Gold And Silver Still 'Widely Under-Owned' Despite 'Enormous Asset Bubbles', Says Crescat Capital
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(Kitco News) - An economic downturn is on its way and the best hedge against a major stock market sell-off is gold, silver, and mining stocks, which are all “widely under-owned” at the moment, said hedge fund Crescat Capital.
“Precious metals are one of the few pockets of this market offering tremendous value to hedge against extreme monetary policies, bursting asset bubbles, and record global leverage,” Crescat Capital said in its Q2 2019 Research Letter. “We see this opportunity playing out across gold, silver, and related mining stocks.”
In order to capitalize on the looming economic downturn, one of the best-performing hedge funds of 2018 is focusing on precious metals.
“Gold is the ultimate form of money with a long history of storing value for investors and outperforming risk assets during market downturns. In our view, a new awareness of global fiat currency debasement policies is now in its early stages. Gold should become a core asset for those who believe in this macro development, but it is still widely under-owned today,” Crescat Capital told its investors.
Following a solid rally both in gold and silver, precious metals prices have a lot more room to go higher, highlighted the hedge fund.
“Rate cuts point to a new trend of declining real yields to drive precious metals higher even before inflation returns,” the letter to investors stated. “Another way to see how incredibly undervalued precious metals are relative to other risk assets is by looking at the relative performance. The commodities-to-S&P 500 ratio has just reached a fresh 50-year low. The last times we had such historic imbalances we were at the peak of the 2000 tech and the 1972 ‘Nifty Fifty; stock bubbles.”
Mining stocks are not to be missed out on either, now that they are about to start a major recovery after an eight-year bear market, according to Crescat Capital.
“We also feel very strongly that gold and silver mining stocks are undervalued as the current macro set up seems largely optimistic for precious metals. This entire industry has been through an eight-year bear market with some of these stocks down by over 80% since 2011,” the letter said.
The hedge fund has even launched a long-only strategy targeting a selective number of mining stocks.
“Crescat’s Large Cap, Long-Short, and Global Macro strategies already have significant allocations to precious metals mining stocks. Our goal is to carve out this theme specifically for those who want to tap into it directly,” the fund said. “In our flagship global macro hedge fund, our most significant exposures today are long precious metals and related miners, net short global stocks including U.S. stocks as well as stocks in China, Hong Kong, Australia, and Canada. The global macro fund is also substantially short the Chinese yuan and Hong Kong dollar in a risk-controlled, asymmetric trade though laddered put options.”
The looming economic downturn will have a “brutal” impact on U.S. stocks, projected Crescat Capital.
“While many U.S. equity indices have marginally broken out to new highs recently, they have done so in the face of weakening market internals,” the fund told investors. “The deteriorating breadth is most evident in the NASDAQ Composite, home to today’s leading growth stocks.”
The stock market sell-off could be as big as 50%, added Crescat Capital, warning that the equity space’s future looks bleak.
“The problem is, a 50% decline would equate to the highest ever valuation at the depth of a bear market and recession in the U.S., so it could be a best-case scenario. That is how over-valued the U.S. equity market is today!” the letter stated. “The Fed’s policies of near-zero interest rates and quantitative easing since the global financial crisis has created enormous asset bubbles in stocks and corporate credit.”