The Odey International Fund was down 1.59% for June following a commanding 12.14% gain in May. The fund gained 4.33% in the second quarter. For comparison, the MSCI World Index was up 7.85% for June and 5.53% for the second quarter.
According to the Fund’s June 30 performance report, which was reviewed by ValueWalk, four of the top 10 positions were related to gold and/ or precious metals. The fund’s biggest position was a short of the ICE LIBOR GBP 6-month, while its second-biggest position was a short of Japan‘s 10-year bonds dated September. Other top holdings include a long position in Banco Macro, shorts in Lancashire Holdings, and STMicroelectronics, and a long position in Telefonaktiebolaget LM Ericsson.
The remaining four positions were all longs related to gold and the previous metals industry: Source Physical Gold P-ETC, db Physical Gold ETC, Amundi Physical Metals and iShares Physical Gold ETC. As far as sector allocations, Odey is net short information technology, financials and consumer discretionary and net long energy, materials and consumer staples.
Crispin Odey has written quite a bit about gold in recent letters, and his bullish view is centered on what central banks are doing (and not doing) right now. He noted that many are questioning whether the market is approaching the end of the current cycle, although "everyone is hoping not." He adds that the U.S. economy is beginning to resemble the U.K.'s economy over the last two years as employment and wages increase while investment and productivity growth are both lagging.
Because of the current economic environment, policymakers are not willing to reduce interest rates because short-term rates are already negatives. However, this creates a problem for incentives because it "doesn't encourage saving and it doesn't encourage investment."
"How do economists imagine high inventories are going to be drawn down when prices remain high and production continues at full tilt?" Odey wrote. "That used to be the last manoeuvre before a recession. This is now viewed as the beginning of a recovery."
The U.S. Federal Reserve is preparing to wrap up its latest round of quantitative tapering in September, but the world's central banks are already preparing for a new round of quantitative easing with a fresh expansion of the Fed's balance sheet. Whenever the Fed begins a new round of QE, other central banks must roll out expansionary policies of their own because if they don't, the exchange rates of their currencies will rally sharply versus the dollar. Given that the world is "already wallowing debt," he explained that this move will be "far from popular."
Because of how the world's currencies are tied to the U.S. dollar, Odey said central banks are thinking more and more about how to "immunize" their countries from the dollar. For example, he explained that in 2011, China's monetary base was at around $1.4 trillion or about equal to its U.S. bond holdings. Now its monetary base is almost triple the size of its U.S. bond holdings, which means if the Fed expands or contracts, it must follow suit.
He also noted an interesting possibility for immunizing the world's currencies against the Fed's moves by making it into "an amalgam of bitcoin and gold/silver." However, this is more easily said than done because the global economy's monetary base is about $35 trillion, versus the global GNP of $88 trillion. Odey added that official sector gold is "barely valued at $1.5 trillion, rising to near $7.5 trillion when one includes jewellery and private investment." Thus, the gold price would have to rise by some eight times to make the official sector gold convertible with 40% M1 backing. He added that the problem for the Chinese and Russian central banks is that much of the gold is held by "the old economic order," or European and American central banks. He also explained why he is so bullish on gold right now.
"… the idea is that if you can buy it now you only need to buy 1/5th of what you might be buying later," Odey explained. "Hence, we are watching central banks buying gold. Nothing to do with inflation, everything to do with establishing a transactional currency which cannot be manipulated by the United States."
He added that China bought another 10 tons of gold last month, boosting its reserves from 61.61 million ounces to 61.94 million ounces the previous month. The Asian powerhouse bought another 74 tons of the yellow metal in the preceding six months as well.
Odey continues to expect the markets to weaken in the second half of this year, although so far the world's stock markets have remained strong due to the Fed's dovish commentary. He notes that interest rates might not fall as quickly as many currently expect because U.S. employment numbers suggest the economy remains strong.
This article first appeared on ValueWalk Premium