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Hedge fund manager John Paulson is opening a new gold fund seeded with a quarter billion of his own wealth. With Paulson the largest shareholder in the SPDR Gold Shares, it’s a timely reminder that the gold ETF turned five today. Happy Birthday, GLD!

 

Reuters provided some detail on the Wall Street Journal story, which cited three investors who had attended a meeting about the new Paulson fund. The fund will apparently open on 1 January.

We noted last month that Paulson had scored $500 million on his AngloGoldAshanti [AU | ANG] deal.

SPDR Gold Shares took a while to lift off with law suits, SEC nitpicking, and backbiting galore, but it has been a profound success since. Perhaps the greatest success is in the fees the managers are raking off especially as gold prices climb.

Managed by State Street Global Advisors on behalf of the World Gold Council, the fund todayreported an inventory of 35.8 million ounces (1,114 tonnes) worth $41.1 billion.

The fund is currently skimming the equivalent to $15 per ounce in fees and expenses. Obviously that would have to be weighted, but it provides an indication of how rich the fee flow is.

The fund reports selling $0.03466 of gold per share to fund its expenses and fees. That translates to some $13 million a month, or a handy $150 million a year at current levels.

The question for gold bugs now is if the ETF is signaling trouble ahead?

Have a look at the chart below and see how little accumulation has occurred since June when the gold price commenced its recent upward phase.  It’s a very different response from the market compared with the heavy accumulation of GLD between November 2008 and April 2009.

That looks like reason for some caution.

Disclosure: No Position

Brazil has received some lavish praise in recent months. The November 12 edition of the Economist is typical of the press attention it is garnering. However, the country’s late October decision to tax foreign equity and bond inflows makes the loudest statement about the country’s potent offshore appeal.

 

To see the charts and tables accompanying this article, please click here.

Back in 2003 Goldman Sachs coined the BRIC acronym to cover the countries it bet were growing to major power status. Brazil, Russia, India, and China have certainly lived up to that billing, but it should not be underestimated how risky the call was back then.

Russia and Brazil had both recently offered investors a sovereign default beating. Brazil was a prototypical Latin basket case with a succession of clownish leaders, crippling inflation, and any number of wealth destroying policies. Indeed, it was locked into stagnant relationships focused on the region, including what might be characterized as a virtual agreement with Argentina not to outperform each other.

The Economist mistakenly ignored the international context for Brazil’s recovery in the 1990s. Brazil was forced, like many other emerging markets, to adjust to the reality of globalization, driven by free market ideals under the Washington Consensus, unleashed in the wake of the termination of the Cold War.

It was no longer convenient to cultivate victim status because one superpower stopped being a sugar-daddy, and the other stopped being much of anything. This was especially true for India and Brazil who had played off the Cold War rivalry, and whose intellectuals thrived on the rubbish of core-periphery exploitation as an excuse to engineer mass poverty.

And so Brazil grew up and invented a new currency to match its maturity.

Add an ‘S’

One additional country was similarly thrust onto the global stage before it was necessarily ready for it – South Africa.

Indeed, some have added South African to BRIC to make BRICS. However, the relatively small size of the population and economy has made it less and less common. There are additional reasons related to general pessimism about South Africa because of several political dramas.

That aside, South Africa and Brazil share many similarities.

Negatively, both are highly stratified along race and class lines. They share high unemployment rates, staggering poverty, world leading levels of violent crime, and extensive petty crime. Their governments are reluctant free marketeers; there is a strong affection for Marxist interpretations of mostly everything because of their colonial histories.

Positively, they enjoy relatively stable climates and geologies that contribute to low cost bases. Both have vibrant and productive middle classes that punch above their weight globally given the constraints they chafe against. Their middle classes consume luxury goods in greater proportion to richer countries. That’s because savings are disincentivized through taxation and inflation, and also because of capital controls on citizens and business.

Both countries have won the right to host Soccer World Cups (SA in 2010, Brazil in 2014), both have pitched for the Olympics though only Brazil won its bid.

Both countries are richly endowed with a variety of minerals which have provided a base for industrial diversification and global integration. They also share many national security concerns and are nuclear powers, though Brazil is advancing to weaponization whilst South Africa is retreating from it. The countries are gravitating toward each other in a South Atlantic axis, especially as Brazil seeks to penetrate Africa’s former Portuguese colonies but still requires South Africa’s regional influence for leverage.

Similar but different

South Africa does not have oil and gas to speak of, but Brazil does not have much in the way of precious metals. South Africa does not have abundant water, but Brazil does not have abundant coal supplies. Each has complementary agricultural assets, though Brazil clearly has more ag potential.

And so we could go on. The point is that the countries and societies are surprisingly similar despite their very different cultures and histories. What’s more, the economies have been marching in some degree of economic lockstep.

We chose 1990 as a convenient marker for the new era of globalization. As the charts (see charts at end of article) make clear, both countries have followed a surprisingly similar track. Surprising because Brazil has benefits of scale and location that outweigh South Africa’s advantages. Indeed, were it not for South Africa’s higher birth rate, or rather immigration rate, gross national income per capita would have grown faster.

Also intriguing is the quite close tracking of the currencies – they share very similar trend lines. Whilst both countries are dominated by commodity exports, Brazil has many more manufactured exports than South Africa. It is also notable that both countries managed impressive GDP gains despite their currencies appreciating. The rand does seem to be a leading indicator for the real.

Market overlaps

Their stock markets also share several similarities (see tables at end of article).

Unfortunately, South Africa’s more oppressive capital controls have reduced opportunities for local investment through Depository Certificates. It has also chased off a number of companies that have moved their headquarters abroad. That has deflated the value of the Johannesburg Stock Exchange relative to the Bovespa, but there is some parity when the emigrants are added to the fold.

There is a good case to be made for treating South Africa and Brazil as a single investing entity. The similarities suggest that a portfolio built on the combination thesis would provide additional diversification and exposure to a greater range of emerging market high yield stories in several industries. As a combination, South Africa and Brazil could mimic a larger and more diversified market.

Splitting up?

That is all good and well, but how will the next two decades shake out for each country?

There is a strong case to be made that Brazil is about to step into a new era of sustained high growth rates that could eclipse South Africa. The primary concern for South Africa is the risk of a Chavez like lurch to the left should its populist factions gain sway. Brazil seems to have settled into the role of a more disciplined democracy that has dispensed with the economic claptrap of prior decades.

Another concern is the steady decline in South African gold production. There is little to substitute for the gold, especially whilst platinum group metal prices remain depressed. Compare that with Brazil’s massive oil and gas discoveries that will come on stream in the next decade, along with substantial new or expanded ag projects.

Brazil will also be building into the World Cup and Olympics whereas South Africa is coming off its infrastructure surge that spurred recent growth.

Brazil’s fiscal condition has been substantially repaired, with debt much reduced. South Africa is hinting about going the opposite way as the ruling party seeks to buy favor and pay for patronage.

Finally, Brazil is in a mutual courtship with China. Brazil has the resources and scale to meet a good portion of China’s demand. South Africa is interesting to China, but Beijing’s investment flows to Africa confirm that it is not critical; mostly useful as a trade partner.

Both countries may realize and accept that a formal alliance would be mutually beneficial, but we doubt it. So take care if you are convinced that this is a good combination trade – timing will be everything.

Disclosure: No positions

 ST. LOUIS (Alpha Found) — Ambrose Evans-Pritchard, writing for the UK Telegraph, knows how to craft a headline for maximum attention. He may have outdone himself this time with “Barrick shuts hedge book as world gold supply runs out”.

There is a mild clarification in the sub-header, “Global gold production is in terminal decline…”. But it’s still very sensational.

The reality is that because gold is so valuable, virtually every ounce that has been liberated from the earth has access to the market. Price determines the sources and volume of supply, and it determines the sources and volume of consumption.

Whilst newly mined gold is declining, it’s still to early too say it’s terminal. However, it is true to say that for the last decade it has been very clear that gold producers have not been finding gold in the quantities and concentrations they used to.

If gold miners cannot supply what the market demands, then scrappers and substitution will, and prices will adjust accordingly. What Evans-Pritchard’s article points to is that the supply-demand balance is shifting toward higher prices that will stimulate alternative sources to meet demand.

It’s an important change in the market compared with the 1980s and 1990s which saw gold production rocket higher on new technologies and impressive discoveries. It has been a long, dry spell for explorers since then.

 

 

 

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 ST. LOUIS (Alpha Found) — Two of the most awaited invest reports have hit the market almost simultaneously, and are starting to shape it. GMO’s Jeremy Grantham released a twofer with his third and second quarter letters bundled together.PIMCO’s Bill Gross released his monthly letter for November.

It’s particularly interesting against the backdrop of the recently conducted Bloomberg global poll.Respondents chose, predictably, Warren Buffett as the wisest man of the markets, followed closely by Gross. In fact, in the US, Gross was regarded as Buffett’s equal.

We don’t discount Gross’s wisdom. He ranks very highly in Alpha Found’s Investor Reporting Analytics, but we do believe it has a lot more to do with marketing than raw appeal. After all, the same respondents placed Nouriel Roubini third despite his recent elevation and lack of a consistent track record.

For our money, Grantham’s wisdom is more accessible, his thought more structured, his forecasts more specific, and his analysis more rigorous than Gross’s.

It’s not strictly fair to set them side-by-side because they have different emphasis. However, both are used by the market to divine the future because they inevitably look to the future to justify part of their past performance. Let the comparisons begin.

Let’s start with the soft stuff and then move to the hard stuff. If you’d just like to see visualizations of their work, scroll down.

Style

• Both gurus use humor, often sarcastic though not gratuitous.
• Gross can be a show off with literary and pop-culture analogies.
  • November’s effort does not work well with the opening from Shakespeare (to illustrate what, exactly?) and ending with Dylan Thomas.
• Gross attempts personal, folksy, ‘regular-guy’ introductions and conclusions that indicate his intended audience is the retail investor and media market.
• Gross maintains continuity between newsletters by repeating or amplifying key themes and topics.
• Gross is especially successful in conveying a sense that he is sharing shop secrets with the reader. Very effective.
• Gross generally speaks to his ‘book‘
• Grantham embraces a wider scope of topics and is utterly unafraid to be political.
• Grantham is loyal to ideas over opportunities and circumstances.
• Grantham is self-deprecating about the consequences of being a value investor.
• Grantham suffers a tension between his commitment to value investing (long-term discipline) versus his disdain for inflexibility (situational responsiveness).
• Grantham is writing for a knowledgeable and sophisticated audience that is not easily distracted.

Substance – Where they Agree

• Both are in synch on the psychology and motivations for the sharp recovery after last year’s capitulation.
• Both are in synch that the recovery has reached its apex for now.
• Both attack author Jeremy Siegel for his book Stocks for the Long Run. Grantham calls it dangerous. Gross calls its premise a fallacy. Ouch.
• Both agree that the recovery will look very different from prior experiences – an intractablelong-term malaise. Grantham describes it in Biblical terms as ‘7 lean years’. Gross calls it the New Normal, though we call it the Old New Normal.
  • Grantham notes that US GDP growth has slipped below its 100 year trend of 3.5%, and has been decelerating sharply.
  • Gross warns that nominal US GDP growth needs to be 4%p.a. just to stay afloat.
• Both agree that the process of delevering is incomplete.
  • Gross foresees a long period of delevering to reset to asset price appreciation matched with GDP growth rates.
  • Grantham warns that we must consume less, pay down debt, learn to be less capital rich, and global trade balances must readjust.
• Emerging Markets will offer higher yields and profits than developing markets.
  • Grantham fears an emerging market bubble must eventuate.
  • Grantham fears China ’stumbling’.
  • Gross praises China for spending its stimulus on ‘real things’.
• Assets, especially in developed markets, are overvalued by several measures, especially thecult of the market.
  • Gross highlights the artificial stimulation of assets via leverage, securitization, and the belief in asset appreciation rather than production of goods and services.
  • Grantham warns investors to beware of the unemployment quick-fix that is providing short-term corporate profits.
• Interest rates will remain low.
  • Gross undertook no little amount of advocacy aimed at the Fed to keep rates low, which helps PIMCO.
  • Gross did warn that debt instruments offer little growth in future income or value appreciation.
• Japan is instructive for the current situation in the US.

Substance – Where they Diverge

• Grantham makes specific forecasts whereas Gross makes general ones.
• Grantham is scathing of the ‘Teflon men’ who remain employed despite having to beg the government for life support. But he is more scornful of the government sorts for agreeing to bail them out, and heaping new risk upon old risk.
• Gross reverts to utilitarianism and says the spending, loose credit, and cheap money are necessary to prevent Armageddon.
• Gross presents an ends justifies the means view of the present circumstances. Grantham warns that the means are so blighted that the end will not only be unjustified, it will be worse.
• Grantham highlights the rush to risk driven by the Fed – again, and as if the last lesson wasn’t hard enough.
• Grantham reminds us of ‘co-ordinated incompetence‘ such as the Smoot Hawley fiasco. Oddly, he does not see the danger advancing on the horizon of mass co-ordinated incompetence in the form of health care ‘reform’, rising taxes, increased regulation, and expanded entitlements.

 

Disclosure: No positions

ST. LOUIS (Alpha Found) — We have been surprised by the limited attention paid to the passenger rail strategy  that may lie behind Berkshire Hathaway’s [BRK.A], aka Warren Buffett, $44 billion takeover of the 77% of Burlington Northern [NYSE:BNI] that it did not already own.

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