NEW YORK -- More famous for punting Japan and other exotics, Morgan Stanley global strategist Barton Biggs is lately a gold bull, and a convincing one.
In a report circulated on Wednesday, Biggs wrote: "…I have never believed in gold, for all the conventional reasons, but now I am changing what's left of my mind. I think there is a plausible case that a professionally managed portfolio consisting of the metal itself and gold shares could realize returns of 15% real per annum in the difficult environment ahead."
Biggs is a bare-minimum bull on bonds and equities, and thinks mid-single digit returns are going to be the norm going forward. "Large portfolios are going to have to be imaginative and unorthodox to beat 6% nominal in my opinion."
The Biggs turnaround is thanks to Peter Palmedo, boss of low profile research and money management outfit Sun Valley Gold, one of the most powerful "lurkers" on the gold investment circuit.
Describing Palmedo as a true believer, Biggs says: "Peter's style has always been to focus intensely on one thing, study it, build models on it, and develop an analytical edge. He came up with gold because it was complex, misunderstood, under-researched, and susceptible to his option-pricing theories."
Unwittingly, Biggs stumbles into the gold conspiracy mother lode – ex Treasury boss Lawrence Summers seminal study Gibson's Paradox and the Gold Standard. "The conventional wisdom is that gold is a barbaric metal, it has a negative yield, and its only role is as a hedge against inflation and the apocalypse. By contrast, Summers and [co-author Robert] Barsky argued that the relative price of gold is driven by (and is the reciprocal of) the real rate of return from capital markets and that this relationship has strengthened since the price of gold was floated."
A Sun Valley research report written by Palmedo concludes that it is not the dollar that predicts the gold price, but the stock market. "Since 1988 the price of gold has had a negative 0.85 coefficient of correlation with the S&P 500 and an R squared of 72%. As things got crazier since 1994, the negative correlation rose to 0.94, with an R squared of 88%."
Gold's advantage in the current circumstances is that such a tiny proportion of metal is available to the investment market. "Only 18% of the gold mined throughout history is held in investment form, or slightly more than $200 billion. The investable capital markets of the world are estimated to be about $60 trillion. In a low-return cycle for stocks and bonds, monetary and investment demand for gold turns positive, and there is a dramatic shortage of available metal," Biggs writes.
"This large differential can only be solved by much higher prices. The point is that it is not inflation or deflation that is the principal driver of gold, but the return from other long-term financial assets, particularly equities."
Sun Valley's modelling suggests that when capital markets offer a 10% return, gold will slump by 8%, but when capital markets are at par, gold should return 17%. The firm believes the "long-term equilibrium or inflation-adjusted price of gold in today's dollars is about $500/oz, as compared to the current price in the low $300s."
The much maligned Summers and Barsky report also gets rehabilitated. Far from being a blueprint for manipulating the gold price, it points to a "secular trend toward a higher real and nominal [gold] price."
"Population and income growth exceed the constrained growth of the physical stock of metal, which has been a mere 1.75% over the centuries. In addition, in the modern world, monetary growth far exceeds economic growth, " Biggs summarises.
Biggs recommends large funds should have 5% invested in "professionally managed gold", but even modest gold bugs will say he's being way too conservative.
Welcome to the nuthouse, Mr Biggs
POLITICIANS & DIAPERS BOTH NEED TO BE CHANGED,
AND FOR THE SAME REASON---
