Here’s the way the game works – when the Big Commercials (AKA the Bullion Bank Cartel) launch an attack on gold (or silver), they withdraw their bids and flood the floor with sell orders (shorting the market). The price starts to drop. Then the “parasite” Swap Dealers jump in and gang up on the “longs” as both they and the Cartel continue to short the market in unison. And why not! They know the drill and it is easy pickings for them to tag along with the Cartel. So the selling intensifies and the price falls further. The Cartel counts on the added support from the tag-along Swap Dealers.
Dan Norcini, in his column below, points out “What appears to be happening is that the Swap dealers are slowly moving out of their net short position using the selling of the Commercial class to provide them with someone to buy from.” Not only will this have the effect of minimizing the damage on the downside, but it seems to signal that they are no longer comfortable shorting gold, but they are making a move to close out their shorts and go long. The Cartel seems to be fighting the battle by themselves.
A friend sent me an article to read titled “One Legendary Investor Is Worried.” The article start out – Seth Klarman is worth listening to, especially when markets go mad.
Mr. Klarman is president of the Baupost Group, an investment firm in Boston that manages $22 billion. His three private partnerships have returned an annual average of around 19% since inception in 1983-and nearly 17% annually over the past decade, as stocks went nowhere.
To measure Mr. Klarman’s importance as an investor, you need only see the value his rivals place upon his words. You could have earned at least a 20% average annual return since 1991-better than twice the performance of the market-merely by buying and holding Mr. Klarman’s book, “Margin of Safety”: Published that year at a cover price of $25, hard copies now fetch up to $2,400. Klarman is very concerned over our Government’s reckless spending, our exploding debt and the effect it will have on the value of the Dollar. He warned “All the obvious hedges”-commodities and foreign currencies, for example-“are already extremely expensive.”
His view on gold was – “It is near its all-time high and it’s a very hard moment to recommend gold.”
Mr. Klarman pointed out that his own ideas “on bottom-up opportunities in undervalued securities are more likely to be accurate than my top-down views on what’s going to happen in the world at large.” In other words, while you might want to insure against a disaster scenario, you shouldn’t bet the ranch on it.
He said – one of the best ways to protect against a decline in purchasing power is to buy whatever is “out of favor, loathed and despised.” So forget about gold or other trendy hedges. Instead, wait patiently for markets-European stocks, perhaps-to get so cheap that they turn most investors’ stomachs. Then you can pounce.
You should understand that the only reason that my friend sent me this article was to refute my belief that gold is THE place to be at this time. We have an on-going and friendly, though sometimes heated debate on gold and where we are headed. Bless his heart, he is much more optimistic than I am and I really hope his views are correct. That said, I am not selling my gold!
Pay particular attention to the following quote by Klarman – “I am more worried about the world, more broadly, than I ever have been in my career.” That’s because you can make good investing decisions and still end up with bad results if you reap your profits in currencies that do not hold their purchasing power. Mr. Klarman said that his firm, Baupost, is buying “way out-of-the-money puts on bonds”-options that have no value unless Treasury bonds plummet. “It’s cheap disaster insurance for five years out.”
Am I missing something here? If it is dangerous “to hold onto currencies that do not hold onto their purchasing power” then why is he hedging his portfolio by betting on a collapsing Dollar and the Treasury Bond market by investing in a product that will pay him back with more (depreciating) Dollars? I don’t get it! As for his commonly-touted view that “gold is near its all-time high” I don’t get that either. Adjusted for inflation, gold’s 1980 high of $850 would translate to about $2,300 in today’s Dollars, and that’s using the Government’s own CPI figures – which are ridiculously UNDERSTATED! Computing inflation the way they did when gold hit $850 would translate into a current price of over $6,000. He can’t possibly believe the BLS baloney inflation numbers can he? Klarman may understand the stock market but his understanding of gold is not one of his strong suits.
So here you have one view – things are bad but gold is NOT the answer. Now it’s my turn to counter it with another article on gold with a different take.
A billionaire goes all-in on gold
By Liam Pleven and Carolyn Cui
The Wall Street Journal
Saturday, May 22, 2010
Gold is setting records again, boosting the holdings of central banks, Armageddon worrywarts, and ordinary people who own gold bars, coins, and jewelry.
But few individuals stand to benefit as much as low-profile billionaire Thomas Kaplan. A New York-born commodities magnate who earned a doctorate in British colonial history at Oxford, Mr. Kaplan oversees an empire devoted largely to gold.
Many fund managers and high-rollers have allocated small percentages of their portfolios to gold as a hedge against inflation. But Mr. Kaplan is the bull of bullion. He has gone further than perhaps any other major investor, betting the majority of his wealth on gold and other precious metals. And it reflects his deeply held conviction that global economic instability could bring rising demand for gold.
Through his firm, Tigris Financial Group, and affiliates, Mr. Kaplan has loaded up on bullion and bought up properties in 17 countries on five continents, where geologists are exploring for more. Tigris subsidiaries have taken stakes in mining companies, including tiny firms that have yet to produce an ounce.
Though he won’t disclose how much physical gold he owns, Mr. Kaplan, who is 47 years old, controls up to 30% of the shares in some so-called junior miners. Together, his holdings amount to a nearly $2 billion bet on gold, more than the Brazilian central bank’s bullion is currently worth.
“I’ve reached a point where I feel the only asset I have confidence in is gold,” Mr. Kaplan said in an interview at Tigris’s midtown Manhattan headquarters.
Mr. Kaplan’s views are shaped by a concern, shared by many investors, that heavy government spending hasn’t contained the woes facing the financial system. Gold hit an exchange record of $1,242.70 a troy ounce at the Comex division of the New York Mercantile Exchange on May 12, days after euro-zone leaders announced a nearly $1 trillion bailout for ailing member states.
He has experience with how supply and demand can drive the price of raw materials. His doctoral thesis studied Britain’s involvement after World War II in Malaya, home to prized rubber and tin. That taught him how far people and governments will go to secure natural resources.
Wanting to apply his insights, he went to Israel to advise hedge funds. His nose for finding valuable resources was developed at firms he started that explored for silver and natural gas, which helped him make his fortune.
Gold miners are struggling to make major discoveries and it takes years to bring new finds into production. If people want to stock up on gold in a hurry, it will be hard to ramp up production enough to satisfy them, Mr. Kaplan believes.
“You’ve got a perfect storm with no apparent solution,” he said. “If the world does well, gold will be fine. If the world doesn’t do well, gold will also do fine … but a lot of other things could collapse.”
Mr. Kaplan acknowledges the dangers involved in investing in small mining companies. “It’s not the kind of thing I would suggest for widows and orphans,” he said.
And, he added, he isn’t in a rush to cash in on his gold investments. “If I am right about the big picture,” he said, “I will be rewarded for my patience.”
So there you have it – two different views by two very successful investors. Which one will you follow? You see, it’s still kind of a free country and you can choose for yourself. Do choose, because doing nothing is really a choice – a choice to stay in dollars instead of gold. Personally, I think that will be a very bad choice.
The most important section in today’s Daily are the latest comments from Richard Russell on the state of the economy and the stock market. I usually only highlight his comments on gold, but Russell has a very important message for his subscribers and you should pay close attention to what he has to say. I am inserting them at the beginning of the Daily to make sure that they get read.