Fund Manager Davies: Gold Is Undervalued in ‘Fiat’ Money Terms

Wednesday, 24 Apr 2013 08:18 AM

By Michael Kling

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While many are wondering if the gold bull market is over, Ben Davies, head of an alternative management fund, believes gold is still undervalued in ‘fiat’ money terms.

“Right now gold remains undervalued when examined in the context of other assets, primarily against paper money,” Davies, CEO and founder of Hinde Capital, a U.K. alternative investment management company with a specialist gold fund, writes in his newsletter.

“One phrase that sums up my thinking — price has changed, but nothing has changed,” he notes

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“Gold has a price and a value. These two constructs are not interchangeable. Price is a level at which you make an exchange, and value is whether it is worth it,” Davies explains. “Right now gold remains undervalued when examined in the context of other assets, primarily against paper money.”

Gold is as undervalued as it was in 2000, and now is the time to own the metal, he says.

Evidence points to a high probability of manipulation, according to Davies. And it’s clear that someone knew a central bank would be selling gold.

“Our money (gold) has been at the mercy of a state engineered gold correction using the threat of coerced European gold sales to scare holders into selling and speculators jumped gleefully on the band wagon,” he writes.

“By suppressing the gold price, and reweighting growth and inflation indices to mask the effects of rising prices, a government can maintain stable and lower yields in the domestic sovereign bond markets, thus enabling them to have a virtually endless supply of paper money,” Davies notes.

“The very act of scaring individuals from the market has backfired and we have witnessed a truly fantastic response to lower gold prices,” he writes. “We are relieved, as the initial reaction was one of panic from individuals. Understandably so, because they just didn’t understand the malevolent forces at hand.”

Readers, he says, are probably thinking, “typical sour grapes from a gold manager trying to justify his seeming ineptitude; trying to abdicate responsibility by blaming some malevolent forces. This could be no further from the truth.”

Many pundits mocked gold investors and took glee in gold’s recent plunge.

For instance, financial markets commentator Barry Ritholtz poked fun at gold investors on his blog, The Big Picture, by listing “12 Rules of Goldbuggery.”

“These social conventions look less like a debate about asset classes and more like a religious cult,” writes Ritholtz, CEO of Fusion IQ, a quantitative research firm.

His top rules are: Gold is a currency not a decorative or industrial metal. The price of gold cannot fall; it can only be manipulated lower, and the world must return to the gold standard one day.

A bonus rule for true believers is: “Never admit gold might be falling because it trades on human emotions and psychology and has no intrinsic value whatsoever,” he says.

“The enormous amounts of dollars involved in the gold trade has attracted all manner of charlatans and frauds to the gold trade,” he concludes.

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