A number of leading hedge fund managers share a view that quantitative easing undertaken by central banks around the globe could increasingly produce undesirable consequences for stock markets and economies while devaluing currencies. Stanley Druckenmiller, chair and CEO of the Duquesne Family Office, and David Einhorn of Greenlight Capital Inc. are members of this group. As a recourse strategy, these managers are turning to gold, which has rallied 20% in the first few months of 2016.

Druckenmiller, in an address to the Sohn Investment Conference on May 4, 2016, stated that the economy is in the longest-ever period of excessively easing monetary policies, which he believes will continue. He argues that even while the U.S. Fed has stopped lowering rates, radical dovishness persists. Druckenmiller recommends that investors withdraw from stock markets, which he believes are in the process of becoming exhausted, and asserts that his core investment and greatest currency allocation is gold. 

Einhorn of Greenlight Capital is also bullish on gold. He has criticized the European Central Bank’s low borrowing costs, increased asset purchases and borrowing subsidies, which have implicitly devalued the euro. His view is that the imposition of a negative interest policy by the Bank of Japan and the lowered forecasts for U.S. rate hikes might also contribute significantly to raising the value of gold.

Paul Singer Becomes an Adherent to Gold

Paul Singer of Elliott Management Corporation has also endorsed these views, expounding the belief that gold’s best quarter in 30 years, achieved in early 2016, is only the beginning of a long-term uptrend in gold, as global investors process the implications for inflation of unprecedented monetary easing.

Paul Singer founded Elliott Management in 1977, making it one of the oldest hedge funds under continuous management. From its inception, the hedge fund has provided a 14.6% net compound annual return for investors, compared to 10.9% for the S&P 500 stock index. The fund now has more than $15 billion in assets under management.

Gold Benefits as Confidence Weakens

Singer believes that investors are beginning to assimilate the fact that the world’s central bankers are completely focused on debasing their respective currencies. Correspondingly, he contends that as confidence in the judgment of central bankers weakens, the positive effect on gold may be very powerful.

Strengthening this argument, gold for the first time has a positive carry in many parts of the world as bankers experiment with negative interest rates. Additionally, JP Morgan Chase & Co. (NYSE: JPM) is recommending that clients position themselves for a new and very long bull market in gold. The rationale is that with the proliferation of negative interest rate policies around the globe, gold could emerge as an alternative currency. As a consequence, investors may seek to hedge against the ensuing volatility in stock markets and other asset classes, making gold increasingly attractive. In this scenario, bonds and U.S. rates might cease to be the main risk-off asset.

Conclusion

The list of prominent hedge fund managers backing gold is lengthening and has been bulwarked by JP Morgan, a major financial institution. Paul Singer of Elliott Management Corporation is the latest name to lend his support. While other notable parties, such as Goldman Sachs Group Inc. (NYSE: GS), demur from this view, it is likely that more investment institutions may turn to gold as the logical way to countervail the effects of many years of quantitative easing.

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