$5,000 Gold? Fund Manager's Idea Has Its Critics
The West is close the point where its paper currency system is insolvent, and as a result gold is heading to $5,000 an ounce, according to the manager of a gold fund.
“A paper currency system ultimately ends in insolvency," said Ben Davies, the chief executive of Hinde Capital in an interview with CNBC.com on Tuesday. "We have arrived at this point in the West. So why own worthless paper?”
His belief that gold will hit $5,000 an ounce is not shared by many major players in the market. On Sunday, Goldman Sachs raised its 12-month price target for gold to $1,860 an ounce. In early trading Tuesday, spot gold hit a record $1,778 an ounce, before pulling back.
Goldman based its new target on low-inflation-linked U.S. 10-year Treasury yields, a weaker economic outlook in the U.S., the fact that gold remains well below its 1980s inflation-adjusted highs, and the national debt problems in the U.S. and Europe.
While there are plenty of gold bulls out there, few are as bullish as Hinde. On Friday, Ashok Shah, the CIO of London and Capital, told CNBC that emerging market sovereign wealth buyers looking to reduce exposure to the dollar could push prices significantly higher, but warned it will be difficult to call the level at which prices will level out.
"In essence, where does the clearing price ultimately equilibrate?" said Shah. "I think that's very hard to say.”
Hinde Capital's Davies believes the relationship between Asian exporters and Western debtors has led China and others to shun the U.S. dollar, as America and others attempt to use monetary policy to boost their ailing economies.
“(The second round of quantitative easing) was not a means to try stimulate the economy, although they hoped it would. But the transmission mechanism between markets and the real economy is broken," said Davies. "The real reason for quantitative easing was to stop bond market collapsing—where rising rates would crush an over indebted nation, both state and householders."
On the other side of this relationship are the creditor nations attempting to maintain dollar pegs to assist exports, fueling domestic inflation, according to Davies.
“(The Chinese) attempted to sterilize this currency rise by raising reserve requirements. But it is not working, as seen by the latest Chinese inflation numbers," he said.
Figures last week showed China's inflation rose to a 37-month high in July.
Davies believes the Federal Reserve got it wrong by attempting to pump cash into the system to avoid a liquidity crisis, as, he argues, they were not facing a liquidity crisis but a solvency crisis.
“Policymakers can't grasp the reality that allowing bondholders to default now, although horrendous for economies and employment," is a better option that defaulting later, said Davies.
“Individuals and private institutions are fleeing all fiat currencies into an asset that has no liabilities. This flight from insolvency is an exponential event," he said. "Gold is an inverse function of currency.”
Fiat currencies are those a government has declared to be legal tender, without any intrinsic value or backing by reserves.
“Asset markets lost their funding when (the second round of quantitative easing) ended," said Davies. "Deleveraging has only just begun, but for now I am sure markets will bounce as QE3 arrives globally.”
“If you think gold is high (now), wait until all and sundry exit dollar bonds," he said.