Barron's: Time to Buy Gold

Savvy investors will start stocking up now on gold since roaring inflation is poised to soon ravage global economies, Barron’s reports.

“Inflation is starting to pick up in the U.S. and in much of the world as central banks shrink their enormous balance sheets. And gold has represented a good defense against inflation eroding the value of a stock or bond portfolio,” Barron’s said in this week’s cover story entitled “Gold Is Cheap. Inflation Is Coming. You Do the Math.”

Barron’s explained that gold has always held its value against the dollar. “Gold was $20.67 an ounce 100 years ago and that bought a good men’s suit. At $1,200 an ounce, the same is true today,” the report said.

There are an estimated six billion ounces of gold in the world, worth more than $7 trillion, about 30% of the value of the S&P 500. Annual new mined supply adds less than 2% to the global total.

“Gold is rare, and it’s hard to rapidly increase the supply of it,” says Keith Trauner, co-portfolio manager of the GoodHaven (GOODX) mutual fund, which holds Barrick Gold (ABX), a leading mining company. “People have historically viewed it as a hedge against government depreciation of local currency,” he told Barron’s.

“Virtually every government in the world is trying to promote inflation partly because there is so much sovereign debt,” Trauner sais. When there is so much debt, he explained, governments have three choices: default, restructure, or inflate the currency. “Politicians, when given the chance, will choose the latter.”

One catalyst that could change investor sentiment on gold is a decline in the U.S. dollar.

“Gold is the anti-dollar,” says Pierre Lassonde, the chairman and a co-founder of Franco-Nevada (FNV), a gold and mining royalty company with an $12 billion stock market value. “When the dollar is strong, there is no need for gold. But when the dollar is weak, people go back to gold.”

To be sure, other prominent investors are preparing for gold’s resurgence.

Billionaire hedge-fund manager John Paulson recently formed a coalition with 15 other investors aimed at curbing years of what his fund has called value destruction in the gold sector.

John Hathaway -- who is a general partner at Tocqueville Asset Management LP -- and activist fund Livermore Partners are among those who have agreed to join the group, according to an emailed statement from the newly formed Shareholders’ Gold Council, Bloomberg reported. Egyptian billionaire Naguib Sawiris’ La Mancha Group is also on the council. In April, Sawiris told Bloomberg he put half his $5.7 billion net worth into gold.

The idea for the group was first floated by Paulson & Co. during the Denver Gold Forum last September.

“Since last year, the gold price has crept lower and shareholder returns have been poor,” Marcelo Kim, a partner at Paulson, said in a separate email. “Interest in the sector has continued to languish, and you have seen capital leave the space and notable fund closures.”

Gold was trading around $1,300 an ounce, about $100 higher than current spot prices, when Paulson announced plans to unite big institutional gold investors around common issues.