It has been a violently turbulent year for bearish British billionaire (actually, as of April, he is no longer a member of the three comma club), Crispin Odey, whose hedge fund has plunged 29.9% YTD, following a 21% drop in 2015.
That's the bad news. The good news is that the fund, which has a Sharpe ratio that will need a very big chart, was only down 4% in July when global central bank intervention went into overdrive.
Which brings us to Odey's current investing mindset, and what he believes is the best trade for the future. Needless to say, with a gross notional allocation of 86% of his entire AUM, Odey is rather convinced that it is all about gold.
Here's why Odey is betting it all on gold, from his latest investor letter:
There are some signs of exhaustion in the demand for gold and silver at present. The net speculative position is greater than normal and suddenly with the USA posting a higher than expected 255,000 additional new entrants to the workforce, the markets are hopeful that there will be a rate hike in September in the USA and the US dollar’s weakness might be over. Optimists are now going for a 3.8% third quarter rise in real GNP over there.
To be fair, we were wrong footed. All the services data out of the USA pointed to a weaker number. The second quarter GNP figure which had widely been expected to come in at +2.8% turned out to be only +1.2%. With capital spending following profits downwards and the world economy continuing to be weak, only consumer spending and bank consumer credit lending kept things going.
It is indeed ironic that the USA accuses China of growing only thanks to consumer spending and debt, when the USA is pursuing exactly the same policies. US banks in the second quarter grew their lending by 8.5% annualised, or by nearly 24% of GNP, which is following on from growing their lending by 11% last year, or nearly 30% of US GNP.
These are large numbers, producing tiny results.
If we are at the limits of QE and financial repression, central banks, in the developed world, are at least doing a very good job at printing money. Every chance is taken to push some money printing through. Carney was quick to take advantage of Brexit to keep up with his fellow central bankers.
And this is where gold comes in. Gold was the original currency. It came out of distrust of governments and was chosen because it could not be manufactured at will. Today there are around 300,000 tons of gold extant and each year around 2,700 tons are mined, or less than 1% of the stock of gold. In August of 1971, France bought down Bretton Woods by demanding that the USA support every dollar of credit with a dollar of gold (at the then exchange rate of $35 per ounce). Because the USA had been running a current account deficit since 1963 to fight the Vietnam War, gold reserves only represented 26% of dollars outstanding. Sic finit Bretton Woods.
Today, world GNP stands at $75 trillion and world money supply stands at around $83 trillion – some ten times its level at the start of the millennium. Gold has a value less than $7.5 trillion, of which 57% is for jewellery, 22% is invested and only 17% is held by central banks. So central banks have printed over $80 trillion of money, backed by only $1.27 trillion of gold. The French took fright when they discovered that the USA had been fiddling the books in 1971. But in those days the US gold reserves were only valued at $35 per ounce and still represented 26% of outstanding dollars. Today at $1360 per ounce reserves represent a measly 1.5%. Where are the French this time?
They are, along with all of us, hoping that globalisation, bringing competition to bear across the world, continues to overcome the political reaction to the pain it has caused. If it fails, and it looks like it is failing, then Brexit and Trump will bring back inflation like the wind.
In a world where $13 trillion of bonds are negative yielding, where $4 trillion of investments are in ETF’s, is it wise that only $1.5 trillion of savings are invested to protect investors against a change in the weather?
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For Odey's sake - who is massively levered to an upside in gold paper futures - and that of his LPs, it would be a welcome change for gold to be repriced appropriately in the near future. Of course, that would necessitate the BIS to stop pummelling gold every other day when the precious metal is about to break out (as happened on Friday), which however is unlikely to happen as another sharp surge in gold would lead to questions about the viability of the current monetary system, collapse faith in central banking, and plunge markets into a historic crash. However, since it is only a matter of time before that happens anyway, as Deutsche Bank explained earlier, the ongoing "financial repression" of the price of gold, is a welcome - and ongoing - opportunity to convert some more fiat into what Odey called the "original currency." After all, for those who truly believe that the existing system is set to collapse, it's not like gold is an actual investment to be redeemed back into fiat terms in the near or not so near future, even if at much higher fiat-denominated prices.