Tuesday, January 26, 2010

Next Leg Down?

I would say there is a strong chance that we are on the verge of another equities selloff.

First, valuations and bullish sentiment have reached strained 2007 (pre-crash) levels, though economic fundamentals (rail traffic, employment, etc) have not shown commensurate improvement.

Second, the Treasury has gotten itself into a bind with too much short term debt perpetually needing to be rolled over. But they could refinance this easily into long-term Treasuries at attractive rates given another equities crash.

If this happens, gold will do poorly. Institutions such as hedge funds own a lot of gold, and are positioned very bullishly. They are all-in on inflation. They will be forced sellers of gold à la summer 2008, when it fell from almost 1000 to 700.


Homercydal said...

What is your sources for the hedgies betting heavily on gold/inflation?

(I agree with you, short term - few years - strong dollar, relatively speaking... Also believe long term inflation is the only way out of our deficits)

CP said...

If you look at hedge fund manager letters, you'll see they are all doing the inflation trade - buying GLD, buying miners, the dollar is trash, etc.

MrGotham said...


See David Einhorn, John Paulson, and Paul Tudor Jones.

Einhorn is buying bullion and storing it in an undisclosed location, Paulson is starting a fund specifically to invest in gold and gold related assets and Jones has one of the best long term records in the business. I believe all three of them have never owned gold before.

CP said...

QED - a crowded trade.

What are these guys gonna sell when their merger arb positions get hit in the next wave of selling? Some gold.

GLD had the highest inflows of any ETF in 2009! Where's the incremental buying going to come from?