Commodity Trade Mantra

I Buy Gold as it’s Cheap & Central Bankers are Weakening Paper Currencies

I Buy Gold as it’s Cheap & Central Bankers are Weakening Paper Currencies

I Buy Gold as it’s Cheap & Central Bankers are Weakening Paper Currencies

Stanley Druckenmiller is considered one of the greatest traders ever. From 1986 to 2010, his hedge fund earned average annual returns of 30%. Even more incredible, he didn’t have a single down year during that stretch.

In 2010, Druckenmiller stopped managing outside money. But he didn’t retire. He now runs a family fund with about $1 billion in assets.

In other words, Druckenmiller’s still active in the market. And still worth watching…

• In 2015, Druckenmiller made a huge bet that captivated the financial world…

He bought $300 million worth of gold.

At the time, that was about 20% of his fund’s money. It was his biggest position by far.

Most investors wouldn’t put that much money in gold. But Druckenmiller isn’t like most investors. He thinks of himself as a “pig”:

The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered.

I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere.

In short, Druckenmiller doesn’t bet small when he finds something he likes. He bets the ranch.

• Now, we don’t know exactly why Druckenmiller loaded up on gold two years ago…

But we do know that he worries about the same things we do. In April 2015, Druckenmiller said the following at an investing conference in Florida:

If you look to me at the real root cause of the financial crisis, we’re doubling down. Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there and enabled those bad actors to do what they do.

Now, Druckenmiller said this almost two years ago. But not much has really changed since then.

The European Central Bank (ECB) and Bank of Japan (BOJ) are still doing everything they can to “stimulate” the economy, like printing money and using negative interest rates. Meanwhile, the Federal Reserve is still holding its key rate near zero.

In other words, central banks are still destroying paper currencies…meaning the case for gold is as strong as ever.

• Yet, Druckenmiller sold all his gold four months ago…

He actually cashed out on election night.

You see, Druckenmiller thought Hillary would win the presidency. When Trump pulled off the unthinkable, Druckenmiller sold all his gold because he likes what Trump brings to the table.

He thinks his pro-business policies will help the economy. He told CNBC two days after the election:

This economy is so over regulated and people are just drowning in red tape, that the removal of that, and I’m expecting serious tax reform, cuts to the corporate tax rate… So I’m quite, quite optimistic on the economy.

• Now, you have to remember something about Druckenmiller…

He’s a trader. He gets in and out of positions all the time.

Druckenmiller didn’t sell his gold in November because he gave up on the yellow metal. He sold it because he’s bullish on the economy, and gold’s a “safe haven” asset.

But he didn’t stay out of the gold market for long. In December, Druckenmiller started buying gold again.

This time, we don’t know how much gold Druckenmiller bought. But we wouldn’t be surprised if it’s a lot. He is a “pig,” after all.

We don’t know how much gold Druckenmiller bought this time. But we do know why he bought more gold:

I wanted to own some currency and no country wants its currency to strengthen… Gold was down a lot, so I bought it.

• Pay attention to Druckenmiller’s choice of words…

He didn’t say he bought gold because the stock market or economy is about to crash.

He bought it because 1) it’s cheap and 2) central bankers are weakening paper currencies.

And he’s absolutely correct.

Today, gold is trading 10% below last year’s high. It’s 35% below the all-time high it set in 2011.

Accounting for inflation, it’s even cheaper. Just look at the chart below.

To reach its previous inflation-adjusted high, gold would have to rise another 44%. That would push gold well above $2,000 an ounce. But we think it could head even higher than that in the coming years.

That’s because inflation is making a comeback…

• Inflation measures how fast everyday prices rise…

At least, that’s the mainstream definition.

But Casey readers know that most investors have it all wrong when it comes to inflation.

You see, inflation isn’t a side effect of money printing. Inflation is money printing.

When central bankers create money out of thin air, they don’t add anything “real” to the economy. All they create is more currency units.

Eventually, the economy accounts for this. Everyday people end up paying a lot more for groceries, gasoline, and rent.

This is important because central bankers have printed more than $12 trillion since 2008.

In other words, it was never a question of if we’d get inflation. It was a question of when.

Now that inflation has finally arrived, it’s time to take action.

• Physical gold is the best way to protect yourself from inflation…

You see, gold isn’t just money. It’s a hard asset. It has tangible value.

Because of this, the price of gold should rise as inflation picks up. And if central bankers don’t stop printing money, its value could skyrocket.

This is why we encourage everyone to own at least some gold.

Just be sure you understand something…

Just don’t trade gold like Druckenmiller. Leave that to the pros.

Instead, treat it like a core holding. Own it for the long haul. You’ll be very happy you did five years from now.


Chart of the Day: Investors Are Ducking Inflation

Investors are worried about inflation.

Today’s chart compares the iShares TIPS Bond ETF (TIP) with the iShares 20+ Year Treasury Bond ETF (TLT).

TLT holds long-term Treasury bonds while TIP holds TIPS, or treasury inflation-protected securities. These are bonds designed to protect investors from inflation. Because of this, investors buy TIPS when inflation is high or likely to rise.

The chart below shows TIP as a ratio to TLT. When this ratio is falling, it means TLT is doing better than TIP. When it’s rising, it means TIP is outperforming TLT.

You can see that this ratio has surged higher over the last few months. This happened because investors got out of normal Treasurys and into TIPS.

More importantly, this key ratio looks like it just broke out of a downtrend that it’s been in since 2011. This signals inflation is here to stay.

 

Justin Spittler

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