Lieberman For Gold!

Lance Lewis
Jun 19, 2008 10:45 am

In an Financial Times article this week describing investors exiting the equity market for fear of stagflation, Karen Olney, chief European equities strategist at Merrill Lynch, said, “Investors don’t know where to go. They are favoring oil and commodities plays in equity markets, which shows that inflation is playing havoc with the rest of the economy.”

It’s been so long since investors have had to deal with stagflation, it’s almost as if they “don’t know” that they should be buying gold. When the herd figures out that they need to own gold, there's going to be a virtual stampede into gold and gold mining equities. I just wish I knew when the light bulbs will be turned on in people’s heads? I have to think we are very close though, and this week's proposed bills by Lieberman to limit “speculation” in food and energy may just turn that light bulb on for people.

In what could be the most important event for investment in gold and silver since GLD and SLV ETFs were constructed, Senator Lieberman released the details on three draft bills to limit investment in energy and agricultural commodities yesterday.

The first bill would prohibit private and public pension funds with more than $500 million in assets from investing in agricultural and energy commodities traded on a U.S. futures exchange, foreign exchange or over the counter. Most pensions can’t buy futures anyway, but it may affect those who buy them OTC or through ETFs or indexed products, depending on how the final version of the bill is worded.

A second proposed bill would direct the CFTC to establish total limits on the share of the commodity futures market held by financial investors. Again, this relates to the futures only, but it would conceivably affect ETFs that buy futures, like USO.

A third bill would direct the futures regulator to impose speculative-position limits on any stakes not related to real hedging activities, an action that could limit the commodities-swaps activities of big investment banks. Again, this is only directed at futures markets, but would affect commodity index products and ETFs.

Why does this matter to gold? I don’t know if any of these bills will pass or not, but in each case, gold is the clear beneficiary if they do pass.

As a result of these becoming law, any U.S. pension funds (or U.S. investors that can't buy commodity futures or indices offshore) that are seeking inflation protection would no longer be able to buy commodity futures or commodity index products that invest in commodity futures.

And because commodity prices are rising due to worldwide global inflation (and not "speculators"), the inflation rate is not going to suddenly drop to zero overnight because these laws are passed. As a result, investors will still seek to hedge against inflation despite these "laws."

The effect would then be that U.S. investors that fall into these penalized categories are effectively forced to buy traditional physical inflation hedges, like physical gold and silver (not gold and silver futures) if they want to hedge against inflation. Even the GLD and SLV ETFs would not be affected by these bills because these ETFs hold physical silver and gold.

Obviously, more money seeking an inflation hedge would also be forced into precious metal shares and other commodity producing shares as well, which could push up valuations across the gold, oil, and commodity sectors.

The irony is that the passing of these bills might just be the best thing that ever happened to gold and the gold shares. As a gold bull, I’m rooting for Lieberman to get this nonsense passed.

Position in GLD

Lance Lewis is the principal of Lewis Capital, a Registered Investment Advisor (RIA) in Dallas, Texas. He is responsible for portfolio management and investment research for all of the company's managed assets.

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