Gold Bug Feeding Frenzy

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 (.pdf) 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 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.

DISCLOSURES: Long physical gold and silver and no position in the problematic SLV or GLD ETFs.

Comments

[Doc 224899:]

"Demand for gold will be satisfied by sales from current owners": I'm betting that the GLD ETF is operating with some sort of gold lease or derivative arrangement, so my money is in CEF (the Canadians are so nice, and it's easy to trust them).

Nov 02 01:22 PM

[bindlepete:]

I wonder how governments will control the rise in equity price for gold miners? This is where I have made my play, for sieze or beg gold they will. The authority is there in the history and now very likely the monitoring of safe deposit boxes.

Melt down your watches and rings? I doubt it but with the Bush/Cheney endorsement of waterboarding you teeth may be at risk?

Look at the questionable nationalistic behavior of the Koreans.

Nov 02 01:42 PM

[Doc 224899:]

Is "survivalism in the suburbs" the current state of affairs? Suburban housewives are driving SUVs to give themselves a sense of security in daily driving, as though they were in armored vehicles (dare to get in the way of a determined soccer mom behind the wheel, if you don't believe me). Door locks and electronic security systems in motor vehicles, places of business,and in homes are increasingly robust and sophisticated. People are buying and hording precious metals. People are moving from "modern" states like Florida, and buying property in the rural west and in the mountains east of the Mississippi River. The demand for civilian firearms and ammunition is breaking all records. Nationally, the demand for guns and ammo, compared to the supply of such products, resembles the brief regional demand in Louisiana after Hurricane Katrina. Citizens increasingly want military configuration weapons because they offer advantages in a home defense situation (rapid reloading, high volume magazines, and intimidating appearance so there is a confidence-building effect for the person holding them and a deterrant effect on whomever may find themselves on the wrong end of the weapons) that enable people to imagine themselves prevailing in a seige of their neighborhood.

I'd say people in the suburbs increasingly feel like they have a survivalist mind-set, though most of them would never admit it to any but their closest friends, and never in print.

I think we'll see an expression of this in voting trends this November.

Nov 02 01:55 PM

[kohalakid:]

The GLD prospectus specifically says the fund does not lease gold and does not use futures or forward contracts.

The only way to create GLD shares is to deliver physical gold to the trustee's custodian depository.

On Nov 02 01:22 PM Doc 224899 wrote:

> "Demand for gold will be satisfied by sales from current owners":
> I'm betting that the GLD ETF is operating with some sort of gold
> lease or derivative arrangement, so my money is in CEF (the Canadians
> are so nice, and it's easy to trust them).

Nov 02 06:05 PM

[bkdc:]

The Prospectus for GLD also states that the gold it its vaults does not necessarily represent the chemical element Au with the atomic number 79.

Nov 02 06:35 PM

[Trace Mayer:]

kohalakid, please provide a credible and verifiable citation for your assertion that 'The GLD prospectus specifically says the fund does not lease gold and does not use futures or forward contracts. The only way to create GLD shares is to deliver physical gold to the trustee's custodian depository.'

I have thoroughly analyzed the GLD documents for the prospectusly impaired:

www.runtogold.com/2008.../
www.runtogold.com/2009.../

Additionally, in a report from Deloitte, a big four accounting firm who also performed the audit of GLD's 2008 10K, there is a statement in direct opposition to your assertion. On page 4 it states, "If the proposed ETF tracks a commodity, it buys ***or borrows*** certificates of ownership of that commodity." [emphasis added]

(page 4) runtogold.com/images/D...
(audit statement on page 70-71) www.spdrgoldshares.com...

Consequently kohalakid your statement appears to be unsubstantiated, unverifiable and in opposition to recognized authoritative statements contained in the official documentation and in reports by recognized authorities.

Doc224899, the illusion of security and stability is there isn't it! You heard about the Royal Canadian Mint scandal right? Darn Canooks!

www.runtogold.com/2009.../

Nov 02 08:15 PM

[goodasgold:]

Good article, good summary of many important points and developments. I recently discovered
the views of "fofoa" ... read it for one of the most interesting and convincing writers on money and gold.

Nov 02 11:08 PM

[EE:]

GLD has been shorted.....so where are all those imaginary ounces?

Nov 03 08:50 AM

[USisCorrupt:]

Time to STICK a Fork in America! America is one Giant Madoff!

Nov 03 09:13 AM

[kohalakid:]

The GLD prospectus provides the method for the creation of shares. That method, the only method stated, is the delivery of gold bars to the custodian, or to a sub-custodian who then transfers it to the custodian. There is absolutely no mention of creation of a "basket" of shares by exchanging futures contracts or COMEX warehouse receipts or a forward contract promising delivery. The ONLY method to create shares is simple: you give us the gold, we give you shares. Do you read something somewhere that allows the creation of shares on a basis other than that?
While the prospectus itself doesn't use the words "we don't lease out our gold", the prospectus does say at the bottom of page 6 that "the trust does not generate any income". Leasing would produce income. If they have no income it doesn't sound like they are leasing. And the only reason to lease would be to produce income.
But the prospectus also states on page 7 that "the trust is not actively managed". I'd certainly include leasing gold as "active management". Also, the tax treatment of "collectibles", which is what the government considers bullion to be, discussed on pages 32-37, differs, I believe, from the tax treatment of futures or forward contracts. If GLD was using futures or forwards, the tax implications to individuals would be stated differently.
But they don't use futures or forwards because, again, the only way to create shares is by the delivery of physical metal. There is no provision or procedure anywhere in the prospectus that allows otherwise.
One has to go to the FAQ section on the GLD website to find the specific words, in FAQ #23, that says GLD's gold bars are "not traded, leased or loaned under any circumstances" and since there is no mention of the trustee, or sponsor, or custodian having the legal right to manage the trust in that way and since the trust generates "no income", I can't see any evidence they lease their gold.
Trace, having read the prospectus yourself, do you find anything in there that allows the creation of shares by other than physical delivery of gold bars??


On Nov 02 08:15 PM Trace Mayer wrote:

> kohalakid, please provide a credible and verifiable citation for
> your assertion that 'The GLD prospectus specifically says the fund
> does not lease gold and does not use futures or forward contracts.
> The only way to create GLD shares is to deliver physical gold to
> the trustee's custodian depository.'
>
> I have thoroughly analyzed the GLD documents for the prospectusly
> impaired:
>
> www.runtogold.com/2008.../
>
> www.runtogold.com/2009.../
>
>
> Additionally, in a report from Deloitte, a big four accounting firm
> who also performed the audit of GLD's 2008 10K, there is a statement
> in direct opposition to your assertion. On page 4 it states, "If
> the proposed ETF tracks a commodity, it buys ***or borrows*** certificates
> of ownership of that commodity." [emphasis added]
>
> (page 4) runtogold.com/images/D...
> (audit statement on page 70-71) www.spdrgoldshares.com...
>
>
> Consequently kohalakid your statement appears to be unsubstantiated,
> unverifiable and in opposition to recognized authoritative statements
> contained in the official documentation and in reports by recognized
> authorities.
>
> Doc224899, the illusion of security and stability is there isn't
> it! You heard about the Royal Canadian Mint scandal right? Darn
> Canooks!
>
> www.runtogold.com/2009.../

Nov 03 09:35 AM

[kohalakid:]

Your comments about the Deloitte statement is not a comment about GLD. It's a comment about ETFs in general by Deloitte and would apply to the oil ETF which holds futures, not physical oil. Deloitte discusses "proposed" ETFs. Clearly GLD is not "proposed", it already exists.
Besides, GLD holds only physical gold bullion. It's the only way to create shares.

And, as you stated, Deloitte audited the 10K for 2008.

Deloitte did not audit GLD's physical gold holdings. That audit was performed by Inspectorate Int Ltd in March of 2009.


On Nov 02 08:15 PM Trace Mayer wrote:

> kohalakid, please provide a credible and verifiable citation for
> your assertion that 'The GLD prospectus specifically says the fund
> does not lease gold and does not use futures or forward contracts.
> The only way to create GLD shares is to deliver physical gold to
> the trustee's custodian depository.'
>
> I have thoroughly analyzed the GLD documents for the prospectusly
> impaired:
>
> www.runtogold.com/2008.../
>
> www.runtogold.com/2009.../
>
>
> Additionally, in a report from Deloitte, a big four accounting firm
> who also performed the audit of GLD's 2008 10K, there is a statement
> in direct opposition to your assertion. On page 4 it states, "If
> the proposed ETF tracks a commodity, it buys ***or borrows*** certificates
> of ownership of that commodity." [emphasis added]
>
> (page 4) runtogold.com/images/D...
> (audit statement on page 70-71) www.spdrgoldshares.com...
>
>
> Consequently kohalakid your statement appears to be unsubstantiated,
> unverifiable and in opposition to recognized authoritative statements
> contained in the official documentation and in reports by recognized
> authorities.
>
> Doc224899, the illusion of security and stability is there isn't
> it! You heard about the Royal Canadian Mint scandal right? Darn
> Canooks!
>
> www.runtogold.com/2009.../

Nov 03 09:50 AM