Tuesday, September 23, 2008

Eveillard Says Gold May Surge as Investors Seek `Insurance'

By Stewart Bailey

Sept. 23 (Bloomberg) -- Jean-Marie Eveillard says he has stashed $1 billion in gold in a vault near Times Square as insurance against ``extreme outcomes,'' like a market collapse or unintended consequences of the U.S. plan to avert one.

Eveillard keeps as much as 8 percent of his $22 billion First Eagle Global Fund in bullion or gold-mining stocks. He occasionally visits the vault in a building about 12 blocks from his Midtown Manhattan office, he said.

``Gold is insurance,'' Eveillard said in an interview yesterday. ``In most of those instances where things would get bad enough so you would get into equity bear markets, where economic and financial circumstances would be bad for a year or two or three,'' gold prices will rise.

Gold futures traded on the Comex division of the New York Mercantile Exchange have surged 19 percent since Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed for bankruptcy protection. The metal has gained for seven straight years, more than tripling in price, as the dollar declined.

Bullion rose $44.30, or 5.1 percent, to $909 an ounce yesterday.

Eveillard, a 68-year-old Frenchman, came out of retirement in March 2007 to resume managing the First Eagle fund after his successor, Charles de Vaulx, abruptly resigned. With Wall Street's turmoil forcing the U.S. toward a $700 billion plan to prop up the financial system, the dollar may plunge and inflation accelerate, Eveillard said.

Annual Returns

The First Eagle Global Fund, which he managed for 24 years before his first retirement, has returned 13 percent annually in the past five years, placing it in the 95th percentile of similar funds, according to Bloomberg data. The fund has dropped 8.2 percent this year.

U.S. officials led by Treasury Secretary Henry Paulson offered proposals during the weekend to avoid a credit freeze that could cripple the financial system and halt economic growth. The plan follows last week's bankruptcy of Lehman Brothers and the government's takeover of insurer American International Group Inc.

``I'm not expecting a disaster, and I acknowledge that the steps they took are probably helpful,'' Eveillard said. ``What I'm saying is, to the extent a price has to be paid, there will be unintended consequences, including the dollar looking shaky or inflation related to the ballooning budget deficit.''

`Creative Destruction'

The U.S. is unwilling to endure ``creative destruction'' that would rectify the market excesses caused by its debt-fueled boom, Eveillard said. Asian economies were forced by the U.S. and the International Monetary Fund to take their ``medicine'' after their market crises in the late 1990s, he said. The Japanese endured a decade of economic stagnation after the country's 1980s asset bubble burst, he said.

``The Asian solution would mean you correct the excesses and it's very painful for a year or two or three, or the Japanese solution is stagnation '' Eveillard said. ``They don't want the South Korean solution or the Japanese solution, so they come up with their own reflation.''

Financing the larger deficit by ``printing more money'' will drive inflation higher, increasing gold's appeal as a safe-haven asset and an alternative currency, Eveillard said.

Investors are buying treasuries as a haven in the debt crisis, he said. The Fed is likely to succeed in keeping companies able to borrow, which will prompt investors to switch from bonds to gold, he said.

Central banks and large investors would need to move a small portion of their money into gold to drastically boost the price because the bullion market is smaller than those for derivatives and currencies. He gave no exact target for gold's price.

``It's a small market, the market for gold bullion, so it could go very high, I presume,'' Eveillard said.

No comments:

Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.