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Report for the Second Quarter Ended June 30, 2014

 -- Published: Monday, 28 July 2014 | Print  | Disqus 

This is the EMA GARP Fund L.P. report for the second quarter ended June 30, 2014.  The Fund increased in value by 10.2% during the quarter, leaving the Fund up 17.8% year to date.











Q2 2014






Q1 2014















Jun 2014





May 2014





Apr 2014








Since Inception





























































*  Net fees; incentive allocation is charged in December if the 10% hurdle is reached.

** Net fees and incentive allocation; audited.



Current Themes

Investment Implications

Monetary Chaos

Long precious metals, mining stocks.


Short as appropriate for deflation.



Second Quarter Overview


In the second quarter of 2014 the EMA GARP Fund increased in value by 10.2%.  This is the best quarterly performance in over a year, and it represents the second consecutive quarter of positive results.  It is still too early to tell if we have seen the worst in the markets for gold and silver, and gold and silver mining shares.  However, we like what we see.  If, indeed, the trend has changed then we see a lot of upside potential in our portfolio, given how oversold and undervalued each and every one of our portfolio companies has become.


The second quarter of 2014 was notably different from 2013 in other ways.  Gold stocks continued their strong relative performance when compared to the general stock market.  In the schedule below you can see how during the second quarter the DOW was up 2.2%, the S&P500 was up 4.5% and the NASDAQ was up 5.0%.  This was the second consecutive quarter in which gold stocks outperformed the general markets.  In our year-end letter we offered statistical evidence showing that the US stock market is extremely overvalued, and since then it has become more overvalued.  Furthermore, gold stocks are equally extreme in their undervaluation.  


Below we present the performance of the Fund and relevant indices during the second quarter of 2014:





















S&P 500 Index















XAU Gold/Silver Stocks





HUI Gold/Silver Stocks





GDX Gold Majors ETF





GDXJ Gold Juniors ETF





GLDX Gold Explorers





SIL Silver Miners ETF










Gold bullion





Silver bullion





Crude Oil





Goldman Sachs Commodity Index





CCI Commodity Index





US Government 10 Year Bond Yield






In our last quarterly letter we noted how commodity inflation emerged strongly in Q1 of 2014.  We mentioned it because inflation drives gold, and the annualized rate of increase was large.  If commodity inflation really gets going gold is going to soar.  In the second quarter the rate of commodity inflation moderated. The GSCI growth rate slowed down and the CCI index declined modestly.  So we will have to wait to see if commodity inflation resumes its upward thrust.  We are watching these numbers carefully as a clue to what gold’s next move will be.  If, as we believe, commodity inflation is inevitable given all the money that has been printed, then it should not be long before we see the next leg up in gold.


Because not much has changed from last quarter, and the points we made in our last report are still valid, we have provided a review of where we have been at EMA, and where we are going.


How We Got Here


We are an investment partnership that pursues financial return by choosing stocks which exhibit growth-at-a-reasonable-price (GARP)[1] characteristics.  We adjust our focus to find market segments, industries and companies that presently exhibit GARP.   This means that we do not lock ourselves into any one area.  We always look for the best GARP. There is a time or a season for each investment.  We believe GARP gives investors the best risk adjusted rate of return on equities.


For the first five years of our existence this strategy worked very well for us.  From our launch on January 1, 2006 through 2010 we achieved compound annual returns of 25.4% per year.  If you were with us you will recall we pursued the following themes:  1. India, China and Vietnam equities which took advantage of growth of the middle class in those countries (2006-2008).  2.  Anti-GARP as we shorted the overvalued over leveraged financial firms which blew up in the Global Financial Crisis of 2008 (2007-2009).   3.  Gold and silver and gold and silver mining company shares (2009-Present).


The thesis behind the bet on gold, silver and the companies that mine these metals was fairly straightforward.  Gold and silver are traditional, non-printable, inflation proof money.  They have had this characteristic for 5,000 years and 6 billion people on the planet get to vote on their value.


In an overleveraged system that was rapidly deflating in the Global Financial Crisis of 2008 the actions taken by the world’s governments and central banks to print money in order to keep the system functioning were large and unprecedented.  If you had told us in advance what would occur, we would not have believed it remotely possible.  Yet, the FED and other authorities ran deficits, printed money and took monetary steps which have NEVER been taken in the history of finance on a global basis.  Since that time these policies have continued.  Six years and running of zero interest rate policy (ZIRP) is a good example.  In terms of monetary policy we are in uncharted territory.   We often ask ourselves, is anybody paying attention to how far outside of the norm these financial conditions are?  The complacency is stunning to us. We feel very similar to the way we felt about the Dotcom stocks in early 2000.  The difference is that in this cycle the bubble is in debt or “money” rather than internet stocks.


In 2008 there was not a lot of GARP to be found in the general stock market. Naturally, it was obvious to us that the way to protect oneself was to own gold, silver and mining stocks.  We did, and in 2009 the fund was up 33.2% and in 2010 the fund was up 47.1%.  Then something funny happened.  The authorities hinted at an exit strategy to QE and this punctured the inflation trade.  Of course, they did not really follow through on the “exit strategy” for long, but their zig zag helped to cool commodity inflation down.   In the end, in fact, they increased their rate of printing as can be seen in the chart below.  What happened that is fishy is that as the money printing continued and grew the price of gold continued to go down. 


The charts on the next page illustrate the disconnect between the continued growth of the Monetary Base (which is reflected in Federal Reserve Assets and is nothing more than the money created by the FED) and the price of gold. 


In this chart on the left, FED Assets (money printed) is the green line.  The S&P 500 is the red line.  And the price of gold is the black line.  From the GFC in 2008 until mid 2011 there was a strong correlation between all three of these variables.




The chart on the right shows the relationship between the price of gold and the monetary base over a longer period of time. 


Notice how the rate of money printing slowed from mid-2011 to late-2012.  This slow down, in conjunction with a coordinated attack by the Central Bankers on the price of gold[2] was enough to break the inflationary psychology that built up in 2010 and early 2011.  Recall that at this time inflation was breaking out all over the place. At the same time the FED implemented operation Twist which was designed to bring long-term interest rates down by selling short dated treasury bills and using the proceeds to buy long dated treasury bonds.  This increased bond prices, decreased the long bond yield and sent the market a deflationary signal.  If all this manipulation by the FED strikes you as Machiavellian then you are not alone.  We live in a financial climate where many stated asset prices do not reflect the true value of the underlying asset.  Markets can be manipulated, but not forever.  Fundamentals ultimately win out.

How did they get the price of gold to go down so aggressively in 2013?  Simple.  They sold paper gold contracts into the market place and swamped the market with a supply of paper claims on gold.  This is not conjecture on our part.  There is documentation and evidence that strongly supports this claim.  The amount of gold that was sold in the middle of April in 2013 surpassed historical records by many multiples.  It is not like a bunch of gold holders all woke up one morning and decided to sell their holdings in huge market moving size.  The volume could only be accounted for by the actions of the Central Banks.


It is a well accepted fact (even conceded by gold bullion bankers) that there are 100 paper claims outstanding for each available ounce of physical gold.  What this means is that a lot of people own a paper claim to gold.  But in fact they are an unsecured creditor against whoever sold them that derivative or piece of paper.  If the seller is financially unstable and becomes Lehman Brothers, the gold certificate holder will never collect on the gold price appreciation that will occur when this scheme blows up. It is really quite diabolical because gold is financial insurance yet people are selling fake gold (in the form of un-backed contracts).  When the insurance is needed the insurer will be bankrupt.  Selling gold that does not exist is similar to what AIG did when it sold Credit Default Swaps that had no reserves to back them. In a financial melt-down only real gold will count and you can bet that it will not be priced at $1,300.  Can you imagine the lawsuits that will come from the people who thought they owned gold but really did not when this fraud ends?  Furthermore, we believe some of the bullion banks are aware of this.  Several of the more sophisticated gold bankers have exited the gold trade because they can see what is coming.


It is like a game of musical chairs.  Physical ownership of a real piece of gold is a chair.  For every ounce of gold in existence there are 99 other claims who think they own that ounce or chair.  Bottom line, the bankers and financial entities who have a deep vested interest in the continuation of this system have used “paper gold” claims to manipulate the price of gold lower.


In this effort they were aided in early 2013 by Ben Bernanke and Tim Geithner who travelled together to India and convinced the Indian Government to put import duties and quotas on the importation of gold.  The Indian people were one of the world’s largest consumers of gold prior to these duties.  Indian imports fell by over 90% when the duties were put into place.  Notably, these import rules could be changing as the newly elected Prime Minister of India, Nahindra Modi is known to be very pro-gold and pro gold ownership by Indian citizens.  Modi was elected in a landslide in part because of his pro-gold, anti-government corruption stance.


So, what we would submit is that there are really two gold markets out there.  One is the real physical market marked by safe ownership where possession is 9/10ths of the law.  The other is the paper gold market which is manipulated by the Central Banks and Governments to hold our creaky financial system together.  A strongly rising gold price threatens the claim of all central bankers that inflation is under control.  A claim that is ludicrous to begin with since the Global Money Supply has increased at a 17% annual rate since 2008.


What absolutely terrifies the banks and governments is the spread of the knowledge of this condition.  If the 99 holders of paper gold were to step forward and say please deliver our physical gold this fraud would collapse.  There is not enough gold at these prices to settle all claims.  Notably, earlier this year the German government did step forward and ask for a return of some of its gold from the United States Treasury.  The US Treasury promised to deliver the gold over 7 years.  Now, the Germans have backed off on their demand.  One can only wonder what sort of pressure was applied to get them to back off.


Selling more gold than you own is an old trick.  This has happened once before in recent history.  A very similar thing happened to the London Gold Pool in 1968 when the Central Banks tried to defend $35 per ounce gold and were unsuccessful in doing so.


Now, some people make the claim that this line of reasoning is just crazy “conspiracy thinking”.  The big banks and governments would never manipulate a financial instrument like that.  That retort had more credibility before the LIBOR scandal unfolded.  If one examines the behavior of our banks and our governments in just the things that they have been publicly fined or censored for, it is not much of a leap to assume that the gold market too has been managed and manipulated.


We strongly believe our analysis on this is correct, only our timing has been bad. We underestimated the lengths that the banks and governments would undertake to maintain the illusion.  This error cost us three years of poor results.  The good news is that the game has not ended yet and we still have our positions.  We are going to be right and when we are we are going to make you multiples of your capital.  No manipulation of this kind can go on forever.  It will end, and end badly for the financial system and the people who are short gold.


Manipulations cannot last forever because the world is in a constant state of change.  The stock market has been continually pumped higher, and clearly does not represent real value.  Gold has been held down, and yet the demand for physical gold continues to grow.  Every developing country sees this and is adding to their stock of gold.  China, Russia, Brazil and many others are large and continuous purchasers of gold reserves.  The leaders in these countries can see that the Western system of debt and dollar dominance is coming to an end.  All of the developing countries are racing to set up bi-lateral currency agreements so that they can deal with a world where dollars are worthless.


The last time a gold manipulation fell apart between 1968 and 1980, gold went from $35 per ounce to $850 per ounce over a twelve-year period, rocketing to 24 times the starting point.  The low in gold during the cycle we are currently in was $280 per ounce in 1999.  Using a similar multiple results in a price over $6,500 per ounce.  In this particular cycle the money printing excesses are larger and the problem is worldwide. We believe the figure will be much higher than $6,500, though it does not matter.  At $2,000 gold, our portfolio will show very large profits.  We do not believe that this bull market in gold is going to stop at $1,300, (only 4.6x the low).  That is not how bull markets end.  All of the fundamental factors supporting a higher gold price have not changed.  Ultimately fundamentals will win out over manipulation.


We still firmly believe that as more and more people become aware of the out of control monetary policies and the impact they have on the value of their savings held in dollars, there will be an enormous shift into ownership of gold and gold related assets (and other tangible assets.)  Furthermore, it could happen very quickly because the price of gold has been artificially suppressed similar to a beach ball being held under water.


All it takes for this to happen is greater awareness among more people.  We see signs everywhere that inflation is becoming more evident and each day more people are waking up to the inflation threat.  Ultimately a tipping point will be reached and we will have what Austrian economist Ludwig Von Mises called a “crack up boom” as people rush to convert depreciating dollars into hard assets that will have value when a new currency regime is established.  In our opinion we are very near this point.  This also helps to explain why the mainstream press and Wall Street are so anti-gold.  They know that when this manipulation ends their gravy train will be over.


Presently, gold is hated, misunderstood, ridiculed and under-owned.  Even if you are only casually aware of the value of pursuing a contrarian investment strategy you should consider having some of your assets in gold.  In our opinion the largest wealth transfer in the history of mankind is about to take place.  We believe that there is a very high probability that by the end of 2014 the price of gold will shock the world.  We could be wrong.  It could take until well into 2015.  But recall that gold is and always has been insurance against “monetary chaos” and we believe that there is a lot of monetary chaos in the world right now.  Obviously, only time will tell us if we are correct in our analysis.


As always we encourage you to call us if you have any concerns or questions.




Larry and Rich.



[1]  We define Growth At A Reasonable Price (GARP) as companies which have a revenue line that is growing at 10% per year or much greater.  In turn, they have a valuation which leaves much more room for PE multiple expansion versus PE multiple contraction.  This can be measured using a PEG ratio which is the ratio of the percentage earnings growth rate over the price to earnings multiple.  Most GARP investments have PEG ratios less than 1.0  and sometimes as low as 0.4.  The lower the PEG ratio the cheaper the growth adjusted price. 

[2] There is significant evidence that all of the major central banks and the Bank for International Settlements (BIS) coordinate their efforts with the major gold bullion banks to manipulate the price of gold below its true market clearing price.  The best source of this evidence is The Gold Anti Trust Action Committee.  They have been active since 1999 and they have the definitive evidence supporting the fact that the price of gold is manipulated.  See

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