spent the past few years doing their best to increase the value
of our assets they are becoming increasingly concerned with how
to protect the assets that we already have.
Rob Weinberg, the new head of Institutional Investment at the
World Gold Council, making an observation at the Council's 15th
annual meeting (May 18th 2001) about the prior day's surprisingly
large turn out by nearly 100 fund managers who had come to listen
to their case for gold.
He was referring
to recent concern expressed by many global pension fund managers
whose passively managed (or index tracking) portfolios, the upshot
of a 50 year paradigm shift, have turned into a one way bet. It
is a candid analysis of the global investment environment, and surprisingly
bullish for gold.
In the analysis,
he hones in on a recent report published, no… not by Professor Nuberger,
but by Graham Birch of Merrill Lynch Investment Managers,
who is responsible for the management of the sole remaining gold
fund in the UK. Mr. Birch points out that in addition to the
enormous growth in passively managed, indexed funds from 1995 through
2000, many of the actively managed funds have also adopted stringent,
index related benchmarks. Importantly, Graham notes that gold does
not feature in any of the major indices or benchmarks. In other
words it is being ignored (italics are Rob Weinberg's words).
simultaneously discusses the likelihood that the global financial
environment is in the "throes of another paradigm shift"
- where earnings may no longer outpace the rate of global inflation,
for instance, and where long run investment returns regress to their
mean. And if so, does gold have a place in the world of portfolio
We only object
with one sentence in the 4 page report… you'll spot it… it sticks
out like a very sore thumb. Otherwise, it is quite bullish (for
Markets and Opportunities for Gold:
But wow!! How
many passively managed global pension funds, which have little or
no gold in their portfolios, are there? We've heard reports of fund
buying for several days now. Is this only the beginning? Probably
Goldenbar Subscriber Question:
neighbor trades foreign currencies. He says the Dollar will not
crack for the simple reason that no one wants the Euro or the
Yen as the obvious alternatives. The dollar is the lesser of three
evils if you will. Do you think that this is possible or are the
(deteriorating) economic factors behind the dollar - low
US economic growth, higher inflation, lower interest rates and
deficit spending - just too powerful to stop the U.S. Dollar from
question, heh? As far as we can tell, our hypothesis has been strengthening,
so we do expect to continue to see deterioration in real economic
growth, and much higher inflation. Over the past two quarters, the
rate of inflation (measured by the implicit price deflator) has
outpaced the real rate of growth implicit in the US GDP report.
To the extent that the government's inflation data (the CPI, PPI,
and the implicit price Deflator) lags reality, as it was designed
to, it functions as a fine manager of inflation expectations. In
this case, the data is presumably telling a six-month-old story.
And since there is reportedly a six-month lag before the effects
of a rate cut set into the economy, the first in the series of rate
cuts this year will manifest sometime in June. Why, that's this
while the government's figures won't reveal these effects until
December some time, we believe that fixed income investors have
caught on to the obvious trends. So yes, we see higher US debt market
yields, for various other reasons as well.
question is, what is the Fed gonna do about it? It will have to
follow the market, as always. That portends a reversal of monetary
policy sometime this year. But higher interest rates need not contract
the money supply. In fact, they hardly ever have, by themselves.
They can exert an influence on its rate of growth, but there are
other factors that affect the rate of growth in money supply, perhaps
more today, such as the business cycle or the credit cycle, or maybe
even the dollar itself. By credit cycle, we are referring to secular
trends in the interaction between borrowers and lenders - and to
the extent that the spread between short and long term interest
rates allows an incentive for lenders to lend, they will, as much
as borrowers want to borrow.
the multi factor combination of higher nominal interest rates, slower
real growth, the subsequent prospect for a surprise decline in government
tax receipts, the determination of the current administration to
expand outlays over the next two years, and the ultimate correction
in equity risk premiums will undeniably raise the probability of
a budget imbalance.
the extent that the dollar's external purchasing power is dependent
upon prospective (US) economic performance, the higher inflation
rates portend a return to a reliance on fiscal policy - or deficit
spending - which spending power may be broadly perceived to have
been saved up now, in order to defend the dollar.
to the extent that the dollar's foreign (external) purchasing power
is reliant on the perception of economic stability, God only
seems to know that it cannot deliver. So let's discuss the all-important
dollar, which is supposed to be as good as gold, relative to all
the June 1 Subscriber issue of the GIC:
The battle to contain inflation expectations rages!
the ECB bribe speculators, or reward investors?
can we expect market psychology to adjust to a potential reversal
in the primary trend of gold prices?
some perspective on how market's have had to accept the unacceptable
in the past.
does the shifting economic paradigm in our reader's question conflict
with the goal of the US Treasury; the strong dollar, which today
means the foreign exchange rate? Is it really the lesser of three
will Dollar/Gold break down - in other words, when will gold prices
bust through the mid $300 handle?
Edmond J. Bugos
The GoldenBar Global Investment Climate is not a registered
advisory service and does not give investment advice. Our comments
are an expression of opinion only and should not be construed in
any manner whatsoever as recommendations to buy or sell a stock,
option, future, bond, commodity or any other financial instrument
at any time. While we believe our statements to be true, they always
depend on the reliability of our own credible sources. Of course,
we recommend that you consult with a qualified investment advisor,
one licensed by appropriate regulatory agencies in your legal jurisdiction,
before making any investment decisions, and barring that, we encourage
you to confirm the facts on your own before making important investment