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Fund managers often shy away from gold. They believe it is better to invest in “productive assets” rather than gold.

29 Jul 2011

NEW YORK (Commodity Online): Fund managers often shy away from gold. They believe it is better to invest in “productive assets” rather than gold.

Would you rather have a 67-foot gold cube made of all the bullion in the world, or all the farmland in the US, ten Exxon Mobils and $1 trillion in walking around money? - Warren Buffet

His point being that Gold is not a productive asset. It just sits. Its value is entirely dependent on the whims of buyers.

However, things are changing. As the world economic outlook grows weaker and weaker; the drive for these funds becomes not capital appreciation but capital preservation.

“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can’t print any more of” said Kyle Bass, the well-known Hayman Capital hedge fund manager

Institutions and Large managed funds keep about 1% of their total assets in gold. But “If these colossal funds start getting the idea that holding 5% of their portfolio in gold is more conservative and intelligent than holding the current average of 1%, what will this mean for gold demand? The answer is obvious and the ramifications huge” says Ron Fricke, President of Regal Assets.

If these endowments and private foundations were to increase their conservative gold holdings from 1% to a mere 5%, there would be a requirement of over 1000MT of gold. That is more than 200% of China’s yearly production!

According to a report from the Gold Council, the total supply for gold in 2010 was 4155 tonnes. An additional 1000 tonne demand would obviously skyrocket the prices and send the markets into a buying frenzy.

The University of Texas, the second largest endowment fund in the US, added about half of a billion dollars worth of gold to its portfolio in May, on top of the half-billion it purchased several months prior. Is this an indication of things to come?

“Basically you have a very orderly rate of increase. If you go back to 1979 gold doubled in a single year, well it hasn’t doubled in any year in the last ten years. So as this move is ending it’s conceivable to me that you are going to see a doubling of the gold price from some higher level, but I feel very good about the sustainability of the current action in the gold price” said John Hathaway the prolific manager of the Tocqueville Gold Fund on King World News.

“Gold is up (roughly) 13% year to date, if you tack on another 10% in the second half that is not unsustainable in terms of the macro picture that I see. What’s going to drive it (gold) crazy is when institutional buying starts to take place, and we really haven’t seen that (accelerated) sovereign wealth and (accelerated) central bank buying. That still lies out there and that’s the fuel that’s going to get the gold price up to numbers that I’m almost afraid to mention on air or in print.” He went on to add.

 


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COMMENTS (4)
Roguetrader
05 Aug 2011
Hey wanderlust, your calculation is wrong dude. you havent adjusted for inflation. the author said "worth" $4. also buffet meant it when he said that gold is not a productive asset. however, i dont know how one could calculate stock returns as mentioned in this article, since there are many number of stocks. maybe we shuld read the book.
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Writer
01 Aug 2011
Hi there, There is a difference between a productive asset and a valuable asset. what "not a productive asset" means is that gold does not produce anything. Companies pay dividends on the basis of goods produced that is consumed by the economy. The shares of a company increases only if it produces. on the contrary, gold does not produce anything. It does not mean its value is not increasing. its value increases when economic production goes down. Gold does not have to "produce" anything. "whims of buyers" is said in this context. Importantly note that, everything mentioned considers a time period of 20-30 years. Plus stocks have always outperformed gold. Gold outperforms stocks in a short term in a bad economy. Mr Buffet is an investor, he invests for 20-30 years. Stocks are the best option for such prolonged periods as he has said. commodityonline/news/Historical-performance-Stocks-beat-gold-other-asset-classes-41238-3-1.html Even considering 200 years starting 1800, stocks are more worth today than gold. Since 1802, A $1 investment in stocks would have grown to $700,000 when gold would be worth a paltry $4.(Stocks for the Long Run -2008 Edition) I hope this clarifies the issue. thank you for your comment.
Wunderlust However you wish to interpret it, the Buffett comment that you used does not imply that gold is "not a productive asset" but that there is a small amount of physical gold available for investors to hold. Your comment that gold's value "increases when economic production goes down" is oblivious to the many instances when gold prices increased along with rising economic growth, specifically from 2001 to 2004 and 2009 to 2010, among other periods of time. Your statement is further discredited by the most recent time period in which gold prices rose amid global economic decline, between 2008 and 2009, among others. Next, your statement that "stocks outperform gold" is not quite true because NOT ALL stocks increase in value over a long period of time, and many are big losers (by the way, I invest much more in the stock market than physical gold and I never said anything negative about investing in stocks). Also, I'm not quite sure if your intention is to mislead folks or if you're just making up figures as you go along, but gold's price has gone up from $19.39 in 1802 to about $1640 today, representing an 8,357% increase.
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Wunderlust
31 Jul 2011
You clearly missed the point of Buffett's comment. He was trying to convey the very small amount of physical gold available for investment, not that gold is an "not a productive asset." Furthermore, any notion that gold "just sits" exudes ignorance considering the enormous growth in demand for the physical metal and increase in its value. Equally dumb was your insinuation that gold is peculiar because it is "dependent on the whims of buyers." I'll remind you that the value of every asset and investment depends on the actions of buyers and sellers. I sure hope you weren't paid to write this article! If so, please provide poor Commodity Online a refund.
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Frank
29 Jul 2011
Your statements have ignored a huge factor, which is that gold mining shares have crashed overt the last few months. This will eventually cause investors to sell all their shares, which will then kill gold gold as an investment vehicle. Today is a typical example. The POG soared at the opening but gold shares declined just as dramatically as gold bullion rose. Also, if you continue to ignore this you will be compounding the problem. Frank
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