Whitney Tilson & Hedge Fund T2 Partners: October Commentary

Below is a lengthy and great read from Whitney Tilson's hedge fund T2 Partners. In addition to their investor letter update, they've provided an in-depth presentation on the overview of the housing and economic crisis. We can't stress enough what a comprehensive presentation it is so definitely check it out as they detail exactly why there is more pain to come.

Embedded below is the investor letter & presentation (RSS & Email readers come to the blog to view it):



Also, you can download the large .pdf here.

If you missed our previous post, we recently detailed T2 Partners' thoughts at the Value Investing Congress as well. Lastly, those interested can also check out their August letter too.

Dead Government Walking: Hedge Fund Sprott's October Commentary

We wanted to post up hedge fund Sprott Asset Management's October market commentary entitled, 'Surreality Check Part Two... Dead Government Walking" penned by Eric Sprott and David Franklin.

Embedded below is the document:



Also, you can download the .pdf here.

We've covered a lot of Sprott's research on the site before, including some of their September commentary, as well as their special report on how gold is the ultimate triple-A asset. Additionally, you can also check out fund manager Eric Sprott's recent thoughts at the Value Investing Congress.

Jeff Saut Of Raymond James Asks, 'What Is A Permanent Investment?'

In his latest commentary, Chief Investment Strategist Jeff Saut of Raymond James poses this very question. He begins his investment strategy with a quotation that focuses on gold versus other investments through the years. He then shifts his focus to both gold and farmland as being possible 'permanent investments,' citing their bullishness on both assets. Definitely an interesting read from Saut this week as we continue to cover his commentary here on the blog.

If you've missed his past excerpts, definitely check out his skepticism on the ever-lasting market rally, as well as his other previous commentary.

Embedded below is Raymond James' weekly investment strategy from Jeffrey Saut:




Also, you can download the .pdf here.

Jeff Saut's Weekly Investment Strategy (Raymond James)

We're back with the latest investment strategy from Raymond James' chief investment strategist Jeffrey Saut. This week Saut's commentary again focuses on the skepticism behind the ever-lasting market rally. He notes that while bears call this a sucker's rally, the bears themselves have been the suckers in the near-term as they've missed out on a hearty 7 month rally. Don't forget that you can also check out Saut's insightful commentary from last week entitled 'Direction Dictates' as well as two weeks prior where he examined historical market returns.

Embedded below is Saut's investment strategy for the week of October 19th, 2009:




You can also download the .pdf here.

Jeffrey Saut Weekly Investment Strategy (Raymond James): Direction Dictates

Raymond James' chief investment strategist Jeffrey Saut is back with his weekly Investment Strategy. Last week, his piece 'Octobered?!' looked at returns during some of the market's historically worst months. This week's piece definitely caught our eye because Saut calls the passage below "two of the most important paragraphs I have ever encountered in more than 40 years studying markets."

Taken from Stock Profits Without Forecasting by Edgar S. Genstein, here are the two paragraphs he is referring to, started with the following quotation:

"The absolute price of a stock is unimportant. It is the direction of price movement which counts.”

“During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favor of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose.

In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price – by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.”


Definitely food for thought and especially relevant given the massive rally we've seen from this year's March lows. Embedded below is Saut's market commentary for this week, "Direction Dictates":



Alternatively, you can download the .pdf here.

If you're interested, you can also check out Jeff Saut's commentary from last week where he examined historical stock market performance in the month of October.

Jeffrey Saut Investment Strategy (Raymond James) - 9/28/09

It's been a long while since we last covered the investment strategy of Jeffrey Saut from Raymond James and we thought we'd pick it up again. Here is his latest piece just released yesterday entitled, 'Zebras!?' While the title is a bit strange, it makes sense once you read his piece where he likens portfolio managers to Zebras just waiting to be eaten by the Lions. Saut is Raymond James' chief investment strategist and managing director.

Embedded below is his weekly note.




Additionally, you can download the .pdf here.

Market Insights From Hedge Fund D.E. Shaw & Co: Common Trading Mistakes

This is a first for Market Folly in that we've been able to track down some market insight from none other than hedge fund firm D.E. Shaw & Co. While the commentary is from July of this year, it is theoretical and applicational in nature so it's still very relevant. Not to mention, it's probably worth your time regardless, considering it is coming from a firm who has their hand in all different types of markets. After all, they are a hedge fund, a private equity firm, and technology development shop all rolled up into one.

This particular research report focuses on intuition versus reason. Additionally, it deals with analyzing trades and what they call the "time-portal" fallacy. It makes for interesting reading so definitely check it out as they delve into the topic of common trading mistakes and the consequences that follow. You can download the .pdf here. For more on DE Shaw, check out our recent portfolio coverage on them.

Don Coxe's Basic Points - September 2009 Market Commentary

Market strategist Don Coxe is back with his 'Basic Points' for September 2009 and we have embedded them below. Alternatively, you can download the .pdf here. We've typically covered Coxe's commentary in months prior but after a brief hiatus on our part, we're back with his latest edition. If you're interested in his past work as well, you can view his June commentary here and an excellent question and answer session with Coxe himself.

If you're not familiar with Coxe, he's a market strategist and has quite a large following due to his opinions and forecasting. He currently likes commodities, precious metals and the like. He is an agriculture bull and actually shares a lot of views with that of legendary investor Jim Rogers (we've covered Rogers' market thoughts in the past as well).

RSS& Email readers: come to the blog to view the embedded document.

Don Coxe Basic Points Sept 2009

Hedge Fund Clarium Capital's August Commentary: Save Now, Invest Later

Here's the latest from Peter Thiel's hedge fund Clarium Capital. Their August commentary is titled 'Save Now Invest Later' and makes for some interesting reading (as does typically all of Clarium's commentary). Through the end of June, Clarium was down 6% for 2009 as noted in a recent piece, 'macro hedge funds bet against recovery.' As of the end of August, Clarium is now -8.3% for the year. That article further goes on to divulge that Clarium is positioned for a bear market by betting on the US dollar, hypothesizing the currency will strengthen due to leveraged investors selling equities to pay down debt they used to finance the equity trades they were in. Additionally, they are keeping a steady eye on the unemployment rate among other indicators. Clarium was down another 4.5% in August and is now -8.3% for the year. The poor performance even reportedly had a normally calm Peter Thiel yelling at Managing Director Jack Selby. For the year of 2008, Clarium was also down 4.5%. Someone once told us it's almost as if they think that the fancier the idea, the bigger the potential profit. Somewhere along the line at Clarium there seems to be a disconnect between the idea and turning it into a successful trading strategy.

While Clarium continues to have interesting research, they still have yet to translate those ideas into solid performance. All the same, we'll gladly read their commentary as it's always prudent to evaluate all sides of an argument regarding the economy and markets, whether you agree or disagree with them. And as an avid lifelong supporter of Manchester United Football Club, we were caught a bit offguard (yet delighted) to see Clarium start off their letter with a quote from the great George Best.

RSS & Email readers will need to come to the blog to view the letter or you can try downloading the .pdf here:

Clarium Save Now Invest Later


We also recommend checking out their past commentary, as well as their piece, 'Macro Framework For Equity Valuation.' Lastly, you can also check out some brief thoughts from Peter Thiel from the Ira Sohn investment conference.

Bill Gross September 2009 Commentary (PIMCO)

Here's the latest commentary from PIMCO's bond boss, Bill Gross. He entitles it, "On the 'course' to a new normal." In addition to the text below, you can also download it in .pdf version here.

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From PIMCO:

Analyzing why people play golf is like exploring the intricacies of string theory – there are so many permutations lacking scientific observation that physicists or golfers can pretty darn well say anything they like and the explanation might stick. When it comes to whacking that little white ball, the possibilities are nearly endless: People play to relax, to be with friends, to get close to Mother Nature, to enhance business connections, to compete and excel. Gosh, I don’t know, the Zen explanation for why we play golf could even resemble the old saw about climbing a mountain: People golf because it’s there. Whatever the reason, it is the most frustrating, damnable game ever conceived – alternately elevating and depressing you within the span of mere minutes. I love golf. No, I hate it.

Personally, the reason that golf draws me to its intricate web of psychological entrapment is epitomized by a simple six-inch trophy: a chartreuse ball resting on top of its ebony base, preening on a bookshelf in the family room at our desert home. Its inscription reads, “Hole in one, March 15^th, 1990, 14^th hole Desert Course, 155 yards.” Well and good, I suppose – the ace of my life – except it wasn’t. It was the ace of my wife. Above the inscription rests the name Sue – not Bill – Gross. It was a great shot but it wasn’t my shot, and I guess therein lies the explanation for why I continue to tee it up.

Actually, two years ago I did tee it up in the sweltering 105° June heat of the Palm Springs desert. No one, of course, was crazy enough to be with me including my “ace” role model wife who was sipping a cool lemonade in the comfort of our air-conditioned home. Now, there is an “unwritten” rule in golf that in order to be official, a hole-in-one has to be witnessed, and that you have to play a full 18 holes. Otherwise, I suppose, you could stand on the tee with a bucket of balls and hit hundreds or thousands until one of the little guys went in – whatever. The fact is, on this particular day, I was playing only one ball, but I was alone, and – good God! – it went in! The trophy with ebony base and spanking white Titleist ball would read: “Hole in one, June 7^th, 2007, 17^th hole, Mountain Course, 139 yards.” Or was it? Does a falling tree make a sound in the middle of a forest if no one’s there? Is a hole-in-one a hole-in-one if no one else saw it? I say emphatically – yes! That damn ball went in and later that day Sue agreed with me (although she had a funny look in her eye – especially since she didn’t know a thing about the rules of golf). No one else though. No one else agrees with me. Not a soul. I suspect they’re jealous and, in fact, I’ve seen a few of them hitting buckets of balls at dusk from that very same tee when they think nobody’s looking. I’m watching, though, which brings up a funny question. If they sunk one, would theirs be a hole-in-one because I was a witness? Like I said – a damnable game.

“Is a hole-in-one a hole-in-one” may not strike you as the most critical question of the hour, and I would readily agree. “Will we have a New Normal global economy (and investment market)?” would probably usurp it on even Tiger Woods’s top ten list. This “new” vs. “old” normal dichotomy was perhaps best contrasted by Barton Biggs, as I heard him on Bloomberg Radio in early 2009, when he said he was a “child of the bull market.” I thought that was a brilliant phrase, and Barton is a brilliant phrase-maker. He went on to say though, that his point was that for as long as he’s been in the business – and that’s a long time – it has paid to buy the dips, because markets, economies, profits, and assets always rebounded and went to higher levels. That is not only the way that he learned it, but that is the way, basically, that capitalism is supposed to work. Economies grow, profits grow, just like children do. I think that’s why he said he was a child of the bull market, not just because he had experienced it for so long, but also because economic growth and higher asset prices are almost invariably a natural evolution, much like the maturation of a person. That’s how people grow, and so I think Barton was saying that capitalism just grows that way too.

Well, the surprise is that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

This focus on the DDRs – delevering, deglobalization, and reregulation – may be conceptually understandable, but nevertheless still a little hard to get one’s arms around. Why would they necessarily lead to a new, slower growth normal? A little easier to grasp might be the following approach, which feeds off the same concept, but which extends it a little further by suggesting that DD and R lead to a number of broken business or economic models that may forever change the world we once knew and make even Barton Biggs a chastened adult. They are as follows:

1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.
   
2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”
   
3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.
   
4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.
   
   Similarly, the financialization of assets via the shadow banking system led to an American era of consumerism because debt was available, interest rates were low, and the livin’ became easy. Savings rates plunged from 10% to -1%, as many (if not most) assumed there was no reason to save – the second mortgage would pay for everything. Now things have perhaps irreversibly changed. Savings rates are headed up, consumer spending growth rates moving down. Get ready for the New Normal.

I could go on, reintroducing the negatives of an aging boomer society not just in the U.S., but worldwide. Increased health care may be GDP positive, but it’s only a plus from a “broken window” point of view. Far better to have a younger, healthier society than to spend trillions fixing up an aging, increasingly overweight and diabetic one. Same thing goes for energy. Far easier and more profitable to pump oil out of the Yates Field in Texas or even Prudhoe Bay than to spend trillions on a new “green” society. Our world, and the world’s world, is changing significantly, leading to slower growth accompanied by a redefined public/private partnership.

The investment implications of this New Normal evolution cannot easily be modeled econometrically, quantitatively, or statistically. The applicable word in New Normal is, of course, “new.” The successful investor during this transition will be one with common sense and importantly the powers of intuition, observation, and the willingness to accept uncertain outcomes. As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

1. Global policy rates will remain low for extended periods of time.
2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
5. The dollar is vulnerable on a long-term basis.

Like playing in an Open Championship, future golfers/investors need to play conservatively and avoid critical mistakes. An “even par” scorecard (plus some hard earned alpha) may be enough to hoist the trophy in a New Normal world. Holes-in-one? Maybe if you’re lucky. But make sure someone’s watching, and that their eyes are focused on the New Normal. As for golf, even Sue, my only supporter, has asked me to move my ball, on its own ebony base, away from her more authentic and perhaps the still solitary ace made by Gross family golfers. What a damnable condition.

William H. Gross
Managing Director

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Make sure to also check out Bill Gross' August commentary as well if you're interested.

Hugh Hendry's Eclectica Fund August Commentary

Many of you may have already read this, but we found it prudent to post up the latest from Hugh Hendry's Eclectica Fund. The resident deflationist is back with his August 2009 commentary and you can read it below. As we noted in our hedge fund news update recently, Hendry sees a very crowded trade in that so many people are confident inflation is in our future. You can also view Hendry's previous letter here.

Without further ado, Hugh Hendry's Eclectica Fund August 2009 Commentary (Email readers will need to come to the blog to view the embedded document, or you can attempt to download the .pdf via this link):

Eclectica August Commentary

Sprott Asset Management: Beyond the Stimulus (Market Commentary)

Here's the latest commentary from Eric Sprott's hedge fund Sprott Asset Management. Their August market commentary is entitled 'Beyond the Stimulus.' As always, great insight from them and recommended reading. Last week we also posted up another piece of theirs entitled 'Gold: The Ultimate Triple-A Asset.'

And if you can't get enough Sprott, then also check out their July market update, their market commentary (highly recommended) and the list of their positions in UK markets. Email readers will need to come to the blog to view the embedded document below:

Sprott Comment August 2009


And you can try downloading the .pdf here.

Hedge Fund Elliott Management's Market Commentary (Investor Letter)

*Update: Letter removed per request of representatives from Elliott. Read on at the bottom of this entry if you want another way to view it.

Very in-depth and analytical commentary out of Elliott Management in their recent second quarter 2009 letter to investors. The hedge fund has penned a 24 page letter covering topics of risk management, the automotive industry, regulation, distressed assets, arbitrage opportunities and much, much more. We highly recommend taking the time to peruse through this lengthy and informative hedge fund investor letter.

Elliott Management was founded by Paul Singer back in 1977 and managers over $12 billion today. They typically focus on distressed investments and back in their first quarter letter mentioned that all the government spending and bailout activity could potentially make the economy worse. RSS & Email readers will need to come to the blog to view the embedded letter.


You can try to download the .pdf directly here if the link still works. Do note that the document is hosted by Scribd, not MarketFolly. If you really want to read the letter it is most likely floating around somewhere on Scribd's site.

Sprott Asset Management Market Commentary: July 2009

Thanks to a reader in Toronto for sending over the latest from the Sprott camp as they seek to emphasize that markets are 'surviving' on investor sentiment rather than cold hard facts. We like how they chose to end their letter: "Keep it simple, stupid - investing is and has always been about the real economy, and this market is ignoring the hard data. You can invest in sentiment if you want to, but as we have said before, we prefer to invest in real things." The phrase 'real things' obviously has multiple meanings here. First, they mean using the real, raw economic and earnings data as a guideline. But, at the same time, one can't help but note that they most likely want 'real' to mean 'real assets'... as in commodities, and specifically, precious metals. And, even more specifically, gold. Sprott has a big weighting in precious metals as we have previously noticed when we covered their portfolio. Obviously they are skeptical of the market being able to hold itself up on 'hope' and 'green shoots' (and rightly so). Additionally, you can download Sprott's June performance data .pdf here.

Enjoy their commentary below in embeddable .pdf form. RSS & Email readers will have to come to the blog to view it.

Sprott July 2009

Why Gold Prices Will Rise

Just yesterday, we posted up a technical analysis video that looked at what trading range gold is currently trading in. With so many hedge funds in the gold trade, it's always a topic worth monitoring. Below is a guest author piece entitled, "With Inflation on the Horizon, Gold Prices are Ready to Rally."

By Jason Simpkins

Managing Editor

Money Morning

With the global economy on the mend, could gold be gearing up for another record-setting run? It sure looks that way. After peaking north of the $1,000 per ounce price level last year, gold hit a stumbling block when deflationary fears in the world's largest economy sucked the air out of commodities prices and sent hoards of investors stampeding into the safe-haven of U.S. Treasuries, and helped spawn a rebound in the U.S. dollar. Since that time, the global economic outlook - especially beyond U.S. borders - has improved, and gold prices have stabilized. The next step - many gold bulls say - is for the yellow metal to make a run for new highs.

Whipsaw Trading Patterns

Gold started 2009 at about $870 an ounce - down substantially from early 2008 when prices hit a record-high $1033.90, but significantly higher than the $712.30 an ounce it was trading at in mid-November. Then, when talk of inflation resurfaced in February, and later in April, prices surged well over $900 an ounce, again testing the $1,000 level. Gold prices hit $983 in early June - a 38% jump from their November low. Gold prices have since lost some of that momentum, dropping back down to $940 an ounce, but many analysts believe this is where gold will find support before eventually shooting back to $1,000 - and possibly even higher - by the end of the year. There are many reasons to believe that gold is poised for such a strong showing: Supply of newly mined gold is dwindling, fresh discoveries of deposits are on the wane, and demand has remained strong. But the biggest reason analysts believe gold will rebound to its 2008 apex is that the medium and long-term outlook for dollar is rapidly darkening.

Government Support for Gold

With the U.S. Federal Reserve pursuing a policy of quantitative easing and a federal budget deficit that's spiraling out of control, the dollar is extremely vulnerable. The Federal Reserve has lowered its benchmark Federal Funds rate to a range 0%-0.25% and has said it will remain there for "an extended period." The Fed has also injected more than $2 trillion into the financial system, expanding credit through increased loans to banks to provide liquidity. It's also created the Commercial Paper Funding Facility - which holds $109.2 billion in short-term IOUs issued by corporations - and the Term Asset-Backed Securities Loan Facility (TALF) - which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans. And the central bank itself has pledged to buy $1.75 trillion in mortgage-backed securities, Treasury notes, and federal housing agency bonds. "In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base," said Money Morning Contributing Editor Peter Krauth. "That can only lead to serious inflation, perhapseven hyperinflation. This will cause the value of the U.S. dollar - which has been eroding since 2001 - to decline at an even-more-frenetic pace." In addition to the Fed's action, the United States' spiraling debt poses a significant threat to the dollar's value, as well. Federal debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010, according to the Congressional Budget Office (CBO). The CBO projects the U.S. budget shortfall will reach at least $1.85 trillion - equivalent to 13% of the nation's gross domestic product (GDP), a level not seen since World War II - in fiscal 2009. And if the economy doesn't rebound soon, that number will very likely top $2 trillion by the end of September. The CBO anticipates the deficit will shrink to about $1.4 trillion in fiscal 2010 and $1 trillion in fiscal 2011, if the economy continues to stagnate, there is a good chance that those budget shortfalls will be even greater than the fiscal 2009 deficit. Some of U.S. President Barack Obama's advisors have already acknowledged that the administration underestimated the rapid rise in unemployment and that a second stimulus may be in the cards. Laura Tyson, former chair of the U.S. President's Council of Economic Advisers during the Clinton administration and current advisor to President Obama, said July 6 that the $787 billion stimulus passed in February was "a bit too small" and that more may be required. But if another stimulus is needed, how exactly does Washington plan on financing it? While the government has continued to find buyers for its Treasuries, the question being asked by analysts is at what point will investors start to balk at continuing to finance the American expenditures. China - the largest holder of U.S. debt - is already losing its appetite for U.S. Treasuries. In fact, the world's fastest growing economy has already admitted to stocking up on gold to hedge against the dwindling value of its dollar holdings.

With the Dollar Diving, China Turns to Gold

China bought less than a sixth of the Treasuries issued by the U.S. government in the 12 months through March. That stands in stark contrast to the Treasury market of two years ago, when China's demand for U.S. securities actually exceeded the United States' own borrowing needs. Additionally, when China has purchased Treasuries, it has done so by swapping them with other U.S. assets, rather than exchanging foreign currencies or commodities. China has increased purchases of short-term Treasury notes - those that mature in a year or less - while at the same time unwinding its position in Treasuries with longer maturities. "They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher," JPMorgan & Co. analyst Frank Gong told The Associated Press. "Inside China, there has been a lot of debate about whether they should continue to buy Treasuries." As Money Morning reported in June, Treasury Secretary Timothy F. Geithner traveled to China to reassure the nation about the value of its holdings. But not everyone was convinced. "I worry about details," said Yu Yongding, a former central bank adviser who interviewed Geithner for the China Daily newspaper. "We will be watching you very carefully." Prior to Geithner's visit, Yu told Bloomberg News that he was hopeful for details on the U.S. plan to support the dollar. He also warned that despite its sizeable commitment to U.S. debt, China has other options. "I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds,'" said Yu. "The euro is an alternative. And there are lots of raw materials we can still buy." One such raw material is gold. China recently announced recently that it has increased its holdings of gold by about 450 metric tons in the past six years. "Gold is shifting back from a sovereign reserve asset central banks were inclined to underplay to one of growing, strategic interest," said Trevor Keeley, global head of sovereign client services at the Anglo-Swiss bank UBS AG. "This shift is logical; gold remains the world's primary financial asset that is no one's liability." And China's not the only one loading up on the yellow metal. Whether it's through exchange traded funds (ETFs), or acquiring actual gold bullion, investor demand for gold continues to soar. Individuals' bullion purchases almost doubled last year to 862 metric tons, The Wall Street Journal reported. And while gold buying by investors has fallen from its 2008 peak, the volume still remains historically high. The 130 metric tons of gold purchased in the first quarter of 2009 is 50% higher than this decade's average quarterly volume. Of course, bullion isn't the most practical way to get in on gold's pending surge.

How to Stock Up on Gold

One way to stock up is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares. Today, SPDR itself holds more than 1,000 ounces of gold, and has a market capitalization of $33 billion. The fund's price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold. Buying stakes in gold miners is an excellent way to hedge against the enormous inflationary pressures filtering through the U.S. economy. In this case, the Market Vectors Gold Miners ETF GDX - composed chiefly of major gold miners - offers both company and geographic diversification, while including substantial leverage to the price of gold. Market Vectors is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

Thoughts from Ray Dalio of Bridgewater Associates

*UPDATE *: Unfortunately, the document has been deleted. Originally, it was Ray Dalio's piece, 'A Template for Understanding Whats Going On.' We apologize for those of you wanting to read it, but institutions are understandably protective of these confidential documents.

Here was the original post:

Hat tip to Mebane Faber for flagging and uploading this. 'A Template for Understanding Whats Going On' by Ray Dalio of Bridgewater Associates. This was originally written back in October, but he's gone back and updated it for March. Definitely a great read (RSS & Email readers come to the blog to view it). We've also posted some of Ray's thoughts on the market before as well.

Since the document is no longer there, we'll substitute it with his 'D-process' interview from February so you can at least get some of his thoughts. Thanks.

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