SeekingAlpha.com
October 30, 2009
In his latest letter to investors, hedge fund manager and legendary trader Paul Tudor Jones outlines his firm's thoughts on the topics of equities, bonds, and currencies. Tudor's letter is one of those 'must reads' as his macro sense is phenomenal and he is one of the greatest traders of all time (performance returns summary here). What's interesting about his latest letter is the fact that they included a special section addressing the all too talked about precious metal.
Gold
The macro perspective section of their letter notes how gold is not consumed but rather accumulated as a store of value as it has been a 'medium of exchange for over 5,000 years.' What's interesting is that they plot out inflation-adjusted gold prices and note that we are still far off from the highs seen over 2 decades ago. Tudor puts the inflation-adjusted peak price of gold to be between $1,600-$2,400, with the previous high coming in at $2,422. While Tudor says he has never been a gold bug, he says all assets have a time and a place. And conveniently enough, he says now is gold's time. Tudor joins an army of other prominent hedge fund managers bullish on the precious metal including David Einhorn of Greenlight Capital who has gone as far as storing physical gold. Additionally, John Paulson of Paulson & Co has $4 billion in gold investments, among many other managers.
Tudor's econometric model has determined that gold is 20% undervalued over the next 24 months. This takes into consideration real rates on the price of gold, inflation, and M2 growth. Tudor expects the velocity of money to rise over the next two years, enhancing the bullish case for gold. Additionally, they also cite the supply/demand equation and prudently bring up the fact that a new class of investors has arrived: retail investors gaining access to the metal through exchange traded funds (most notably GLD). Tudor then presented these amazing facts: "The trailing 12-month ETF accumulation has "bought" the equivalent of 25% of new mine production consistently since the beginning of the year. By year-end 2009, the total ETF gold position will hold 3% of global available supplies, making ETFs the sixth largest holder of gold in the world." Tudor expects inflows into these vehicles to continue, furthering the case for a position. Lastly, Tudor highlights another important factor in the gold equation: central banks. He notes that in the second half of this year, the 'official sector will become a net buyer of gold.' We also yesterday posted up an excellent technical analysis video on gold which concurs that gold is in a long-term uptrend. The video outlines $1000 as a key level to stay above and outlines buy points at support as well as price targets going forward.
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