Gold’s Best Quarter in 30 Years Is Just the Beginning

Last week, we reported that billionaire investor Stanley Druckenmiller is publicly advising investors to sell United States stocks and buy gold. Druckenmiller is now joined in his gold recommendation by an equally legendary hedge fund manager – Paul Singer. 

Gold has gone up 20% already in 2016, so it’s not surprising that the large money managers are starting to board the gold bull train. With billions of money under management, investors like Druckenmiller and Singer must watch the big-picture trends, rather than rely on the economic forecasts provided by the Federal Reserve. In fact, these guys are often directly critical of the Fed. 

We shared Bill Gross’ latest investment thoughts yesterday, and we believe Singer and Druckenmiller would likely agree. Gross lays out the fundamental long-term case for gold: 

"I have long argued that this is a Ponzi scheme and it is, yet we are approaching a point of no return with negative interest rates and QE purchases of corporate bonds and stock. Still, I believe that for now central banks will print more helicopter money via QE (perhaps even the US in a year or so) and reluctantly accept their increasingly dependent role in fiscal policy… Investment implications: Prepare for renewed QE from the Fed. Interest rates will stay low for longer, asset prices will continue to be artificially high. At some point, monetary policy will create inflation and markets will be at risk.”

Ominous Portents—–More Evidence That The Global Bubble Is Bursting

by Doug Noland • May 14, 2016

In contemporaneous analysis during the Great Depression, there was insightful debate questioning whether over-investment or malinvestment was primarily to blame. Well, there was ample blame to go around. And this gets back to the fundamental thesis: It was not insufficient “money” after the 1929 Crash that was the root cause of economic depression, but instead gross excess of “money,” Credit and speculation throughout the Roaring Twenties. 

In the name of “shortfalls in aggregate demand,” central bankers have flooded the world with “money” and Credit. Predictably, this unprecedented global monetary inflation has wreaked havoc on financial market behavior and investment patterns, while spurring self-reinforcing asset inflation and Bubbles. And aggregate demand? It is not – will never be – “sufficient”. As we’ve witnessed, Credit Bubbles redistribute and destroy wealth. Bubbles distort investment and spending patterns, which in the end ensures too much of a lot of stuff that the general population either cannot afford or does not desire. 

I do appreciate that few businesses enjoy the capacity to grow accounting profits as rapidly as lending to those with difficulty borrowing from traditional sources/channels. Lenders can charge high rates, ensuring a profits bonanza so long as rapid loan book growth is maintained. Minimal provisions for future loan losses can be justified, with the percentage of seasoned loans turning sour remaining small in comparison to (rapidly expanding) total loans. But ballooning growth in loan books requires that lenders retain ready access to funding markets. Telecom debt in the nineties and subprime in the 2000s come to mind. It’s amazing how long ridiculous lending crazes can endure – and it’s equally amazing how abruptly the “money” spigot can be shut off.

DYI