Are They Cornering the Gold Market?
What Do They Know That You Don’t?
Everywhere you look the “Smart Money” is buying gold at a frenetic pace. That term, “Smart Money,” gets thrown around a lot, so I’ll be more explicit…
I mean people who have made billions of dollars investing.
George Soros, whose net worth is estimated at $25 billion, for example, and his former partner Stan Druckenmiller, who’s worth $4.4 billion.
John Paulson, who graduated from obscurity to legend when he used credit default swaps to bet against the U.S. mortgage market in 2007, netting $4 billion. Since then, his fortune has ballooned to more than twice that.
I’m talking about Paul Singer, a hedge fund manager Forbes estimates to be worth $2.2 billion.
All of these gentlemen are loading up on gold.
It’s rapacious. It’s almost as if they’re trying to corner the market. So what is their motive? What do they know that you don’t? I’ll tell you…
Last year, George Soros dumped 37% of his U.S. stocks and put $475 million into Barrick Gold, one of the largest miners in the world. He then sold that stake and went straight to the source, buying 240,000 shares of the SPDR Gold Trust ETF.
His motivation might surprise you. It’s China.
Soros believes that China’s economy is poised to crash after years of sky-high growth. He has a strong case, too, one that I’ve discussed at length in the past.
See, the problem with China’s growth is that much of it is debt-based. The government basically gives money to banks and encourages them to dole out loans even to unworthy borrowers. This rapid extension of credit has created a huge debt bubble.
At 277% of GDP, China has the highest level of corporate debt in the world. And its national debt load stands at roughly $23 trillion — five times what it was a decade ago, and more than two and a half times the size of the country’s entire economy.
This has Soros fearing a repeat of the 2008 financial crisis.
“There is an eerie resemblance to what’s happening in China to what’s happened here leading up to the financial crisis in 2007-2008 and it is similarly fueled by credit growth,” Soros said.
“It’s eventually unsustainable. But it feeds on itself and it has a lot to do with real estate,” he said.
Stanley Druckenmiller, who managed money for Soros as the lead portfolio manager for Quantum Fund, has echoed that concern.
“Since 2012, the Chinese banking sector has allowed credit to grow by the amount of the entire Brazilian GDP per year,” he noted last year.
“Our strong suspicion therefore is that a large part of this growth is just credit flowing to otherwise insolvent borrowers.”
Obviously, a relapse of the 2007 financial crisis would prove devastating for the global economy, which has yet to fully get its bearings back.
And that’s not all.
Broken Balance Sheets & Negative Rates
Druckenmiller also had a harsh dose of reality for the United States.
“By most objective measures, we are deep into the longest period ever of excessively easy monetary policies,” he says.
“Simply put, this is the biggest and longest dovish deviation from historical norms I have seen in my career. The Fed has borrowed more from future consumption than ever before.”
Making matters worse, most of the debt today has been used for financial engineering, and not productive investments.
“The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness,” Druckenmiller says.
“And we are paying 18× for the asset class.”
Europe is even worse off, as many central banks there have turned interest rates negative.
“Hint: it has traded for 5,000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest rates. Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation.”
Druckenmiller recently plunked $323 million into the SPDR Gold Trust ETF.
The Bond Market Bubble
Indeed, negative interest rates are another major concern for billionaire investors.
For Paul Singer, the founder of the $27 billion Elliott Management, gold is undervalued at
“a very dangerous time in the global economy” — one in which central banks have made the bond market
“the biggest bubble in the world.”
Speaking at the CNBC Delivering Alpha Conference, the respected hedge fund manager said he favors gold and urged the room of investors to sell their bonds.
“I think owning medium to long-term G-7 fixed income is a really bad idea,” Singer said.
“By removing these things that are bad ideas, that’s a helpful thing. Sell your 30-year bonds.”
The bond market is $60 trillion. Right now, nearly $10 trillion in fixed income is negative yielding, according to Singer. He added that these prices and yields contain a
“tremendous, never-before seen asymmetry between potential further reward and risk.”
Singer is among a number of hedge fund managers who have become increasingly vocal against central bank policy. He said that central banks have created a
“tremendous increase in hidden risk” and “unusual dangers that are unique in the ‘5,000 years-ish’ history of finance.”
For that reason, gold is
“underrepresented in many portfolios as the only money and store of value that has stood the test of time.”
“It makes a great deal of sense to own gold. Other investors may be finally starting to agree,” Singer wrote in an April 28 letter to clients.
“Investors have increasingly started processing the fact that the world’s central bankers are completely focused on debasing their currencies.”
So there you have it.
China, so long the world’s growth engine, has become a debt crisis waiting to happen. Central banks in Europe have deployed negative interest rates that rapidly erode value. And in the United States wealth has been borrowed from future economic growth to feed bubbles in stocks and real estate.
That’s why billionaires are rapidly rushing into their old standby, gold. It’s the only asset that can be trusted right now.