Wall Street bought the rumor on President Donald Trump’s “phase one” trade deal with China, but the world’s largest hedge fund says that investors should be prepared to sell the news and park their cash in the next asset primed for a surge – gold.
Speaking with the Financial Times, Bridgewater Associates co-chief investment officer Greg Jensen laid out his case for why the gold price can jump 30% to set a new record high above $2,000.
He identified three primary catalysts for the impending gold price rally.
After the Federal Reserve cut interest rates three times in 2019, investors assumed that the bank would seek to normalize rates as soon as it was clear that the economy was on stable footing.
He predicts the Fed and other central banks will hold interest rates low even if inflation begins to exceed stated targets.
[T]here will no longer be an attempt by any of the developed world’s major central banks to normalize interest rates. That’s a big deal.
Other analysts are concerned about the Federal Reserve for a different reason: its ongoing intervention in the repo market .
Alex Kuptsikevich, a senior market analyst at FxPro, said Wednesday that the Fed’s liquidity injections point to “potential problems with trust in the financial system.”
He warned that waning market confidence could spur equity investors to begin taking profits, which could quickly spiral into a “deep correction.”
Financial problems tend to turn into economic ones rather fast, as GFC [the Global Financial Crisis] taught us. So the attention to the repo market and the Fed’s actions can now shift to the market focus for the coming months.
For stock indices, the attention to this issue can quickly turn from profit-taking after the rally into a deep correction. The other safe-haven currency – the Swiss franc – turned to growth in early December.
Over the long-term, Bridgewater says investors should buy gold to defend their portfolios against the U.S. dollar’s potential replacement as the world’s reserve currency.
That might seem unlikely today, but Jensen believes it’s “definitely in the range of possibilities.” And that makes gold an attractive hedge asset.
Gold should benefit from geopolitical conflicts, particularly those involving China and Iran.
“There is so much boiling conflict,” Jensen explained. “People should be prepared for a much wider range of potentially more volatile set of circumstances than we are mostly accustomed to.”
Today, the U.S. and China will sign a trade agreement that most analysts say does little more than put the conflict on hold.
Earlier this week, a social media account linked to China’s government warned that the “phase one” deal is “just the first round of a game,” adding that the “trade war is not over yet.”
The White House has already begun trumpeting the promise of a future “phase two” trade deal with Beijing. But with a trade deal in Trump’s pocket and a presidential election looming, Wall Street’s not confident a subsequent agreement will ever arrive.
Then there’s Iran.
President Trump’s targeted killing of Iranian general Qassem Soleimani reset U.S.-Iran hostilities in the Middle East. Tensions appear to be defused, but as the unexpected airstrike that eliminated Soleimani demonstrated, they can flare up without warning.
Just today, Iranian President Hassan Rouhani threatened both the United States and Europe during a speech on state television. He warned the West that U.S. troops are “insecure” in the Middle East and that European Union soldiers “might be in danger tomorrow.” He rebuked the U.S. for its “previous crimes,” demanding that the Trump administration “apologize to Tehran” and pull out of the Middle East.
The gold price rallied in the aftermath of Soleimani’s death as investors fled from risk assets, and re-escalation could trigger a similar upside move.
Two months ago, Bridgewater reportedly placed a $1.5 billion options bet that the stock market would plunge by March 2020. That date has significant political implications.
By then, the outcome of the Democratic primary will likely be clear, even though the party convention won’t occur until summer.
If the Democrats nominate a progressive candidate like Bernie Sanders rather than current frontrunner Joe Biden, volatility could strike the stock market and send investors piling into haven assets like gold.
No matter what happens in November, Bridgewater fears that political turmoil will continue to fester beneath the surface. U.S. economic growth is slowing as the country’s longest expansion in history struggles to plow further into uncharted territory.
Jensen says this economic weakness could heighten tensions between the rich and the poor. The ensuing political instability would likely make gold a staple in investor portfolios.