Gold bugs of the world, unite! You have nothing to lose but your exposure to fiat currencies.
Or so says leading hedgie and Wall Street throw back Paul Tudor Jones, who in his latest missive to investors has gone soft at the knees for the yellow metal:
I have never been a gold bug. It is just an asset that, like everything else in life, has is time and place. And now is that time.
Rousing stuff indeed.
The world, according to PTJ, is looking more and more like the 1970s every day — and like many other recent gold converts he fears that countries could be tempted into monetising their mounting global fiscal deficits, thus further destroying the value of paper cash.
One valuation metric used by Tudor Jones and friends is the price of gold versus global money supply, as measured by M2 of the G-20 nations.
By this metric gold appears cheap on a historical basis, especially when compared to the 1970s and ’80s, as the value of gold should increase as its scarcity, measured against paper money, increases.
Another bullish gold signal for PTJ is the shift of central banks and governments from being net sellers to net buyers during the second half of 2009.
“Total international reserve assets,” he informs his investors, “have quadrupled over the last decade, primarily from the accumulation of global money (Chart K). However, the percent of total reserve assets held in gold has declined markedly (Chart L)”.
G7 central banks currently have around 35 per cent of their total reserves in gold, but the remaining G20 nations only have 3.5 per cent of their assets in gold — in spite of the fact that these same countries have made up close to 50 per cent of the increase in global reserves over the last five years.
If the the non-G7 central banks want to shift their gold allocation to 10 per cent, this would require the purchase of 370m troy ounces — or around 20 per cent of current, non-official, above ground supplies.
If the non-G7 central banks want to match the current c.35 per cent gold position of the G7 nations then they would have to purchase 1.3bn troy ounces, or 65 per cent of all non-central bank gold, according to Tudor Jones’ research.
All of which adds up to the fact that PTJ, like many other big name hedge fund managers, has caught the gold bug. Bad.
Here’s his conclusion:
In our opinion, the scope for increased investment demand over the coming years is much stronger than the potential for 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.
(H/T Dealbook)
Related links:
Credit Suisse (still) ? gold – FT Alphaville
The future of hedge funds – FT Alphaville
Paul Tudor Jones – The Trader – FT Alphaville
The Trader vs Goldman Sachs (really) – FT Alphaville