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Stan Druckenmiller: Bull Market Is Exhausted; Move To Gold

Published 05/11/2016, 01:25 AM
Updated 07/09/2023, 06:31 AM

Legendary investor Stan Druckenmiller, founder of Duquesne Capital Management LLC, told the Sohn Investment Conference in New York last week that he is bullish on gold and bearish on the stock market. Gold, he told the conference, "is our largest currency allocation."

Druckenmiller recommended that investors sell their equity holdings. "The bull market is exhausting itself," he told the conference. A major factor has been the Federal Reserve's easy money policy, which has resulted in "reckless" corporate behavior.

Growing corporate debt is increasingly used for financial engineering, rather than in R&D that could lead to productivity improvements, Druckenmiller said. According to him, from 2012 to 2015, use of debt for U.S. nonfinancial firms for stock buybacks and M&A increased from $1.25 trillion to $2 trillion, while debt for R&D and office equipment grew from $1.55 trillion to only $1.8 trillion.

"The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins and growing indebtedness," Druckenmiller added.

The slowing Chinese economy as another reason to sell equities, according to Druckenmiller. He believes that stimulus measures by China have "aggravated the overcapacity in the economy." While he had hope two years ago that the Chinese were willing to accept the tradeoff of a slowdown to gain reform, the Chinese "have opted for another investment-focused fiscal stimulus, which may buy them some time but will exacerbate their problem. They do not need more debt and more houses."

Instead, Druckenmiller has made a move to gold.

"It has traded for 5,000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest rates," he said. "Some regard it as a metal, we regard it as a currency, and it remains our largest currency allocation," he added. Among his investments are holdings in the SPDR Gold Shares (NYSE:GLD).

Druckenmiller gained fame in 1992 when, as lead portfolio manager for George Soros' Quantum Fund, the fund shorted the British pound, a trade that is widely believed to have made $1 billion in profits. Druckenmiller's Duquesne Capital averaged annual returns of 30% before he converted it to the Duquesne Family Office in 2010.

Disclosure: 1) Patrice Fusillo compiled this article for Streetwise Reports LLC, and is an employee of Streetwise Reports. She owns, or her family owns, shares of the following companies mentioned in this interview: None. 2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security. 3) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. 4) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

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I also remember there was a well documented visit by CNBC's Bob Pisani to GLD's gold vault. This visit was organized by GLD's management to prove the existence of GLD's gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this "GLD" bar was actually owned by ETF Securities.
"Among his investments are holdings in the SPDR Gold Shares (NYSE:GLD).". . Don't forget GLD allows its biggest holders to redeem for the underlying physical gold but everyone else is left holding the bag. Paper gold GLD claims to be fully backed by physical gold bullion but yet it refuses to give your everyday investors the right to redeem for any of these ‘claimed’ gold bullion. This fact alone would mean GLD shares are nothing more than paper at the end of the day. Furthermore, GLD’s prospectus is chalk full of weasel clauses and legal loopholes that allows the fund to get away without the full physical gold backing. One good example of this is the clause that states GLD has no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this audit loophole.
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