BY PRESTON PYSH
5 March 2016
Since the start of 2016, we have seen a drastic price growth in gold. As many people know, Warren Buffett has had a consistent opinion on gold – he doesn’t understand how to value it. Here’s an article that goes into great detail on Buffett’s argument. Although Warren is not a fan, there are many other billionaires that are big fans of gold at the moment. For example, we recently saw billionaire Ray Dalio recommend a 5 – 10 % position in gold. Below is a video of Dalio talking about this recommendation in March 2016.
Additionally, billionaire currency expect George Soros is recommending gold in 2016 while billionaire Stanley Druckenmiller has a gold position greater than 20% of his portfolio. So as we take a closer look at gold, I’d like to think of things in terms of buying and selling. In the most basic form of understand what drives prices up or down, the difference between buying and selling is the critical variable. With that said, let’s look at a chart from the visual capitalist that shows the current flows of buying and selling in gold since the start of 2016.
“Issuance of New IAU (Gold Trust) Shares Temporarily Suspended; Existing Shares to Trade Normally for Retail and Institutional Investors on NYSE Arca and Other VenuesSuspension results from surging demand for gold, which requires registration of new shares
iShares Delaware Trust Sponsor LLC, in its capacity as the sponsor of iShares Gold Trust (IAU), has temporarily suspended the creation of new shares of IAU until additional shares are registered with the Securities and Exchange Commission (SEC).
This suspension does not affect the ability of retail and institutional investors to trade on stock exchanges. Retail and institutional investors will continue to be able to buy and sell shares in IAU.
IAU holds gold as a physical asset. IAU is an exchange-traded commodity (ETC), which therefore is not eligible for registration as an investment company under the ’40 Act. IAU may only be registered under the ’33 Act as a grantor trust. Under the ’33 Act, subscriptions for new shares in excess of those registered requires additional filings with the SEC.
Nearly all other U.S. iShares are exchange-traded funds (ETFs), registered as investment companies under the ’40 Act. The ’40 Act provides for the continuous offering of shares and does not require registration of additional shares as the fund grows due to investor demand in connection to new subscriptions.
Since the start of 2016, in response to global macroeconomic conditions, demand for gold and for IAU has surged among global investors. IAU has $8 billion in assets under management, and has expanded $1.4 billion year to date. February marked its largest creation activity in the last decade.
This surge in demand has led to the temporary exhaustion of IAU shares currently registered under the ’33 Act. We are registering new shares to accommodate future creations in the primary market by filing a Form 8-K to announce the resumption of the offering of new shares. The ability of authorized participants to redeem shares of IAU is not affected.”
Talk about interesting. What we have happening right now is an enormous demand for buying gold due to expectations that fiat credit expansion is now being required of financial markets in order to stimulate/sustain asset prices. If the “market” is right and the next step is central bank easing, the growth of fiat currencies will drive the fixed supply of gold into a higher price.
What I’m doing
I’m following Ray Dalio’s advice. I currently have a 5% position in Gold at the time of writing this post and I’m closely watching the price and flows of capital into the gold market. Although Warren Buffett doesn’t like gold, I’m going against his thoughts on the matter because I think the global fiat currency system is broke. The risk associated with buy gold right now is that the US dollar might get even stronger (due to FED tightening) between now and the middle of the summer (2016). If that happens, the price of gold might struggle in the short term. As for me, I’m going to continue holding my 5% position for the long term and look for opportunities to increase that position. I think from a 1 to 3 year play, gold is going to do extremely well.