Talking about fundamentally important news, the following event deserves a primary place in the recent gold market evolutions. Bloomberg reports that The Pacific Group Ltd., a Hong Kong based hedge-fund is converting one-third of its assets into PHYSICAL gold. We have emphasized the word “physical” for a reason. It is not usual for a hedge fund to go outside the paper based trading business. More importantly, the fact that the investment company takes delivery of the metal ($35 million worth of gold bars) shows a growing distrust vis-à-vis paper investments and the exponentially expanding “funny money” base.
William Kaye, founder and chief investment officer of the company told Bloomberg the following:
“Gold, the way we look at it is anywhere from being undervalued to being seriously undervalued. We’re in the early stages, in our judgment, of what would likely be the world’s largest short squeeze in any instrument.”
He went on to say: “Central banks have so far been able to manipulate interest rates to allow governments to service their debt at low costs, averting market seizures. Still, the next big rally in precious-metal prices may be 18 months to two years away, triggered by a “financial catastrophe.”
Indeed, negative real interest rates in major economies of the world are the result of central bank intervention. The latest figures confirm this as published earlier today by Greshams-Laws (data as of December 2012). Still, the financial world seems very slow in reacting to these conditions, as the bond bubble keeps on expanding.
The Hong Kong based hedge fund is not the only back accumulating gold. Late in the summer, when the gold price was breaking out, we reported that smart money has been buying the dips earlier in 2012. Some large hedge funds, as well as Asian central banks, had been accumulating gold when the price dipped to the lows near $1,500. More recently, Japanese pension funds showed their interest in the gold market to hedge their assets against expected inflation as reported by Bloomberg. The Japanese story is not only remarkable because of its scale (the pension funds oversee $3.36 trillion) but also because Japan has no tradition of gold investment / ownership.
More recently, William Gross, founder and managing director of the biggest investment firm in bonds, wrote the following in a widespread article:
When the Fed now writes $85 billion of checks to buy Treasuries and mortgages every month, they really have nothing in the “bank” to back them. Supposedly they own a few billion dollars of “gold certificates” that represent a fairy-tale claim on Ft. Knox’s secret stash, but there’s essentially nothing there but trust. When a primary dealer such as J.P. Morgan or Bank of America sells its Treasuries to the Fed, it gets a “credit” in its account with the Fed, known as “reserves.” It can spend those reserves for something else, but then another bank gets a credit for its reserves and so on and so on. The Fed has told its member banks “Trust me, we will always honor your reserves,” and so the banks do, and corporations and ordinary citizens trust the banks, and “the beat goes on,” as Sonny and Cher sang. $54 trillion of credit in the U.S. financial system based upon trusting a central bank with nothing in the vault to back it up. Amazing!
It is exactly the same point that William Kaye pointed to in his Bloomberg interview. He pointed to the differences between paper vs physical gold investing:
“All you actually need for a major upward revaluation of gold is for a small fraction of people to physically reclaim from major central banks or other depositories that are holding your gold and using it for their purposes.”
While some of the smart money investors mentioned earlier have been buying into the paper market, we find the latest move of The Pacific Group brilliant. They did exactly what Gold Silver Worlds has been advocating since its inception: “If you can’t own it, you don’t hold it.”