Tudor Jones On Gold

TUDOR JONES ON GOLD
By Theodore Butler

Today, I ran across an interesting take on gold by Paul Tudor Jones, the renowned hedge fund manager. I’ve followed Mr. Jones for decades. It is rare when you run across a detailed opinion by him, so I thought I’d share it with you. I’m referring to Mr. Jones’ Third Quarter letter, dated Oct 15, to the investors in his $12 billion hedge fund.

Gold investors should be interested in Mr. Jones’s presentation. He joins a very distinguished number of successful and well-known hedge fund managers, including John Paulson and David Einhorn, who have recently voiced bullish opinions on gold. Mr. Jones lays out a compelling case for the long term investment merits of gold. I’m going to summarize Jones’ findings here.

The main points supporting his gold bullishness are the accommodative monetary stance by world governments, the relative value of gold compared to other assets and the great amount of potential investment demand by professional money managers and non-G-7 central banks. He also mentioned that western central banks had ceased being net sellers of gold and the powerful impact of physical investment demand, particularly in the Gold ETFs.

I believe that Jones made a convincing argument for gold. Although it was not mentioned once by him, I found he made an even more compelling case for an investment in silver. That’s because almost everything that Jones wrote about gold could also be said of silver. If gold is undervalued relative to other investment assets, then given silver’s undervaluation to gold, silver is even more undervalued. If investors are just awakening to the merits of gold, then they are still in a deep slumber about silver. If growing money supply is going to impact gold, then what the heck is it going to do to silver, a market less than one percent of the size of the gold market? They are both precious metals with a shared 5,000 year history and as such, have more similarities than differences. Which one will show the better long term investment returns? In the end, that’s all that matters. I have to go with silver, because it’s rarer in available inventories and priced at 1.5% of the gold price.

Of course, there are differences between gold and silver. The chief difference is that gold is an official monetary asset, while silver is not. Gold may be bought by non-western central banks in the future to increase the mix of their official reserves, as Mr. Jones predicts. It is also possible, of course, that gold sales could resume from the western central banks. It is unlikely that any central bank would ever buy silver. On the other hand sales of silver by governments or capital banks are impossible, since so little silver is officially owned. This is decidedly in silver’s favor.

As Mr. Jones pointed out, gold is not consumed; it is accumulated and saved and held as an investment. Silver is not only saved and held as an investment, it is also consumed industrially. Because of this consumption, there is less silver bullion inventory remaining than gold. Maybe one person in a million knows this fact, eventually more will know. Because of the industrial consumption of silver, and the demand from investors in direct competition with that industrial consumption, it is certain we will witness a silver industrial user buying panic at some point. A similar industrial user buying panic will never occur in gold, not because gold is inferior, but because gold in not consumed greatly by industry. If there is one fact that argues in favor of silver, it is this industrial consumption. Although it may not have been his intent Jones made a persuasive case for buying silver, without mentioning it once.