Billionaire Sam Zell Buys Gold: Right Move, Wrong Reason

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Investment guru Sam Zell is buying gold for the first time. Zell claims "Supply is shrinking."

Please consider Billionaire Sam Zell Buys Gold for First Time in Bet on Tight Supply.

Gold’s dimming supply prospects have caught the eye of one billionaire.

“For the first time in my life, I bought gold because it is a good hedge,” Sam Zell, the founder of Equity Group Investments, said in a Bloomberg TV interview. “Supply is shrinking and that is going to have a positive impact on the price.

“The amount of capital being put into new gold mines is a most nonexistent,” Zell said. “All of the money is being used to buy up rivals.”

Misunderstanding Supply

Zell is correct about capital, about new mines, and about gold being a hedge.

Zell is wrong about supply. The supply of gold increases every month, albeit at a diminishing rate.

Since gold is not used up, the supply of gold is nearly every ounce ever mined, including gold in jewelry. The supply does not include gold buried and forgotten about or otherwise lost, gold in antiques, gold in historical treasures, etc.

At every price point, someone has to decide to hold on to their gold or sell it. Someone has to hold 100% of the supply, 100% of the time and that supply is constantly increasing.

Supply is not tight. Zell confuses supply with production as do most analysts.

But Zell is correct about gold being a hedge, perhaps not how he intends it. Gold is a hedge against central banks and runaway credit expansion.

Gold a Measure of Faith in Central Banks

As I have pointed out, gold moves primarily in response to faith in central banks.

Mike "Mish" Shedlock

Comments (34)
No. 1-14
Carl_R
Carl_R

According to this chart, 34% of gold is used in electronics:

It goes on to mention that the average cell phone uses $.50 worth of gold, and that most phones are not recycled. Gold certainly does get consumed, and it is actually possible for the total supply to shrink.

Sechel
Sechel

newmont seems to be making moves to lower their break-even price. they're also one of the larger outfits being that gold mining companies are leveraged on the upside i would tend to like this one. plus they're financially stronger than many of the smaller firms

Mish
Mish

Editor

Wagner - post away - I will delete every comment you make since that is how you want to play the game. Waste your time. I don't care

Mish
Mish

Editor

"According to this chart, 34% of gold is used in electronics"

So what?

The supply of gold goes up every month by the 65% that is not used up. Only when more gold is used in electronics than is mined will that cease to be true.

wootendw
wootendw

"...gold moves primarily in response to faith in central banks."

The 'moves' are very volatile but, just eyeballing the chart, I roughly estimate the long term ('79-'85) average gold price at about $400 during the early '80s and about $1300 over the past 6yrs.

The FRED CPI averages over the same two periods, again roughly using the following chart, suggests the CPI has nearly tripled over the same period.

As I said, my estimates are very rough. However, the increases in the avg gold price and CPI, in percentage terms, are within an order of magnitude.