Insights – A tale of two Buffetts
August 26, 2020
Gold Market Update
Gold prices dipped to USD $1934 last week after 9 straight weekly gains in a row.
Prices settled slightly lower for the week as profit-taking and technical selling gained the upper hand.
The sell-off looks to be an extension of the market’s reaction earlier in the week when the Fed released minutes revealing it would forego yield curve control for now – a policy that would have ensured lower interest rates at the long end of the rate spectrum.
Every probe lower in the gold price has been met by strong bargain-hunting buying, which seems to be consistent and strong enough to be coming from larger pools of capital (banks, governments, and other large investors).
Gold price this month in AUD/OZ
This week in our blog we discussed the news that legendary investor Warren Buffett was buying shares in gold mining company Barrick Gold.
In the article, we also quoted Buffet’s much less-famous father Howard Buffett: “The owner of gold redeemable currency has economic independence. He can move around either within or without his country because his money holdings have accepted value anywhere.”
Gold in the News
Here are a few articles trending on the subject of gold.
First, the “strong bull” case: Frank Holmes, CEO and chief investment officer of U.S. Global Investors, says “it is quite easy to see gold going to $4,000”: https://www.cnbc.com/video/2020/08/10/gold-could-hit-4000-in-next-three-years-us-global-investors.htm
Wilmington Trust, with USD $114 Billion under management, added gold to their recommendations last week. “We’ve had a really rapid run in the equity market. If we did see a little bit of risk being taken off the table by investors, we would expect gold to do well. But it also can do well in … a really rapid recovery.” https://www.cnbc.com/2020/08/23/wilmington-trusts-meghan-shue-flags-cyclical-trade-opportunities.html
Professor Richard Werner is one of the first academics in the world to bring attention to the fact that banks create money from nothing. This is something even The Bank of England would not admit for nearly four hundred years (they finally fessed up officially in 2014). We’re also big fans of the documentary based on his work entitled “Princes of the Yen”. His work puts the comparison with gold, which cannot be printed by governments or bankers, into high relief. https://thenewdaily.com.au/finance/finance-news/2017/01/03/how-banks-create-money/
This week we highlight the opinions of Mohammed El-Erian. El-Erian is the former CEO of PIMCO, the world’s largest bond investment firm, where he was responsible for setting the strategic direction of the firm and leading its operations globally.
El-Erian has served on several boards, including the U.S. Treasury Borrowing Advisory Committee, the International Center for Research on Women, the IMF’s Committee of Eminent Persons, and the Peterson Institute for International Economics. He is widely considered to be one of the world’s foremost macro-economists.
Last week El-Erian wrote a Financial Times editorial in which he outlined his views on gold:
Gold has something for everyone
“Until recently, the rapid rise in the price of gold had more to do with opportunistic financial trading than any larger structural investment theme, let alone a drop in physical supply or an increase in industrial use. Now, the metal is seen to offer something for everyone”.
Gold a more attractive substitute for government bonds
“You need only look at real yields on government bonds after adjusting for inflation to see why so many investors are buying gold as a long-term option”.
“Contrary to what most textbooks would suggest, the recent drop in nominal yields has coincided with a rise in inflationary expectations. This makes gold a more attractive substitute for government bonds in two ways:
- Investors who opt for gold forgo less income than they would if bond yields were higher.
- They also hedge against what would be a dramatic loss in the value of those bonds, should central banks stop trying to keep interest rates low by flooring official rates and buying massive amounts of market securities”.
El-Erian gave a balanced and wide-ranging interview on Bloomberg last week, in which he touched on the many reasons why investors are turning to gold in the current market and economic environment.
Watch the Bloomberg interview with Mohammed El-Erian:
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