Balestra Capital Partners, L.P. is a large alternative investment manager. The fund was positive +0.01% net during the month of February and is positive +0.78% net YTD as of February 29, 2012. Numbers for March are not out yet. As of March 1st, strategy assets were $1.94B USD and Balestra Capital, Ltd. managed a total of $2.16B USD.
The fund was down 4.78% for 2011. The fund has a superb long term track record with a 24% annual return since 1999 as we recently noted.
The fund noted in a recent report that they were very bullish on gold and take a long term view, which will eventually play out in their favor. Balestra states that as countries continue to print money it is only a matter of time before Gold will skyrocket in price.
Recent price action in the gold market has been extremely volatile. Gold skeptics have been highlighting this volatility as an indication that gold is a dangerous bubble. However, the volatility we have seen in gold is less than what we have experienced in equities! Gold is simply reacting to the same economic uncertainty as equities. Given the relentless rise in gold over the last several years, there will continue to be periods when speculative momentum traders create extreme moves. Caution is warranted during these periods. However, such short-term volatility has little relation to the long-term bullish case. Globally, long-term investors are seeking ways to store value in assets other than cash and sovereign debt. Beyond currency price volatility, and sovereign credit downgrades, what happens to bond investors if the collapse in interest rates reverses? Despite the attention gold has been receiving lately in the media, indications are that average investors do not have a high exposure.
Historically speaking, relative valuations for gold are not stretched. Some analysts have forecasted seemingly fantastic target prices ($5000, $7500, etc.). We see no point in engaging in this practice. However, based on the relative valuations we have provided, such targets are not implausible over the long-run.
The valuation is reached by comparing gold to oil prices and to the S&P 500. Furthermore, for U. S. gold reserves to fully back the monetary base, gold would have to be priced around $10,000!
A persistent element of economic history has been the struggle to construct a robust and stable international monetary system that fosters investment and international trade. The only consistency in all the previous regimes has been eventual failure. If there is one particular reason for repeated failure, it is the tendency for the currency issuer to abuse its power. Whether they are individual bankers creating too much bank credit, governments debasing coins, or central banks monetizing government debt, the end result has been the same: instability of the system, followed by its demise.
The general consensus is that modern day central bankers have solved the previous problems, and that the current system is stable. The recurrent crises of the last several years should have created some doubt toward this view. Over the next several years, there is a potential for disharmony similar to the 1930’s. Regardless of the outcome, we expect governments to do what they always have in the past: debase their currencies. If so, investors will increasingly seek to protect the value of their savings. We believe that one good protection lies in holding gold.
Our long-term view can be summed up in the following points:
1. The developed world is overly indebted.
2. So far, there is little indication that heavily indebted countries will be able to grow their way out of debt.
3. Recent measures to cut government spending will create further headwinds to near-term economic growth.
4. Failure to provide added monetary stimulus will likely risk a fall into a debt deflation spiral (this risk is heightened by the Euro zone situation).
5. Central banks will continue to “print money”, as needed, to prevent debt deflation.
The timeline for our thesis to play out is indeterminate. It took decades for the current situation to evolve. Resolution could take many possible paths depending upon the actions of politicians and central bankers. Nevertheless, we have strong conviction that the end result will be more monetary stimulus, and a higher gold price in all currencies.