. I just know that it hasn't yet occurred. In the meantime, prepare yourself for a lot more company (besides the smartest of the hedge fund managers) and more head-fakes. In the end, the public will come in en masse. They'll also be buying gold stocks with abandon. That is clearly not the case today.
October is typically a seasonally weak month for gold (November-February are usually very strong months) and the bears were out in force, expecting a selloff. Commodities "expert" Dennis Gartman harrumphed that requests for interviews from him about gold had reached "unprecedented levels." He warned "The public's and the media's attention to things such as gold always reaches a fever pitch and then falters... or collapses." Gartman has been consistently on the wrong side of this trade.
And in case it is not evident, here is the simple conclusion:
Gold is no longer being driven by jewelry demand, as in the recent past. It is investment demand that's wagging the yellow dog's tail. It's a loss of confidence in the U.S. dollar and U.S. government policies around the world that's driving gold to record levels. As it has been for thousands of years, gold is the safest store of wealth, not so much something to be fashioned into a necklace.
Not surprisingly, Fred, as increasingly more people, is long many, many gold stocks.