As losses mount, hedge funds no longer have the ability to drive speculation in the markets, Hugh Hendry, chief investment officer and partner at Eclectica hedge fund told "Squawk Box Europe" on Tuesday.
"There is no role for speculation or speculators today. This is kaput," Hendry said. "If we were Second World War generals, we've exposed our flanks. We've been wiped out. This is about fundamentals … this is about losing money."
As the crisis unfolds, the policymakers' focus should shift from the threat of inflation to that of the world economic downturn, which could be more severe than economists anticipate, he said. (Watch Hendry's interview below for more on the economy, inflation and commodities).
China, which many believe will balance out slowdowns elsewhere, will struggle if difficulties in the U.S. continue, while the current spike in producer prices is just a hangover from rising oil prices earlier this year, Hendry said.
"I fear that the central bankers of the world are fighting yesterday's battle," he said.
As for the banking sector, it is "insolvent," Hendry said, adding he can't tell just how low those stocks will go.
In addition, Fannie Mae and Freddie Mac "have no value" and it is likely that they will be put under the control of the Treasury "in a matter of months," he said.
Savage Bear Market Coming for Gold
The slip in gold, which was joined by fellow precious metals platinum, silver and palladium, dragged it well below its all-time high of just over $1000 an ounce in March.
But that was predicatble, Hendry said.
Bull markets "of this variety, with the potential to trade higher, paradoxically can have these savage, and quite prolonged, bear market components, and I fear that is where we are headed," he said.
The "current markets could take gold as low as $600 or $550 per ounce," he added.
"I have greater comfort being in 10-year bonds than gold for the first time in ages," Hendry said.