Will Greece Bankrupt Gold Punters?

I hope you don’t listen to hedge fund managers — they’re losing billions.

During a choppy first quarter, investors withdrew US$15.1 billion from hedge funds. This is the largest quarterly outflow since the second quarter of 2009, according to Hedge Fund Research.

It’s alarming…

Although, I should say, the number’s not huge. Hedge funds do manage around US$3 trillion in total.

What makes the drawdowns worrisome is the symbolic significance of it all — they’re back to Global Financial Crisis (GFC) levels. Remember those days? The financial market volatility was relentless — and the losses were huge.

Unfortunately, if you thought that was bad, the next financial meltdown — the sovereign debt crisis — will be far worse. The drawdowns will be bigger this time around I think, with the majority losing everything.

Fortunately, you can protect yourself from the fallout of this looming crisis by buying gold shares. But not yet… It’s not the right time.

I’ll explain…

How to beat the market

To start, let’s talk about fund managers. Most fund managers use the ‘bottom up’ investment approach. They buy and sell stocks based on fundamentals, financial models and valuations. Macroeconomics don’t tend to influence decisions.

Unfortunately, the investment game’s changed.

I hope you don’t subscribe to this approach. What worked in the past won’t necessarily work in the future. Following massive central banking intervention, financial models and valuations no longer matter.

Most fund managers — even the best — don’t know it. Of course, some think they do. But I have my doubts.

These professionals have excellent track records, some spanning decades. Based on their successes, they’re happy with their way of thinking. I don’t expect them to run their businesses any differently in the future. When the next financial meltdown strikes, the ‘bottom up’ investment approach could wipe out trillions from markets.

The best traders know it.

Compared to most hedge fund managers, traders rely on more than fundamentals. Traders tend to adopt the ‘top down’ approach, which involves having a macro view first and fundamental view last. I use this approach for Resource Speculator trades.

Based on my research, the commodities bear market isn’t over. If I’m right, resource and precious metal stocks should hit new lows in the months ahead. For this reason, excel spreadsheets and valuations don’t matter — and, therefore, neither do stock brokers.

When the going gets tough, the best traders won’t worry. Money can be made on both sides of the market — up and down. When the market starts to turn, being open minded and fluid in your approach should pay off. It allows you to adapt to any changes quickly.

I’m not saying it will be easy. In fact, quite the contrary.

Following this massive gold bear market rally, there’s a risk that you’ll become ‘trapped’ in your opinion. For many reasons, gold is sold as a ‘safe haven’. But it’s not as ‘safe’ as you think…at least not yet. There are plenty of reasons why but, today, it comes down to one word: Greece.

Greece — make or break for gold

Last year, the mainstream took us on a rollercoaster ride. Would Greece default or not?

I believed it would. Boy, was I wrong!

In the end, politicians ‘saved’ the day with a €86 billion bailout deal. In other words, they kicked the can down the road. Unfortunately for Greece, the road isn’t very long. Today, we’re back to where we left off…dealing with a county that’s dead broke.

There’s no question this won’t end well — debt’s a major source of instability for the global economy. At this point, Greece needs a miracle to avoid default. According to the Financial Times over the weekend,

The International Monetary Fund has told Eurozone finance ministers they must immediately begin negotiations to grant debt relief for Greece despite German opposition, upending carefully orchestrated negotiations ahead of an emergency meeting on Monday.

In a letter to all 19 ministers sent on Thursday night and obtained by the Financial Times, Christine Lagarde, the IMF chief, said stalemated talks with Athens to find €3bn in “contingency” budget cuts, which have gone on for a month, had become fruitless and that debt relief must be put on the table immediately, or risk losing IMF participation in the programme.

Athens is facing €3.5bn in debt payments in July that it needs bailout aid to pay, and EU officials have told Greek government officials they do not want messy negotiations to continue during the Brexit campaign — meaning if no agreement is reached this month, leaders will not begin discussions again until just weeks before a possible default.

Indeed, the bailout has stalled…

If Greece wants more cash, it must pass its so-called ‘first review’. For this to happen, Greece must pass reforms through parliament to satisfy its creditors — the European Commission (EC), European Central Bank, and the International Monetary Fund (IMF).

Unfortunately, two of its creditors — the IMF and the EC — disagree over Greece’s progress. For that reason, before it decides to support the bailout and allow Greece to pass the first review, the IMF is pushing for debt relief. This is a problem. Most Eurozone members are against debt relief, especially Germany — the bankrupt nation’s largest creditor.

In my view, if there’s no debt relief, Greece is likely to default in July. If you own gold stocks, this is a huge risk. Remember, the (ignored) Greek referendum, which rejected the bailout terms, was held on 5 July 2015. Gold crashed into this date, sinking further into the week of 20 July. It did not rally, as many gold bugs were touting.

While July is still some time off, start preparing for the worst now. If I’m right, gold stocks will be set to crash and burn. I’ll be happy that I’ve avoided the bullion space for Resource Speculator readers. I’m sure they will be too.

If you want to know more on this story, click here.


Jason Stevenson,

Resources Analyst, Resource Speculator

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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