Gold Bug Bit The Tudor

Posted 01 Nov 2009

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.'


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 GLD and 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.


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.


Mr. Jones is, like most of us, merely on the prowl for a good investment.  But there is no market more out of balance in the history of the world than the gold market.  The closing act of this centuries old play began with the fat old lady singing (Bank of England dumping the crown's reserves).  There is even massive fraud alleged.  But you do not spend a lot of time swimming with the vampire squids of Wall Street or in private equity without encountering rigged markets.  Indeed, a nimble outsider can book some good profits by breaking or riding cartels.

But the more I investigated the gold market the more I learned it is easily distinguished from potash, pork bellies or even oil with OPEC.  In this case, the price is being suppressed and not supported and this was being done not by users but by owners.

Dr. Greenspan even testified in 1998 that, ”Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”  Thus, we had a market that was undeniably rigged and that rig was officially sponsored and denied.

But if you own tremendous amounts of an asset then why run a cartel to keep its price down? Like a shark that smelled blood in the water I honed in on GATA's beacon of gold bleeding central banks.  Gold stocks and Australian gold shares are also affected.

With books like Dr. Vieira's masterful and meticulously footnoted 1,700+ page Pieces Of Eight and GATA's dispatches and conferences I learned the macro picture.  Gold is real money, poses a mortal threat to the fiat FRN$ based monetary system, and the bank's legal monopoly to issue legal tender currency is inifinately more valuable than the price of a portfolio asset.

This legal counterfeit monopoly allows for confiscation through inflation which is a form of taxation without representation and without due process of law and in violation of the United States Constitution.  Because this is done only under color of law consequently Federal law has no intelligible answer to What is a Dollar?

As Ludwig von Mises wrote,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.

Indeed, fiat currency and fractional reserve banking are the heart of the State and its health is war, carnage and death.

 Therefore, these centuries old tools of fiat currency and fractional reserve banking are both barbarous and relics that allow special private interests to profit from nefarious activities.


With meticulous documention by the Gold-Anti Trust Action Committee the environment was clear.  The gold market is rigged.  The rig is used to prop up a monetary system that is immoral and in conflict with the Supreme law of the United States.  The rig is merely a means to that end but it is integral and indispensable.  Also, the deeper you dig the more integral it appears to be.  The Achilles heel appears to be physical delivery.

Consequently, the worldwide monetary system is a confidence game built on an illusion and if the people lose confidence in the illusion then the system does not collapse but evaporate.  The easiest way to undermine the fraudulent illusion is by telling the truth and letting real money run free.  As truth will cleave its own way and because of the complex systems we rely on for ordinary life this inevitable event of currency collapse could be very disruptive.  It became time to prepare for survivalism in the suburbs.  This would likely result in tremendous social, political, geo-politicial and geo-strategic changes.


And so the process that many of us have undergone is happening now to many others.  With advances in telecommunications and the Internet the idea of sound money is spreading faster than fabricated H1N1 growth rates.  Major money managers like John Paulson, David Einhorn and now Paul Jones are being bitten by the gold bug.  As I wrote about over a year ago in The Derivative Illusion,

My strategy is to acquire gold on a consistent regular basis with a constant percentage of proceeds from cash-flowing assets.  When you own an unencumbered ounce of gold your wealth is sovereign.  Hoard it.  Humanity’s gold lust has been dormant for nearly a century and when it awakens it will be extremely vehement and go viral.

Those who own gold know of what I speak.  The yellow metal seems to call out to the inner conscience and resonate with our DNA.  The result will be that the pitiful garrets of the central banks will be overrun as The Great Credit Contraction continues.

What is happening is a sea-change.  Fiat currency and fractional reserve banking are going to be replaced by commodity currency with 100% reserves through services like GoldMoney.  It is like an iceberg flipping.

While no one knows exactly how this will play out and hopefully the machine does not stop but the transition happens in a rather orderly fashion and without too much chaos, disruption of ordinary life, destruction of property or loss of life.  

The issue is not that there is not enough gold but that there is too much worthless paper and the first rule of panic is to do it first.  While Mr. Jones is late to the feeding frenzy on the central banks' physical gold he has still arrived before almost everyone else.

DISCLOSURES:  Long physical gold and silver and no position in the problematic SLV or GLD ETFs.