Tuesday, May 8, 2012

Are you a Gold Bug? Jim Rogers and David Einhorn Are

Are you a gold bug? Views on whether to be in or out of gold are always a hotly contested subject.  Currently though, for of the happenings in the EU, on again off again US QE3 reports, Chinese slowdown, and BoJ intervention, Gold hasn’t done much of anything in the past few months.  Overall, since mid February, the precious metal has traded mostly between 1630 and 1690.  This lack of direction in Gold has caused an increase of chatter of what will be the next move.

In an interview with the Gold Standard, legendry investor Jim Rogers stated that investors should own gold as an “insurance policy on their portfolio.”  While Mr. Rogers did mention that it could theoretically see a correction to 1200, with the prospects of rising inflation (he believes the Fed is manipulating the official CPI figures) and possible geo political flare ups like “the US bombing Iran” he hopes to keep buying gold.  Overall Jim Rogers view is that owning Gold is a hedge against the failures of central banks of the world and needs to owned.

In a similar vain, in a note to clients Hedge Fund Manager David Einhorn explained his rational on having a substantial allocation in Gold.  In his note, Einhorn compared the FED and Bernanke to Mr Burns and Smithers from the Simpsons and the Simpsons family to US citizens.  Einhorn argues that the Fed’s monetary actions were created to suppress bond yields, thus causing investors to sell bonds in favor of stocks.  However, this course of action goes against investor reactions, as even though yields were dropping, bond holders have seen their portfolio’s value rising.  As such, if the Fed really wanted to stimulate the economy, it should adopt a hands off approach to the bond market, which would trigger a selloff and an eventual retun of the public back into stocks.

In the absence of this behavior, Einhorn argued that the Fed was articially raising chances of a “long tail event” occuring in the markets, and thus creating a premium for prices of Gold.

EInhorn Concluded As a result, I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote for my portfolio. While I'd love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn't even have quarterly conference calls.

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