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Mainstream Money Manager Sees $10,000 Gold

I’ve been planning to post a review of Shayne McGuire’s new book, Hard Money. It’s coming, but in the meantime, here’s a profile from today’s Wall Street Journal.

‘The World Does Not Need to End’

A Gold Bull and His Prediction: $10,000 an Ounce

There are gold bulls. And then there is Shayne McGuire.

The 44-year-old pension-fund manager from Texas, who spoke recently at a gold conference in Berlin, caused a stir among the roomful of gold aficionados. His provocation: A book that predicts the price of the precious metal could soar to $10,000 an ounce, more than seven times its current price.

Like those who once boldly predicted $1,000 Internet stocks and a 36000 Dow Jones Industrial Average, Mr. McGuire is a lone voice among mainstream investors suggesting such an outsize price jump in gold’s price.

Mr. McGuire’s view isn’t idle prognostication. He runs a $330 million gold portfolio at the Teacher Retirement System of Texas. Mr. McGuire’s forecast, which he made in the recently released book, “Hard Money,” makes him a very far outlier. Most on Wall Street consider the prediction outlandish.

“If you missed” gold’s recent run-up “you have to come up with some pretty sophisticated reasons to buy” now, says Andy Smith, metals analyst with Bache Commodities, a unit of Prudential Financial Inc.

Mr. McGuire was early to the gold trade. In 2007, he and a colleague persuaded the $100 billion Texas fund, the nation’s eighth largest, to move into the metal. It was a novel strategy that made it one of the few large U.S. pension funds to have a fund solely devoted to gold.

At the time, gold was trading at around $650, less than half its current price.

In his 2007 pitch, Mr. McGuire argued that gold was “the most underowned major asset, widely seen as an eccentric, anachronistic leftover from the pre-information age that is best for ‘end of world’ types.”

Not everyone at the Texas fund felt the same way. In one meeting, a pension executive sarcastically asked if anyone else in the room thought “the world was going to end?”

Indeed, most pension funds still steer clear of gold, investing just a fraction of 1% on average of their assets in the yellow metal, according to Alan Kosan, of Rogerscasey, an investment-consulting firm. Most pension funds consider gold too volatile and therefore too risky.

So far, however, Mr. McGuire is in the money. With gold prices surging this year, his fund is up about 25% since its inception a year ago. For its fiscal year ended in June, the Texas pension fund was up 15.6% overall. The gold fund has half its assets invested in a gold exchange-traded fund, SPDR Gold Trust, and the rest invested in gold stocks.

Gold’s historic run-up was spurred by uncertainty about currencies, fears of inflation and continued monetary easing by the Federal Reserve. Like dot-com stocks in that bubble, which were difficult to value because many companies generated no earnings, gold is hard to value because it produces no earnings or revenue and costs money to store.

“It doesn’t do anything but cost you charges and stare at you,” billionaire investor Warren Buffett said in a recent interview.

There are other gold bulls, of course, including prominent hedge-fund manager John Paulson, who has predicted gold could go to $4,000 an ounce by as early as 2013.

For his part, Mr. McGuire says gold is no longer only for those who think financial Armageddon is near. He expects gold to soar amid rising inflation, among other things. “The world does not need to end for gold to go hyperbolic,” he says.

In his book, Mr. McGuire reasons that $10,000 gold is possible if enough other pension funds and big investors jump-start buying and move as little as 1% of total global stocks and bonds holdings into the metal. Such a migration into gold would equal enough demand to push prices up tenfold from their current level, he calculates.

Of course, the same argument would be true for nearly every other investment class. Mr. McGuire has confidence in his argument, however, because he believes inflation will return, which typically pushes gold prices higher.

He said he expects a series of fiscal crises to hit around the world. And then there is China, where he says that gold is “widely regarded as a basic savings asset.”

Gold prices also are rising because of the ascendancy of exchange-traded funds, which are funds that track an index but are be traded like a stock. The largest ETF, under the trading symbol GLD, now invests $50 billion, an amount that Mr. McGuire believes could grow far higher if investors shift a small percentage of their investment funds into gold. At its current level, the stock-market capitalization of all gold ETFs is about $80 billion, roughly that of McDonald’s Corp.

“Now that the value of modern money is becoming highly questionable, more and more people are turning to gold. It’s not the new thing; it’s a return to normal,” he says.

The son of a foreign correspondent for Newsweek, Mr. McGuire grew up in Mexico and spends leisure time playing chess and reading history books.

He is a fan of the financial history of the 1930s, and quotes from Franklin Delano Roosevelt’s first inaugural speech in 1933 about the importance of not overspending. Before joining the Texas pension fund in 2001, he was an analyst at Deutsche Bank and ING Barings.

His gold prediction is by far the most aggressive call he has made in his career, he says, but he says he ignores his doubters. “It seems like an aggressive call,” Mr. McGuire says, “but it’s really a comment on what governments have been doing to the monetary system.”

Of course, the risks of such a big prediction can affect one’s entire career, much as it did former stock analyst Henry Blodget, whose bullish call on Amazon.com was lambasted after shares plunged in the dot-com bust. “There are enough nutty-sounding gold targets out there that this one probably won’t shock anyone,” Mr. Blodget wrote in an email. “But it’s certainly a nice big headline-friendly number.”

On November 2, Mcguire responded to the Wall Street Journal with the following:

This is in response to the profile the newspaper ran over the weekend.  (“There are gold bulls.  And then there is Shayne McGuire…”)

To the editor,

The recent article entitled “The World Doesn’t Need to End”, which focused on my “prediction” that gold would rise to $10,000 an ounce, is misleading.  I have never made such a prediction nor have I ever put a price target on gold, either in a book or any other forum.  Certainly not at the recent London Bullion Market Association conference in Berlin, where the article said I “caused a stir”.  Readers can judge for themselves by visiting the LBMA website (lbma.org.uk), which shows my presentation slides and transcript.

My book, Hard Money, does have a chapter entitled “How Gold $10k is Possible (Taking a Closer Look at Supply and Demand)”, but there’s a significant difference between what I believe is possible and what the article calls a “prediction.”  Where the price of gold ultimately goes will mostly depend on the fiscal and monetary decisions made by our leaders.  The metal’s price rose 2,300% in the 1970s, when central banks were fighting higher prices.  Where gold will go now that leading monetary authorities are doing the opposite—that is, actively seeking inflation—remains to be seen.


Shayne McGuire

Managing Director, Head of Global Research
Portfolio Manager, GBI Gold Fund
Teacher Retirement System of Texas

18 thoughts on "Mainstream Money Manager Sees $10,000 Gold"

  1. Commodities, things we must have or use without alternative, are the true measure of intrinsic value. Yes, gold is used in connectors for keyboard, etc., but continues to move up the list of cost cutting measures. This has in large part already happened in the semiconductor business. Soon gold will only be viable for jewelry or toilet seats in the middle east.

    To my way of thinking, iron is a better measure of intrinsic value of modern man’s needs, right alongside water and oil. Take away any of these commodities and the world as we know it would cease to exist. Remove gold from the periodic table and I doubt anyone would have noticed.

    Silver (IMHO) has higher intrinsic value that gold in that it has the highest thermal and electrical conductivity.

    1. …seriously, you need to stop watching TV and spend some time re-educating yourself on the subject of gold. If you’re honest to yourself, you’ll see that challenging your own (unreasonable) convictions can actually be fun.

  2. Gold does have intrinsic value and a great deal of utility. When you attempt to refute this, understand your keyboard and computer contain gold, so you will prove your own argument to be false. Gold is the best dental material, used in medicine and medical equipment, electronics, the auto industry, etc. The outlook for gold in cancer treatment is very promising. The idea that gold is worthless and has no utility is statist propaganda.

  3. ….what amuses me is he uses GLD as a vehicle. Simple, certainly. Safe? You’ve got to be kidding me. Gold is a currency in my thinking. No more. No less. A barometer. I also agree with the GATA folk: gold prices are manipulated (via futures) by the Fed, and it’s minions like JPM. We have incredible tools available to us today. Unfortunately, like life, they require the serious application of critical thinking.

  4. actually gold is worth nothing like every other commodity unless you can find some one who will exchange something for it … once upon a time gold/silver were the accepted coin of the realm but do you really think that modern humans are smart/dumb enough to re-discover what their ancestors knew?

    modern humans have the more scientific smarts but are the dumbest of the surviving species so don’t count on anything brilliant happening … that time has passed long ago

  5. Gold does not keep its buying power. The price of gold today is double that of 3 or so years ago and prices of stocks, real estate, autos, food, etc have either gone down or increased a few percentage points. Gold has increased its buying power in the last few years.

    At other times, gold’s buying power has fallen. When spain imported huge amounts of gold from S. America in the 1600’s their money supply (gold) was inflated and prices of goods surged. Same with the U.S. during the California gold rush.


    What we will see in the near future is a surge of buying power from gold. A $400,000 house (2005 price) will be $100,000 in a few years with gold at $4000 plus. The house was 800 oz. It will be 25 oz.

    Gold does not keep the same purchasing power. This is a no-brainer.

    1. The house was $400,00 in 2005 because it was over valued. What was the price of the the house in 1999? Gold does not have an intrinsic value but gold (and silver) are money. It is the dollar in your pocket, backed by the full faith and credit of the United States of America, that is being devalued every second of every day that does not keep it’s purchasing power.

      1. Greg,

        You need to look up the definition of “intrinsic value”. Gold absolutely has intrinsic value. The fact that one party is willing to exchange whatever they term as money, be it fiat paper or a house for that matter, to someone else for their gold is the very definition of intrinsic value. Fiat currency would have no intrinsic value where it not for the “full faith and backing of the federal government”. Once that is gone, which should not be much longer, you will see how “intrinsically valuable” gold actually is.

        1. Intrinsic – Definition:

          1. basic and essential: belonging to something as one of the basic and essential features that make it what it is
          an intrinsic part of the plan

          2. of itself: by or in itself, rather than because of its associations or consequences
          has no intrinsic value

          3. anatomy found in body part: occurring wholly within or belonging wholly to a part of the body such as an organ

          To quote Austrian economist Gary North ” INTRINSIC VALUE IS EXCLUSIVELY DIVINE To say that anything has intrinsic value is to say that it possesses economic value that is immune from the imputations of individuals. It is also immune from changing conditions of supply. It is immune from the process known as market pricing: competing bids. In short, it is autonomous.

          Nothing is autonomous except God. There is no market for God. He is not for sale.

          God has intrinsic value. Nothing else does.

          Whenever someone speaks of intrinsic value, he is attributing to a scarce economic resource an incommunicable attribute of God. The language of intrinsic value divinizes some aspect of the creation. This is always a conceptual mistake.”

          My point wasn’t that gold does not have value. Gold’s value is relative to other conditions, supply, demand …etc..

  6. I see gold prices coming down rather than up and just like the internet dot coms disagree with this guy. QE2 is coming to save the day.

  7. It sounds like a “Gold Bubble” Money traders send it up to the sky, profit then it will collapse back down to reasonable levels. Sounds like a crazy idea who’s gonna jump on board?

  8. “In his book, Mr. McGuire reasons that $10,000 gold is possible if enough other pension funds and big investors jump-start buying and move as little as 1% of total global stocks and bonds holdings into the metal. Such a migration into gold would equal enough demand to push prices up tenfold from their current level, he calculates.”

    There are two problems with this thesis.

    First, you could say the same about a similar move into ANY relatively small asset class. I could make the same argument about almost any commodity other than oil and natural gas, and many other relatively small asset classes. The issue, obviously, is WHY folks are going to increasingly move into gold to cause the supply/demand imbalance that he predicts.

    Second, making the argument that, “if X% of investors move into Y asset class, it will cause a Z% move in Y’s price” is specious. There are all sorts of sub-assumptions that may or may not prove to be correct.

    My point is not that gold won’t go to 10,000 but rather that Mr. McGuire’s
    “calculations” are complete guesswork.

  9. Hope you are right, but if Gold reaches the $10,000 mark, that still wont’ be much buying power due to the massive inflation that comes with it.

  10. When gold sees $10,000, the dollar won’t be trash, after all, 10,000 of them will buy an ounce of gold. Scrap paper is worth far less. In fact, in a hyperinflation, gold will go to $10,000,000,000 per ounce (or something with a lot of zeros) before its all over. Now, all of the central banks are headed down the same road, even the Swiss, which means the dollar will be meaningful and not trash even against other currencies.

    With $10,000 gold, the dollar will still work, the masses will hold to the idea that the dollar is viable. A small percentage of people, governments and institutions will will soon dry-up the physical stocks. The gold paper market will fold under the contridictions. I visualize the gold going 10x the current price with everyday commodities remaining where they are at the moment – with some minor adjustments.

  11. The only reason why $10,000 gold seems so preposterous to most/many is that they are viewing that prediction through today’s monetary lens. They seem to infer that all else remains equal. It’s what I call a “dollar-centric” perspective. If gold costs $10,000 an ounce then the dollar will be “trash”, it’s that simple. This article doesn’t say what McGuire’s tme frame is, but I doubt most people in 1913 would have believed that gold would be over $1,350 an ounce within 100 years (about a 64-fold increase.) Same for the stock market, and just about every other asset. But all such equivalences are simply alternative measures of the dollar’s monetary value. For all of the desire expressed for a substantial amount of QE 2, why is it so hard to believe that the dollar could lose another 90% of its value? It lost over 95% since 1913, and about 11% in the last few months. Think the FED knows better than to do that? Think they can maintain control of things? Think again. History is not on their side. And that is beside the possibility that a gold mania takes hold.

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