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Selasa, 13 September 2011 | 06.37 | 0 Comments

The asset class which you must have exposure to

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Money Morning

On a Swiss Roll

On Tuesday of last week the Swiss committed currency suicide. It was a deliberate act but we suspect one that the Helvetians will come to regret. The Swiss National Bank announced at 9 AM on, what the Swiss will eventually come to know as Black Tuesday, that the Swiss Franc would henceforth be pegged to the Euro. Yes, that is the same currency currently facing a few issues in Greece, Italy, Belgium, Spain, Portugal, Ireland etc etc. The reason for the move was that the Swissie had – as a safe haven – appreciated sharply against the Euro in recent years making all sorts of Swiss firms horribly uncompetitive.  But pegged to the Euro, the Swiss France is clearly not a safe haven. Indeed, since in order to push the Franc down the SNB must print loads of new Francs to buy useless Greek, Italian, Spanish and other Eurobonds ( leaving the grateful Swiss taxpayer to pick up the tab for its inevitable losses on these trades plus having to cope with inflat ionary pressures) Switzerland is now on a roll. Downwards.

With the Yen continuing to lose credibility and all other western currencies undermined almost daily by the threat of further quantitative easing, the only safe haven trade remaining is Gold. And gradually folks are coming to realise that.  We expect QE3 to start in earnest in the US, Europe and the UK this Autumn and that – as a result – gold will head past $2,000 by Christmas.  Now there will be days when it falls back sharply. Those are largely days when Comex or the Shangai Metal Exchange increases margin calls. But markets can be manipulated for only so long. The trend is a clear one.

But despite Gold having put on just over 30% in the last six months, gold mining equities have had a poor 2011. It has only been recently that large Banks and Brokers have upped their Gold forecasts (which are still conservative seeing as they have a vested interest in maintaining the public's faith in currencies) and as such the risk off attitude and lack of confidence in a sustained Gold price increase has seen mining equities greatly underperform. But with massively increased cash piles being generated thanks to operational gearing, major producers are starting to turn predatory and juniors and mid caps are now slowly beginning to make up the lost ground.

The fundamentals here are evidently clear; an increase in the sale price of a good means that the company producing said good will be, whilst running with effectively a fixed cost base, generating dramatically increased cash flows. This in turn should profoundly increase the valuation of said company. Apply this to gold mining equities and the investment case here is clear; especially when the majority of the valuations of our investee companies are hugely attractive using a base case $1,500 Gold price let alone a $1,800 Gold price. For explorers and near term producers, a stronger Gold price means that their resource base is worth far more and in addition further deposits become increasingly economic attractive given the backdrop of a rising gold price. These are the companies which are snapped up by majors looking to add bolt on operations.

The really odd thing about gold is how little exposure most investors have to this asset class.  At this stage we quote an article  from Casey Research in the US (article taken from (September 2011)). It is a bit OTT. But the point it makes about the scarcity value of gold and how when people realise that this is the ONLY asset class offering wealth protection, there will be a mad scramble is one we agree with.

You already know the basic reasons for owning gold – currency protection, inflation hedge, store of value, calamity insurance – many of which are becoming clichés even in mainstream articles. Throw in the supply and demand imbalance, and you've got the basic arguments for why one should hold gold for the foreseeable future.

All of these factors remain very bullish, in spite of gold's 450% rise over the past 10 years. No, it's not too late to buy, especially if you don't own a meaningful amount; and yes, I'm convinced the price is headed much higher, regardless of the corrections we'll inevitably see. Each of the aforementioned catalysts will force gold's price higher and higher in the years ahead, especially the currency issues.

But there's another driver of the price that escapes many gold watchers and certainly the mainstream media. And I'm convinced that once this sleeping giant wakes, it could ignite the gold market like nothing we've ever seen.

The fund management industry handles the bulk of the world's wealth. These institutions include insurance companies, hedge funds, mutual funds, sovereign wealth funds, etc. But the elephant in the room is pension funds. These are institutions that provide retirement income, both public and private.

Global pension assets are estimated to be – drum roll, please – $31.1 trillion. No, that is not a misprint. It is more than twice the size of last year's GDP in the U.S. ($14.7 trillion).

We know a few hedge fund managers have invested in gold, like John Paulson, David Einhorn, Jean-Marie Eveillard. There are close to twenty mutual funds devoted to gold and precious metals. Lots of gold and silver bugs have been buying.

So, what about pension funds?

(Source: Casey Research 2011)

According to estimates by Shayne McGuire in his new book, Hard Money; Taking Gold to a Higher Investment Level, the typical pension fund holds about 0.15% of its assets in gold. He estimates another 0.15% is devoted to gold mining stocks, giving us a total of 0.30% – that is, less than one third of one percent of assets committed to the gold sector.

Shayne is head of global research at the Teacher Retirement System of Texas. He bases his estimate on the fact that commodities represent about 3% of the total assets in the average pension fund. And of that 3%, about 5% is devoted to gold. It is, by any account, a negligible portion of a fund's asset allocation.

Now here's the fun part. Let's say fund managers as a group realise that bonds, equities, and real estate have become poor or risky investments and so decide to increase their allocation to the gold market. If they doubled their exposure to gold and gold stocks – which would still represent only 0.6% of their total assets – it would amount to $93.3 billion in new purchases.

How much is that? The assets of GLD total $55.2 billion, so this amount of money is 1.7 times bigger than the largest gold ETF. SLV, the largest silver ETF, has net assets of $9.3 billion, a mere one-tenth of that extra allocation.

The market cap of the entire sector of gold stocks (producers only) is about $234 billion. The gold industry would see a 40% increase in new money to the sector. Its market cap would double if pension institutions allocated just 1.2% of their assets to it.

But what if currency issues spiral out of control? What if bonds wither and die? What if real estate takes ten years to recover? What if inflation becomes a rabid dog like it has every other time in history when governments have diluted their currency to this degree? If these funds allocate just 5% of their assets to gold – which would amount to $1.5 trillion – it would overwhelm the system and rocket prices skyward.

And let's not forget that this is only one class of institution. Insurance companies have about $18.7 trillion in assets. Hedge funds manage approximately $1.7 trillion. Sovereign wealth funds control $3.8 trillion. Then there are mutual funds, ETFs, private equity funds, and private wealth funds. Throw in millions of retail investors like you and me and Joe Sixpack and Jiao Sixpack, and we're looking in the rear view mirror at $100 trillion.

I don't know if pension funds will devote that much money to this sector or not. What I do know is that sovereign debt risks are far from over, the U.S. dollar and other currencies will lose considerably more value against gold, interest rates will most certainly rise in the years ahead, and inflation is just getting started. These forces are in place and building, and if there's a paradigm shift in how these managers view gold, look out!

I thought of titling this piece, “Why $5,000 Gold May Be Too Low.” Because once fund managers enter the gold market in mass, this tiny sector will light on fire with blazing speed.

My advice is to not just hope you can jump in once these drivers hit the gas, but to claim your seat during the relative calm of this month's level prices.

The bottom line is that Gold is being driven by fundamentals. You should however note that the value of your investment can go down as well as up and you may not get back a significant proportion of your investment but we see the opportunity here as profoundly attractive seeing as the majority of our investee companies can be bought with such a large margin of safety. We were recently quoted as saying that many gold stocks could double within just a few weeks. We stand by that view. That's why it's an attractive time to buy units in the SF t1ps Smaller Companies Gold Fund as a possible way to profit.

How to buy SF t1ps Smaller Companies Gold Fund units today

1.The simplest way to purchase units in the SF t1ps Smaller Companies Gold fund is via where the initial charge is 2% - other brokers may charge you more.

2. Contact your broker. Most brokers offer the chance to buy units although few can match the discounted initial rate of 2% and may charge up to 5%. Contact your broker giving them the fund's SEDOL code: B3 YQ 855. If your broker will not deal please call Sarah Read on 01624 641 318 and she will try to rectify the situation.

3. Deal directly through t1ps and The Share Centre at the initial fee rate of 2.5%. If you want an application form email or go to

If you choose to invest directly, once you have made an initial investment (of as little as £500) you can set up a monthly standing order with The Share Centre to drip feed further cash (as little as £25 a month) into the fund. All existing fund holders can set up such an order.

If you have any questions about investing in the SF t1ps Smaller Companies Gold Fund visit our website at or contact 01624 641 318.

You can download the application form from here and the simplified prospectus from here.

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Total return, bid to bid line chart from 11/09/2009 to 13/09/2011 from UKUT and OEICs Universe

Cumulative Performance 08/09/2011

Discrete Performance 08/09/2011

The Fund was launched in September 2009 and 3-year and 5-year performance results are not available.

Source: Financial Express
Past performance is not a reliable indication of future results

Risk warning:

The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not a reliable indicator of future results. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.

t1ps Investment Management (IoM) Limited is licensed by the Isle of Man Financial Supervision Commission.

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