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Bits and Bites Out of The Big Apple


* Insights, Excerpts, and Sound Bites from the Inside Commodities Conference – at the NYSE, NYC *

On the day after the Fed offered a $600 billion ‘freebie’ and eight more months of party time to the world’s carry dollar-carry trade, the who’s who of the world of commodities gathered at the NY Stock Exchange to discuss the present conditions and future prospects for the world’s markets in “stuff.” While watching metals prices gyrate has not been doable today, thus, we bring you a compendium of nuggets of wisdom from today’s commodities event in the Big Apple. Hopefully, they will make for thought-provoking reading.


Sam DeRosa-Farag - Morgan Creek Capital Management (PIMCO)

“We are in the process of re-distributing the world’s resources from the G-7 group to the rest of the world. Certain commodities are critical (food) and thus large capital investments have been made in such sectors, rendering them more efficient. Other commodities exhibit market signs of inefficiency and disequilibrium. Everyone in the world can afford a shirt, but not everyone in the world can afford to eat.”

PIMCO does not ‘own’ commodities; rather it invests into commodity futures. Long-only commodity futures investing can provide inflation hedging for conventional stock/bond portfolios. For one century, the value of the US dollar did not change by more than two or three percent. However, the political reality (democracy) of the last sixty or seventy years is what has altered the value of the dollar. In Japan, that is not the case. They do not have voters who are unwilling to accept the consequences of their own decisions. The US is becoming a capital-intensive country.

The ‘cage’ effect – courtesy of living in the G-7 countries- is highly distracting. Judging the world by where you live (at the moment) is not a very good thing. The world is actually experiencing more than 4% GDP growth and is showing unbelievable levels of prosperity.

Dennis Gartman – The Gartman Letter

“You do not “invest” in commodities; you TRADE commodities. There are times when you must be long, and others when you have to go short. Having watched cotton for three decades the fact that it is trading at $1.35 is stunning, but we are effectively flat out of cotton in the world at the moment. Contangos have vanished and backwardation is now the order of the day in cotton. We are also going to need a lot more corn, and soybean meal, and whatever else goes into the guts of cows and chickens in the world. This, as China returns to the ‘mean’ –that is to say, to once again be the world’s dominant economy, as it once was –for thirty centuries.

The Fed should be lauded for what it did in 2008. Making certain that we do not implode (as we almost did in 2008) is what the Fed was supposed to do. Now, QE2 is quite another story. Should the Fed be targeting inflation levels and asset prices? The Fed basically said ‘we are targeting asset price levels.’ The Fed will be watching equity prices, and they are also what you should be watching. We are about to embark on a much stronger period of economic growth in the US (as well as China and other places) than is currently being envisioned by pundits. Invest in the basic commodities needed for economic growth. Invest in the ‘stuff’ that hurts when you drop it on your foot.

With QE2, the Fed has erred, inasmuch as it has added a new dimension (that of asset prices) to the things it is “watching” (in addition to inflation and unemployment levels). Do not fight the Fed. Asset prices are going higher (and that includes stocks AND commodities). Thus, you want to be long ‘stuff at the moment. However, remember; you do not own commodities, but you merely trade them for profit. ”

Bob Greer – PIMCO

“A ten percent decline in the US dollar’s value will only fuel a 0.5% increase in CPI. Food and energy represent only 25% of the CPI but represent 70% of the volatility in it. One dollar’s worth of commodity exposure will protect ten dollars of a portfolio’s value against inflation.”

Axel Merk – Merk Investments

“The eurozone as a whole does not exhibit significant current account deficits. Bernanke has said that a weaker dollar is not inflationary. We disagree. However, if left up to market forces, we would have deflation. This is something policy makers do not want/ cannot afford. The ‘risk trade on’ / ‘risk trade off’ pendulum has driven the dollar in recent months. At the moment, asset classes are being ‘chased’ by investors, and they are highly correlated as a result. Investors are chasing the Fed, rather than fundamentals.”

Brad Zigler – Hard Asset

“If you were to look at the fundamentals for gold, on a pure supply and demand basis, you’re probably talking about a real-world price of $850 per ounce, and the rest is really a fear premium. When you consider that the price is around $1,350.00 then the current fear premium is $500.”

Lara Crigger – Index Universe

“Conspiracy theorists claim that the major gold ETFs don’t regularly conduct audits, so investors can’t necessarily trust that the gold the funds claim to hold actually exists. This is 100% false. Factually incorrect. Wrong-o. ALL of the major gold bullion ETFs available to US investors conduct independent audits, including GLD.

One audit is a full bar count, while the other is a random sampling. In some ways, ETF gold is actually more trustworthy than the stuff you’d find at coin shops or dealers, because banks offer a paper trail tracking the entire life cycle of each gold bar, from casting to custody. Outside of a bank, it’s harder to dig up the same certified paper trail. “

Philip Klapwijk - GFMS

“Take loose monetary policy variables out of the [gold] market, and assume central banks start raising rates, [and] then all bets are off. Imagine a situation when investors don’t come to the party anymore, and investment demand collapses. Well, prices will fall back to such a level that the market will clear, because scrap supply will diminish and jewelry sales will increase.”

Part Two will follow tomorrow.