There’s been some discussion lately about the convergent moves in gold and the dollar. Contrary (perhaps) to expectations, they’ve been moving in the same direction, with neither offsetting the other.
Actually, this isn’t that weird.
Here’s what famed hedge fund manager Kyle Bass wrote in his client letter in March 2009, right back during the pit of the crisis:
As a country, we now face running a $1.5‐$2.0 trillion operating deficit in excess of roughly $2.1 trillion of government revenue (if we are lucky). If the U.S. were a public company, not even Ken Lewis would consider purchasing us (at a premium no doubt). As an attachment to this letter, enclosed is the United States balance sheet and income statement. I encourage you to look through them in order to formulate your own opinion of entitlement spending and government receipts. Interestingly enough, after quizzing some of the great asset managers in the world, very few could even get close to guessing the government receipts number. I guess it just does not matter anymore.
To the best of our knowledge, there has only been 160,000 metric tons of gold EVER mined in the world. At $950 per ounce, all of the gold in the world would be worth $4.887 trillion dollars. On the other hand, we estimate that there is roughly $60 trillion of fiat money (including currencies, deposits, savings, money markets and CDs) in the world. Given the fact that world governments are caught with so much credit market leverage and losses, we believe that they will – in true Keynesian colour – attempt to print their way out of this mess. If this occurs, you have to ask yourself: How many of people do you think it will take to begin to question the value of paper currency when it is being debased in an attempt to save world governments? If a small fraction of them stop believing, where will they go to preserve their wealth? My guess is the U.S. dollar and precious metals.
Now really, take a few minutes and go back and read his March 7, 2009 letter.
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