Are You Ready for US$931 Per Ounce Gold?

The US Federal Reserve kicks off its two-day meeting tonight. Following this month’s poor jobs report, I don’t expect a rate hike this week. The Fed Fund futures are pricing in a 2% chance of rate lift.

Of course, this doesn’t mean you should write the meeting off. Financial markets are looking for clues on what the Fed could do next. As it stands, there Fed Fund futures predicts a 23% chance that rates will go up next month.

Aside from the Fed meeting, oil traders are focused on US stockpile data on Tuesday and Wednesday. After Friday’s 3% drop, the results could determine crude’s next big move.

Brent crude, the international benchmark, is trading higher at US$49.96 per barrel. It’s up 79.5% from the low of US$27.83 per barrel on 20 January. West Texas Intermediate (WTI), also known as US crude, is trading higher at US$48.38 per barrel. It’s up 85.7% from the low of US$26.05 per barrel on 2 February.

Meanwhile, gold is trading at US$1,282 per ounce. It’s down 1.6% from the May high of US$1,303 per ounce.

With plenty to talk about, let’s stick with gold today…

Another billionaire buying gold…should we listen?

Over the weekend, the billionaire founder of US hedge fund Elliot Management Corporation, Paul Singer, told institutionalinvestor.com,

The cure for the crisis — for the debt crisis, the financial crisis — has been deemed by the developed world governments to be more debt. There has not been a deleveraging. And after seven and a half years and counting of this mix of policies, at the moment we’re either in a stage of stagnation or rollover, possibly in the early stages of a global recession. So I think it’s a very dangerous time in the financial markets.

We obviously agree. Singer continued:

We’re very bullish on gold, which is the anti-paper money, of course, and is under owned by investors around the world. And we are very sceptical about markets. We hedge every equity position. We’re not in the mood to be surprised — surprised in the sense of losing large amounts of money — ever, but in particular now with this extraordinary and unprecedented situations where the stability of financial markets is so dependent on confidence in policy makers and central bankers.’

I haven’t made my first billion yet, but I’ll disagree with Singer nonetheless. While it sounds like a great idea, I strongly recommend avoiding gold — and the gold miners — for now.

It’s clear that financial markets are hooked on money printing and low interest rates. But, when the next financial crash hits, just like every other asset, gold should take a bit of a knock. Remember, gold and gold stocks both crashed during the financial crisis of 2008/09. So, will history repeat? I’m banking on the fact that it will.

Talking about the financial meltdown, Singer believes his success comes down to avoiding losing money. He told institutionalinvestor.com, ‘If you can break even during a bear market, crash, or financial crisis, you’re way ahead of the game.

While the comment makes a lot of sense, I find it amusing. Paul Singer’s professional background isn’t as conservative as you’d imagine.

According to The New York Times, ‘More than one-third of Elliot’s portfolio was concentrated in distressed securities, typically in the debt of bankrupt or near-bankrupt companies during 2009’. We know the history. Elliott Management Corporation made a truck load of cash from the crash.

There’s more to the story…

Elliot is a special type of hedge fund, widely known as a ‘vulture’ fund.

Vulture funds operate with an extremely high risk, high reward strategy. They buy distressed debt from bankrupt nations or companies during times of chaos. When the country or company has stabilised, vulture funds return to demand millions of dollars in interest repayments and fees on the original debt.

This strategy has worked like a charm in the past. Elliot has made billions — and lost little — for its clients. Yet, despite its past success, this is another situation where track records mean nothing.

There’s a major bubble across the debt markets. The coming sovereign debt crisis, when multiple emerging and developed nations will default on their national debt, should turn the world upside down. When this happens, Elliott Management Corporation — and many other vulture funds — may find it difficult to ‘avoid losing money’.

Singer is right to be concerned — he’s clearly in the wrong business.

The next financial crisis will be unlike anything we’ve ever seen. The last sovereign debt crisis happened in 1929–32. Regardless of the times, history tends to repeat. During the initial stages of the financial meltdown, tens of trillions will be lost across the globe across multiple asset classes.

We’re going to see defaults everywhere…

When government and high yield debt markets start blowing up, punters won’t know what to do next. Punters — losing a truck load on their gold stocks — will be confused. In my view, the majority will wonder why gold isn’t going up like they were told it would!

The writing is clearly on the wall. It doesn’t look great in the short term for gold and stocks. Gold should see a major crash to — at least — US$931 per ounce, and stocks a hefty correction.

I discussed this at length to Resource Speculator readers in late February and early March. If you want to know when to buy the gold miners, and the best miners digging it up, check out Resource Speculator.

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

Regards,

Jason Stevenson,
Resources Analyst, Money Morning


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.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia