Why the smart money is buying gold

Big money managers are buying gold. They believe that the experiment with paper money has failed and that the world will return to the gold standard.

Under a gold standard dollars ought to be covered by gold which would mean the price of gold would have to go much higher. To calculate how high this would be you take the monetary base and divide it by the government's gold reserves. The monetary base is currently $2.645 trillion and gold reserves are 8133.5 tonnes or 261.527 million troy ounces. 2,645,000,000,000/261,527,000.00 = $10,113/ounce. The price could go ever higher. In 1980 the money supply amounted to a “mere” $133.425 billion. A full gold backing would have required a gold price of some $500. However, gold shot up to $850. A comparable overshoot would give a gold price of $17000/ounce today.

Indirectly gold is becoming a medium of exchange through institutions allowing it to be used to advance credit.

  • J.P. Morgan Chase & Co. announced on February 7, 2011 that it will accept physical gold as collateral for investors that want to make short-term borrowings of cash or securities.
  • In 2009 the clearing house CME allowed physical gold to be used as collateral for margin requirements on all exchange products,

Masters of the Universe

This is why many of the top money managers in the world are buying gold. You can find out the latest purchases and sales of gold by hedge funds from this site. Type GLD in the stock ticker box and press the search button. Check also for IAU which tracks the gold price as well.

  • John Paulson (net worth $12 B) is the largest holder of GLD owning 8.7% of the fund. He has nearly 17% of his portfolio in this holding.

  • Gold and precious metals represent the largest commodities exposure of hedge-fund giant Tudor Investment Corp managed by Paul Tudor Jones (net worth $3.2B)

  • Thomas Kaplan (net worth $1.7B) of Tigris Financial has gone further than perhaps any other major investor, betting the majority of his wealth on gold and other precious metals. He has gold holdings of around $2 billion.

  • Eric Sprott (net worth $.98B) keeps 60 to 70 per cent of his net worth in precious metals. He especially likes silver.

  • Kyle Bass's Hayman Advisors LP holds more than 15% of its portfolio in gold and other precious metals.

  • Eton Park Capital, headed by former Goldman Sachs trader Eric Mindich, invests in gold. GLD is the fund's biggest holding.

  • Greenlight Capital, run by David Einhorn, has reversed a long-time aversion to gold which now represents their biggest holding. Greenlight has shifted their gold position from GLD to physical gold, citing cheaper fees for storage.

  • Jim Cramer's Fantasy Stock Portfolio has both GLD and SLV.

Seth Klarman of the Baupost hedge fund says:

“Gold is unique because it has the age-old aspect of being viewed as a store of value. Nevertheless, it’s still a commodity and has no tangible value, and so I would say that gold is a speculation. But because of my fear about the potential debasing of paper money and about paper money not being a store of value, I want some exposure to gold.”

It is worth noting that George Soros recently sold all his gold and gold related assets. Previously he had nearly 20% of his assets invested in the SPDR Gold Trust ETF (GLD) which was his largest single holding.

Further information on ETF's can be found here.

Follow the Money

It is often more interesting to note what hedge fund managers do rather than what they say. The Securities Exchange Act of 1934 is very useful in this regard. Section 13(f) of the 1934 Act requires institutional investment managers with investment discretion over $100 million or more to file quarterly reports disclosing their holdings. When a registered investment advisor acquires beneficial ownership of more than 5% of an equity securities it must file a report on Schedule 13D with the SEC.

Examination of these documents can be very rewarding. Sprott Asset Management is one of the biggest owners of silver in the world. The 13D filings show that Sprott Asset Management sold 1.6 million shares of PSLV resulting in proceeds of $35 million between April 18-25. Eric Sprott personally booked a gain of $6.4 million. The price of PSLV then fell by more than 20% over the next few days. At the same time Eric Sprott was giving interviews predicting that the price of silver would rise to more than $100 per ounce.

Below we give all the latest filings by Sprott Asset Management to the SEC.