Market Commentary: Billionaire Buys Gold, Explains Why
In the pantheon of investors, Stanley Druckenmiller is revered as one of the best. When he managed money he had a track record over 30 years of 30% plus returns annually net of fees. Truly a spectacular record.
When asked about his investing rules, he stated that he looks at the fundamentals and the technicals, as well as the macro environment. If the fundamentals look good but the technicals look bad, he’ll pass. Similarly, he’ll skip to another opportunity if the technicals look good but the fundamentals don’t line up.
So what’s he investing in today? Gold.
Druckenmiller Likes The Fat Pitch
Asked how Druckenmiller likes to invest, he answered that he likes the “fat pitch”. An example of a fat pitch, he explained, was when the Berlin Wall came down. At the time, the consensus view was that East Germany would “pollute” West Germany’s famed productivity, acting as a drag on the economy. Having studied German history, Druckenmiller believed the Bundesbank would fear inflation most of all – look back at the effects of hyperinflation on the Weimar republic to understand their fear.
When Germany raised rates, he believed the lira would fall, and so too would the British pound. It was a fat pitch, and he went all in with George Soros. Famously, they broke the Bank of England, and the British pound, which collapsed.
So what fat pitches does Druckenmiller see today?
Why Is Druckenmiller Buying Gold?
The revered money manager says today he doesn’t see any fat pitches. The world is too complicated for any obvious investment thesis to qualify. But two bets he is willing to discuss publicly are his bet against the US dollar and in favor of gold.
To understand why you need to understand where things are headed. Druckenmiller is seriously concerned about the $32 trillion of government debt.
He asked the question: how much do taxes need to be raised today to keep the same safety net going forward? That amount is the fiscal gap – or how much taxes would need to be raised today to keep the amount promised the same in the future as they are now – is 7.7% of GDP
Question: 7.7% of GDP means what?
Druckenmiller: “A 40% permanent tax increase today, forever. Or A 35% cut in spending, forever. At 4% interest rate, if you add up healthcare spend + social security + interest = 68% of tax revenues. By 2040, it will be 100% of taxes. By 2052, the spend for seniors and interest alone will be 117% of revenues – nothing for defense, NIH, Darpa. If you raise taxes or cut spending by that much, investment would fall and growth would falter considerably… ….making it impossible to maintain the size of our current safety net”
Some gold bugs contend that money printing should lead to a pop in gold. But massive expansion of the Federal Reserve balance sheet has not proven their theory correct.
A study of history shows a much more ominous reason why Druckenmiller is buying gold. When confidence in government collapses, gold is purchased as a safe haven. In recent months, central banks have been accumulating gold in record amounts. So too is one of the world’s smartest and most successful investors. That is a foreboding sign of what might lurk near in the future. And gold offers some protection against that gloomy future.