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Hedge fund advocates buying gold

Buying the dips have made a lot of stock investors money since 2009.  And today, a lot of stock investors continue to buy the dips.  However, Paul Singer’s Elliott Management says that stocks could drop further, down to half of their February highs.  Other analysts forecast the deepest economic decline since the Great Depression.

If Singer is right, the Dow could drop below 15,000, the NASDAQ to 4,300, and the S&P 500 to 1,700.  Substantial drops from existing levels.

In a letter to clients dated April 15, Elliott said, “ Our gut tells us that a 50% or deeper decline from the February top might be the ultimate path of global stock markets.” Elliott controls $40.4 billion in assets and is closely watched for its views on markets and economics.

Although Elliott recently bought some stocks and bonds, the firm said it was too soon to call an all-clear for markets.

Further, the hedge fund said gold, long a safe haven investment during times of uncertainty, may be the most lucrative for investors as the world tries to climb out of this recession.

“This is a perfect environment for gold to take center stage,” the letter said, as spot gold traded at about $1,741 an ounce. Fair value for the metal, the fund believes “is literally multiples of its current price.” A multiple of 1 would put gold just shy of $3,500.  A multiple of 2 would put it above $5,000.

Ever since the 2008 financial crisis, Elliott has written in client letters that asset prices were overvalued as governments flooded the market with cheap money to revive growth.  Now with millions unemployed, the April 15 letter said that “Deficit spending and massive monetary expansion are called for to prevent total collapse.”

Sounding a note of caution for policymakers, the letter added that “monetary soundness is the key to financial system soundness.”  However, before monetary soundness becomes a reality, there will be a great deal of money printing, which could cause gold to see the multiples that Elliott forecasts.

Over nearly four decades Singer and his team have been known as steady and reliable investors who protect capital for pension funds, college endowments, and private investors by returning an average of 13% a year.

In the first quarter, the Elliott International Fund gained 2.2%, while its Elliott Associates Fund was up 1.6%.  The average hedge fund lost roughly 8% percent during the same time, according to Hedge Fund Research.

The firm said it hedged its portfolio with protection trades on credit, equities, rates, and gold. This helped offset declines in distressed debt and equity trades.

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