Trace Mayer: Gold bug bit the Tudor

By TRACE MAYER, RunToGold

Edgar Allen Poe’s most widely circulated story was ‘The Gold Bug‘ where William Legrand appears to go insane after being bitten by a bug he thinks is pure gold and embarks on a search for mythical treasure.  Paul T. Jones II of Tudor Investment Corporation has approximately $11.57B under management and has earned $1.22B year-to-date in 2009.

Mr. Jones is a serious money manager who makes serious money.  In the  2009 Q3 report he wrote, ‘I have never been a gold bug.  It is just an asset that, like everything else in life, has its time and place.  And now is that time.’

20% UNDERVALUED

On page 17 he writes,

Our proprietary econometric model, which evaluates the impacts of inflation, M2 growth, and real rates on the price of gold, suggests – under our baseline macro scenario – that gold is 20% undervalued over the next 24 months.  Our modeling work highlights the importance of real rates and inflation to the price of gold.

Mr. Jones is not alone with the Ancient Metal of Kings and is flanked by John Paulson with over $4B in gold investments and David Einhorn of Greenlight Capital who understands the risks of GLDand  reported to shareholders that  ’We made modest changes to our macro hedges.  First, after extensive investigation we switched our entire GLD exchanged traded fund position into physical gold’.  Interestingly Mr. Jones devotes 9 of 23 pages discussing gold like it is some forgotten mystery of finance.  In some sense it is because if you want to learn the truth out money you have to learn it on your own.

Mr. Jones’ valuation of gold is eerily similar to my  call of $1,300 earlier on Business News Network of Canada.  $1,300 times 80 percent is $1,040.  While Mr. Jones does not assume the title of a ‘gold bug’ having such company is encouraging.

GOLD SUPPLY

On page 18 he recites,

Despite a three-fold increase in worldwide metal exploration expenditures, new mine production has remained stagnant at 80 million troy ounces over the last decade.  In addition, new mine production is marginal in terms of available supplies.  As a result, any incremental demand for gold must be met through sales from current owners.  They just aren’t making that much of it anymore. … The recent advent of physically-backed gold ETFs has increased investment demand from a new investor class. … The trailing 12-month ETF accumulation has “bought” the equivalent of 25% of new mine production consistently since the beginning of the year. … This represents a remarkable change of direction for a market that has been accustomed  to absorbing substantial volumes of gold sold by central banks over the last decade. … More importantly, there is huge potential for more buy-side interest to emerge from central banks.  Total international reserve assets have quadrupled over the last decade, primarily from the accumulation of global money.  However, the percent of total reserve assets held in gold has declined markedly [emphasis added].

For reasons stated earlier I appreciate his use of the word ‘equivalent’ and also the ” around the word bought.

Read more….