Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
George Soros, the billionaire founder of Soros Fund Management LLC, sold most of his holdings in the bullion-backed SPDR Gold Trust and iShares Gold Trust funds in the first quarter, while buying shares of mining companies Goldcorp Inc. and Freeport-McMoRan Copper & Gold Inc. Soros’s fund held 49,400 shares of SPDR Gold Trust as of March 31, compared with 4.721 million at the end of the fourth quarter. The New York-based fund sold all 5 million shares it held in iShares Gold Trust. This amounted to roughly 30 tonnes worth of physical gold held through the custodians, Barclays and HSBC.
Does this mean that he has disposed of the gold holdings he has? Does it mean he is now bearish on gold? After all, it was reported that he bought gold because of his fear of deflation. Does he think that this possibility has now receded? None of the above, for it turns out that he continues to have large allocations to gold investments through owning more gold mining shares and a gold mining ETF. Soros’ fund added Eldorado Gold, Freeport-McMoran Cooper & Gold and Goldcorp to their investments during Q1 2011. Soros bought 301,300 shares of Freeport-McMoRan and 7,600 of Goldcorp. These shares will benefit directly from a long-term appreciation of the gold price through their cash flow from ongoing gold sales. Shareholders will then enjoy the rising capital value of the shares alongside the dividend stream flowing from the sales of gold.
Consider for one moment that the U.S. government was contemplating confiscating physical gold from U.S. citizens and even the flow of gold from gold mining. It would be an easy, one-off exercise to instruct all gold Custodians in the U.S. to hand over their gold to the government, including the custodians of the SPDR Gold ETF and the Gold Trust. With gold shares, all the government could do, would be to instruct gold miners to sell their newly mined gold directly to them. George Soros would then benefit from the continuing operations of these gold companies and their cash flows. We don’t know if this was why the switch is being made, but it would certainly make sense if it were.
Paulson & PIMCO
What of the other leading investment lights who are in gold or who have mentioned it in the last few weeks. Investor Paulson is holding onto his massive holding of shares in the SPDR Gold Trust and has added to stakes in mining companies including Johannesburg-based AngloGold Ashanti Ltd. His fund bought 97,540 American depositary receipts in South Africa’s biggest gold producer last quarter, as well as 2 million ADRs in Gold Fields Ltd., its second-largest producer.
Paulson did not invest for fear of deflation but for fear of inflation that should attend a global economic recovery. Paulson’s investors can choose to have their stakes denominated in gold rather than dollars, meaning the value of their investment rises and falls with the price of the bullion. This really is confidence in gold. The head of PIMCO whose fund is shorting U.S. Treasuries at the moment respects gold’s wealth preserving properties while he has little confidence in U.S. government debt. This opinion is very close to our own.
What are the prospects for the gold & silver markets?
George Soros reportedly bought gold because he feared deflation Paulson has it because he fears inflation. PIMCO respects it because they have no confidence in U.S. Treasuries [plus other reasons]. We expect that the future holds the currency-cheapening inflation, the socially-destructive ‘stagflation’, the economy-destructive deflation plus we see the irresistible tendency in banking and politics to over-issue paper currencies. One or more of these potential, probable, future scenes lie ahead and the entire investing world is aware of these dangers. Even central banks are recognizing the benefits of gold in their reserves. Has this changed? No, not at all!
Should we include silver alongside gold after a drop from $50 to $34? We are of the opinion that silver will continue to be more volatile than gold, but will move in tandem with it, but with more exaggerated movements. The silver market is nowhere near a reserve asset in the eyes of the world’s central banks and has a long road to travel before it is. However, it has moved with gold for years now and will eventually complete that journey. In the minds of the poorer investor it does stand as financial security for him, which is the very essence of gold’s qualities. A look back on the road it has come so far shows that it has proven to be a wealth preserver, despite its volatility and lack of liquidity for the large investors. It took only 1,000 tones of silver to be sold over two weeks to drop the price from $50 to $35. Until that liquidity improves [it will at higher prices and broader demand] silver will remain volatile and less dependable than gold in its price performance. We believe it is and will be a wealth-preserving, precious metal in the future, sought after by global investors, particularly Asian investors.
Gold markets need no further confirmation of the need for them to be a support, if tacit, to global monetary systems. In extreme times gold is money and a far more effective value preserver than paper currencies. Since 1971 the world has experimented with paper currencies. These experiments have not led to the success they should have as money. The issues we mention above as well as the dangers of linking money to one nation in a global world are visible for all to see. We believe these dangers will force central banks and governments to accept precious metals as part of the monetary system again but in full [not simply as an important reserve asset]. Gold will serve to a level far beyond its price, as collateral in inter-governmental transactions [if they are not already doing so through the Bank of International Settlements] in the future.
In the future, this leaves first, the gold market, eventually returning to the control of global governments [first through the control of supplies] and wealthy institutions and individuals, likely at prices beyond the reach of the average investor. Secondly, silver will, we feel, step into the breach left by gold for the individual but still at a more affordable level.
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