The new paradigm – get used to hearing those words. The paradigm however, may not be “new”. Capital is backing an end to the current era of low interest rates and quantitative easing. And gold is the preferred investment alternative, according to Ray Dalio billionaire founder of Bridgewater Associates, to see off an escalating global conflict between capitalists and socialists.
Bridgewater, the world’s biggest hedge fund, is gold set and Dalio believes storing money in cash and bonds will no longer be safe in the future.
His view simply is the debt chickens are coming home to roost. And the next pendulum swing created by historically low interest rates, heralds a new era of debt monetization and currency depreciation. Gold is the answer, he said, where there are internal political conflicts in a reflationary environment as large liabilities come due, not to mention external global conflict.
In a 6000 word essay published on Linked In, Dalio says he thinks the paradigm will most likely end when a) real interest rate returns are pushed so low that investors holding the debt won’t want to hold it and will start to move to something they think is better and b) simultaneously, the large need for money to fund liabilities will contribute to the ‘big squeeze’.”
“There will have to be some combination of large deficits that are monetized, currency depreciations, and large tax increases, and these circumstances will likely increase the conflicts between the capitalist haves and the socialist have-nots.”
“In such a world, storing one’s money in cash and bonds will no longer be safe.”
“It is also a good time to ask what will be the next-best currency or store hold of wealth to have when most reserve currency central bankers want to devalue their currencies in a fiat currency system.”
A defining moment for gold is the US$13 trillion of European capital invested in negative interest rates, and the shift by ultra-high net worths to move away from equities significantly increasing physical gold exposure to as much as 10% ( and sometimes higher) of their portfolio.
Gold is now heading up in all major currencies, and Australian gold equities are in a confirmed bull trend. The ASX gold Index, XGD is 7764 with an eye on its previous high of 8499.
Near record levels for equity markets and rallying bond prices see many market participants on the edge of their seat making the gold clarion call. Gold responded, charting its own course, touching $US1450 an oz. There are a couple of intermediate chart targets it needs to scale before it breaks through its previous September 2011 $US1923 high, and the global inflation described by Dalio, coming through the easy monetary policies of central banks should see that happen.
A good example of gold’s underlying demand is the COMEX (Chicago Mercantile Exchange) gold open interest of 635,000 contracts each covering 100oz for eligible gold delivery . Or 63.5 million ozs for 0.322 million ounces for delivery. So what gold price inference can we draw from this?
Remember gold is a technically (chart) traded commodity. If it breaks it previous September 2011 high, momentum will over time propel it towards $US3000 an oz. Helped particularly, also by a geopolitically destabilized Middle East.
Harry Hindsight, every broker’s friend, reminded us in March we tipped as a buy, Northern Star Gold when it was trading around $9.00. And St Barbra Mines at $2.89 during their recent capital issue. NST is trading now just under $14.00 and SBM at $3.50 having made slightly heavier wind. If gold rises to $US1500 the average price earnings ratio across most local gold producers will fall to around 5.6 times and this will be closer to 4 times if gold reaches $US2000. Dividend payouts will be massive from producers at these prices (most have good balance sheets and low debt) – and gold stocks could follow their older iron ore brothers, becoming the next wave of high yield fully franked payers. Northern Star could easily be $20 a share, St Barbara will be looking at $5.00, and think of the gold big daddy, Newcrest at $100.
Bridgewater’s gold view may take some time to unfold. Prudent investors there is no time for thumb twiddling and should be looking at least a 10% portfolio allocation for gold producers.
As the great French satirist Moliere said about gold, it gives to the ugliest thing a certain charming air, for that without it were else a miserable affair.