A Bullish Case for Gold

AUGUST 8, 2019
Today’s topic is a quick update and extension of my letter that accompanied the Pavilion Flow-Through year-end financial statements. In that letter, I outlined my bullish case for Gold at the time the letter was written. Around the beginning of April, gold was trading at about $1300 USD per ounce. I referenced at that time one of the reasons for my bullishness was the US Federal Reserve and other Central banks pivoting to an easing bias on interest rates and that $10 trillion of debt carried a negative yield. This made gold more attractive relative to bonds, as the “interest opportunity cost” of holding gold became, or was expected to soon become, much smaller. Since then, which is just 90 days, there are now $14 trillion in bonds that are negative yielding; the US Federal reserve has cut interest rates by 25 basis points (1/4 of 1 percent); New Zealand, Thailand and India cut interest rates overnight; the entire German government bond curve out to 30 years is negative yielding; in Denmark you can get a home mortgage for 10 years that is -0.5%. Gold has traded over $1500 USD overnight, the highest since 2013.
For Pavilion funds, this is a very good development. While it takes time for higher gold prices to filter down to the junior markets, it does happen eventually. I think the next 90 days is the start of that eventuality. We are now in the “summer doldrums” when many people are away. When the summer ends, I expect the filtering down of interest in gold juniors to begin. Our strategy for the Pavilion funds is to take advantage of the expected price increases, and hopefully corresponding liquidity, and take some sales. This money will of course be returned to our investors. We will give as many updates as possible about the size and dates of returning cash. This is especially important when we are in new bull markets because we have been fortunate to have an over 85% re-investment rate. In order to stay invested in a rising market and maximize both our tax savings and the asset returns, it is important that proceeds from stock sales and re-invested funds not sit on the sidelines for very long. Keep in mind that this is our expectation of what may happen based on past experiences, but things can certainly be different than we expect, and certainly no bull market moves in a straight line. We will keep you posted. ​
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