'Trade Of The Century': Buy Gold, Sell Stocks - Crescat Capital
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(Kitco News) - Buy gold and sell stocks is the “trade of the century” advice that one of the best-performing hedge funds of 2018 is giving out to its clients.
“We believe that long gold in CNY terms versus short global equities today could be the macro trade of the century!” according to Crescat Capital LLC.
One of the main reasons to own gold right now is the rising risk of a potential meltdown in equities, Crescat chief investment officer Kevin Smith and global macro analyst Tavi Costa wrote in a note published on Friday.
The Denver-based firm is projecting a recession and the start of a bear market in stocks sometime this year.
“Soon the buy-the-dip mentality and bull-market greed will turn to fear. Selling will beget more selling. That’s how bear markets work. There is so much more ahead to profit from the short side of the market,” Smith and Costa stated.
Recession could be a lot closer than the markets are anticipating at the moment, the note pointed out.
“Crescat’s macro models show that the expansion is about to turn into a recession within the next several quarters based on an abundance of indicators,” Smith and Costa said. “How do we get to the recession? The U.S. stock market and corporate credit bubble must burst first. That is how the business cycle works. It started in the fourth quarter, but that was only the beginning.”
The analysts also cited many “insiders” heavily selling stocks in early 2019, while the majority of investors were still in the risk-on buying mode.
And the signs pointing to a recession are already very visible, according to the firm.
“The U.S. twin budget and trade deficit is diverging from the S&P 500 signaling the likely peak of the stock market and business cycle on the heels of the tax cut. U.S. hard economic data is showing a sharp deterioration in GDP in the current quarter … The percentage of inversions in the US Treasury yield curve is now close to 45% by our model. The last two times the credit markets had such a high distortion, asset bubbles began to fall apart shortly thereafter,” Smith and Costa wrote.
Crescat Capital LLC manages about $50 million, with a record of outperforming the S&P 500 Index. In 2018, the company’s Global Macro Fund saw a return of 41%.
Right now, Crescat is very bullish on the yellow metal, choosing to go long gold in yuan terms, while shorting the global stock market.
“Given our negative views on the Chinese yuan, and because we believe gold is historically cheap versus all fiat currencies, including USD, we are extremely bullish on gold. But we are most bullish on gold versus CNY … We continue to think gold in CNY terms is an incredibly bullish setup!” the note explained. “In gold bull markets, silver tends to perform even better than gold, and gold and silver stocks do even better than gold. We currently own them all, including gold at the core.”
Crescat added that this trade explains about 75% of the company’s Global Macro Fund positioning. “This is a value-oriented macro trade that is likely to perform over the next one to three years in a global economic downturn led by an imploding China,” Smith and Costa said. “Our steadfast net short positioning [will be] maintain[ed] until a U.S. recession is widely acknowledged.”