Follow the “Smart Money” – Legendary Billionaire Buys Gold

Release Date: 
Friday, August 21, 2015

Gold and Silver Prices
Gold prices hit a six week high this week driven by safe haven buying by worried investors.

“Gold prices were higher for the third day in a row on the London spot market Friday, buoyed by sustained safe-haven demand as risk-averse investors continued to pile into the metal to hedge against rising market uncertainty… Markets have been beset by volatility of late due to a cocktail of factors that have prompted cautious investors to sell their riskier assets and buy into gold.

“Dovish minutes from the Federal Open Market Committee Wednesday left the market less sure of a September interest rate rise in the U.S. Additionally, the surprise devaluation of the yuan by the People’s Bank of China last week, patchy economic growth in key regions, and plummeting prices in commodities across the board have all spooked investors… The yellow metal is traditionally considered a safe place to stash cash as the metal tends to hold a steady level of value.” (“Gold Rallies to Six-Week High as Safe-Haven Buying Continues,” WSJ, 8/21/15.)

Gold finished the week up $46.40, closing at $1,161.10. Silver prices closed the week at $15.44, up $0.09.

Follow the “Smart Money” – Legendary Billionaire Buys Gold
The CEO of U.S. Global Investors, Frank Holmes, told investors to follow the smart investing of prominent billionaires such as legendary hedge fund manager Stanley Druckenmiller who recently acquired gold.

“I always advise investors to follow the smart money… Druckenmiller has commented in the past that if he sees something that really excites him, he’ll bet the ranch on it… Between 1986 and 2010, the year he closed his fund to investors, Druckenmiller consistently delivered 30 percent on an average annual basis. Thirty percent a year! That’s a superhuman, Michael Jordan-caliber performance…

“During his career, the man has made some now-mythic calls… And now he’s making a call on gold. The $323-million investment is currently the single largest position in Druckenmiller’s family fund…His conviction in gold can be traced to his criticism of the Federal Reserve’s policy of massive money-printing and near-zero interest rates. Such ongoing low rates push investors and central banks alike into other types of assets, including physical gold… This is the case in good times and in bad….

Druckenmiller [isn’t the only one adding to his] gold positions right now… [T]he Chinese government is now reporting its gold consumption on a monthly basis. In July it purchased 54 million ounces. This is significant in the country’s march to become a world-class currency that’s supported by the International Monetary Fund (IMF) for special drawing rights.” (“These Billionaire Investors Just Made Massive Bets on Gold and Airlines,” Kitco, 8/20/15.)

Chinese Currency Devaluation Will Send Gold Prices Higher
Market commentary and “investment guru” Mark Yagalla believes China’s devaluation of its currency will lead to greater Chinese investment in gold, currency wars and higher gold prices.

“[O]ne can see that there is a huge amount of support around the $1,080 level. A solid base has been built and what can't go lower must go higher. China's devaluation of the yuan was just the catalyst that gold needed to break out to the upside… Gold is a currency and is used as a hedge against inflation and more importantly - currency devaluations… [T]he recent yuan devaluation will drive gold priced in yuan higher. This will come from increased Chinese demand looking to hedge their currency exposure…

“I've been a U.S. dollar bull; however, I am starting to reconsider my position… I believe China will devalue the yuan further, and we'll see more of what we saw this week as a result. In other words, a stronger euro, stronger gold prices, and a weaker U.S. dollar index…

“I do believe we are going to see buyers coming back into gold and higher prices over the long run. While we may indeed test the $1,080 level again in the short term, I do believe buyers will emerge and defend that level again. I think the currency wars are here to stay and this will drive gold prices higher. If anything whether you're a U.S. dollar bull or bear, it's probably wise to invest some of your non-U.S. dollars into some gold.” (“Further Devaluation Of The Yuan Will Drive Gold Prices Higher,” SeekingAlpha, 8/14.15.)

Gold Undervalued, Signs of Tail Risk – BofA Merrill Lynch Survey
Bank of America Merrill Lynch’s survey of more than 200 fund managers with more than $500 billion under management disclosed serious concerns about the world economy and tail risks similar to the post-Lehman Brothers collapse.

“The Bank of America Merrill Lynch survey of what fund managers are doing with their money shows a few similarities between the markets of today and the post-Lehman collapse of 2009. Investors are full of "bearish sentiment" with two-thirds saying a Chinese recession and an emerging market debt crisis are the two biggest tail risks out there. Tail risks being events you don't expect to happen, but are possible. Cash holdings are up at 5.2%, near the record 5.5% seen in the wake of the global financial crisis, while a slim majority say gold is undervalued.

“The last time the gold market had signal like this it was 2009 and the yellow metal more than doubled in price within two years. (“Gold is undervalued for the first time since 2009,” Business Insider, 8/18/15.)

Gold Bear Turns Bullish on Gold
Economist and financial analyst Dennis Gartman told CNBC that he has moved from being a gold bear to a gold bull.

“Gold bugs take heart: One of the biggest bullion bears is suddenly bullish.
‘I think for the first time in a while, you can actually say the lows may have been in dollar-dominated gold,’ Dennis Gartman told CNBC's "Fast Money" this week.

Typically, the editor of The Gartman Letter likes to buy gold in weaker currencies like the euro or the yen, but the recent turmoil in the currency markets has Gartman bullish on gold in more traditional dollar terms. ‘Maybe the dollar has seen its best levels, certainly looks that way against the Canadian, Aussie and the kiwi, and that's going to bode well for gold… For the first time literally in years I'm at least no longer bearish of gold in U.S. dollar terms, and might even be coaxed into being an outright buyer…”   (“Dennis Gartman changes his mind on gold,” CNBC, 8/15/14.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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