On Gold, and the China Study – Part 1!

From: Aditya Rana
Date: Sat, Oct 6, 2012 at 2:39 PM
Subject: On Gold, and the China Study – Part 1!


The idea of investing in gold tends to evoke extreme reactions –ranging from gold being perceived as a hedge against a collapse of the modern monetary system (by diehard gold-bugs), to it being viewed as a dead asset and a relic of a primitive monetary system (by the large majority of institutional investors). Gold has limited intellectual appeal as it does not lend itself to a typical fundamental analysis framework as it does not produce cash-flows and is therefore largely ignored by value investors (i.e. Warren Buffet) . However, gold has been in an unprecedented bull market being up every year over the last eleven years, and should be part of an individually held diversified asset portfolio. Successful investors like Ray Dalio (Bridgewater Associates), Bill Gross (Pimco) and Davd Einhorn (Greenlight Capital) have expressed views on the merits of holding gold and Pimco recently produced a note on Gold which makes interesting reading. To summarise:

-Given the unprecedented amount of monetary easing by central banks, gold (at current levels) is a compelling hedge against inflation and superior to fiat currencies as a store of value.

-Gold has attractive supply/demand characteristics with the supply of gold being constrained, and the growth in demand rising with the increase in global economic growth on a per capita basis.

-The Fed is encouraging increased risk-taking by taking actions to increase inflationary expectations and ease financial conditions, resulting in the high likelihood of negative real interest rates for an extended period of time. This makes the opportunity cost of holding gold zero or even negative.

-The total outstanding stock of gold above the ground is about 155,000 metric tons , with the annual amount being mined at roughly 2,600 metric tonnes resulting in an increase of only 1.7% per annum.

-Gold should not be viewed as a investment substitute to equities or bonds, it is not a financial asset but rather a currency which pays no interest. Currencies pay an interest rate to compensate against the decline in their real value over time, while gold pays no interest as it holds its real value over time.

-With interest rates for most major currencies being artificially lowered by their central banks, investors are likely to have a greater desire to hold gold relative to currencies resulting in continued price appreciation.

-Contrary to popular perceptions that gold is currently overvalued, the real price of gold is still 12% below its 1980 peak. It is the level of real interest rates, rather than inflation, which really drive the price of gold.

-In addition to the attractive real price of gold, the dramatic increase in the GDP per capita over the last 30 years has resulted in increased wealth for individuals making gold more affordable.

-The price of gold when compared to the increase in US GDP per capita over the last 30 years, makes it about 34% cheaper in relative terms than in 1980.

-This effect is even more dramatic for China which has experienced a significantly higher growth in GDP per capita (18% per annum over the last 10 years compared to 3% for the US) making gold about 85% cheaper in relative terms.

-Another way to analyse the valuation of gold would be to look at the implied price of gold to match the $12.5 trillion of global currency reserves – resulting in a price of $2,500 per ounce.

A simple yet compelling case to hold gold as part of a diversified portfolio – say in the 5-10% range. If you do not currently hold gold, it would still make sense to buy some in a global environment of “unlimited liquidity” and continue holding it until the QE programmes start getting wound down and/or real interest rates start rising. Yes, it’s not as intellectually satisfying to make the case for gold as for, say, a stock or an asset class – but does it really matter if it gives you the required performance!

In the words of the 85 year old market veteran and doyen of newsletter writers – Richard Russell:

“Below are the last day of the year quotes for gold.

2011 -$1,566.80

“This year’s close for gold marks the 11th year for a higher year-end gold closing. To my knowledge this is the longest bull market of any kind in history in which each year’s close was above the previous year. This fabulous bull market will not end with a whisper and a fizzle. I continue to believe that the upside gold crescendo of this bull market lies ahead. We are watching market history”

Well it looks like gold is likely to enter its 12th consecutive bull market year with the current level at $1,780!

Another great chart illustrates the long term (since 1801!) real price of gold – notice the increased fluctuations since the breaking of the dollar link to gold in 1972! Also notice that gold has underperformed in real terms only during three phases over the last two hundred years- all three being strong secular bull markets in equities- the 1920s, the mid 1940s until the early 1970s, and the early 1980s until 2000!

So in an environment of unprecedented global central bank easing, as the chart below (from Guggenheim partners) depicts clearly:

It would be prudent to have some exposure to real assets like “gold, commercial real estate, artwork, collectibles and rare consumer products like fine wines” in the words of Scott Minerd, CIO of Guggenheim Partners (see chart below on historical performances of various asset classes under a high inflation and low inflation environment).

“The China Study”- Part 1 (Prof. Colin Campbell):

To follow-up on last week’s introduction to one of the most comprehensive studies done on the relationship between diet, lifestyle and chronic diseases, I summarise below the chapter on the protein myth:

-“Ever since the discovery of this nitrogen- containing chemical in 1839 – protein has loomed as the most sacred of all nutrients” and was made to be synonymous with eating meat, being civilized and being rich.

-A cultural bias became fully entrenched – epitomised in the words of the prominent English physician Major McCay stationed in India in early 20th century in order to identify good fighting men – he said people who consumed less protein were of “poor physique, and a cringing effeminate disposition is all that can be expected”.

-The USDA (US Department of Agriculture) initially recommended 125 grams per day – which since then has been reduced to 55 grams per day.

-The RDA (recommended daily allowance) for protein equates to 10% of the daily caloric intake and is what is required to maintain normal body growth rate – however, the average protein intake for an American is 15-16%.

-Fat, carbohydrates and protein are macronutrients, making up almost the whole weight of food, with the rest being micronutrients like vitamins and minerals.

-Proteins are critical to life as they function as enzymes, hormones, structural tissue and transport molecules in our body. Proteins wear out on a regular basis and must be replaced.

-About eight essential amino acids needed to make our tissue proteins must be provided by the food we eat. Food proteins of the highest quality are the those that provide the right kinds and amino acids that are needed to make our tissue proteins.

-Milk and eggs contain the best amino acid matches for our protein requirements and are considered high quality. Plant proteins maybe lacking in one or more of these essential amino acids, but as a group (which we encounter daily in our diets) they do contain them all.

-The concept of quality really means efficiency with which the foods promote growth. However, greatest efficiency does not equate with good health and there is compelling research which shows that “low-quality” plant protein, which allows for slow and steady synthesis of proteins, is the healthiest type of protein.

-The possible relationship between a diet consisting of high amounts of animal protein and cancer first came through a US government sponsored research project in the Philippines in the 1970s, where Prof. Campbell was studying the impact of the consumption of a fungus –produced toxin in peanut butter and the unusually high incidence of liver cancer in young children.

-What they found was striking- the children who got liver cancer were from the best-fed families consuming high amounts of animal protein.

-At the same time, a study was published in India which showed that a liver cancer producing toxin fed to two groups of laboratory rats – one on a 20% protein diet and the other on a 5% protein diet, showed that 100% of the rats on the 20% protein diet got liver cancer or its precursor lesions and 0% of the rats on the 5% protein diet got liver cancer.

-These were the turning points in his career as a medical scientist – prompting a life-long study on the relationship between animal protein and chronic diseases like cancer.

To be continued!

Here is to buying some gold and cutting down on the animal protein intake!



Viewpoint_Worah_Johnson_Oct_2012 – gold.pdf


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