Alan Greenspan and a panel of other bankers and top-gun financiers have told the International Monetary Fund to sell some gold in order to make up for lost lending revenue. Gold, according to Greenspan and company, simply doesn’t work hard enough (earn a yield.) The advisory group suggested the IMF sell 400 tonnes of its gold and create an endowment fund to invest in publicly traded stocks and credit-worthy bonds to generate extra income.
The IMF has a total of 3,217 tonnes of gold, so selling 400 tonnes won’t break the bank. But is now the right time? The gold price made a new six- month high earlier in New York trading, with the spot price hitting $658. Forbes reports that, “Speculation is mounting that gold may well turn out to be the next metal to enjoy a good run.”
So is gold is the next zinc? Or is it the next copper? Or is it the next lead? Or is lead the next gold, as the alchemists have been telling us for hundreds of years? So many questions. Our long-term take is that gold is gaining traction as an alternative asset class. It attracts more institutional money. The gold-backed ETFs have created liquidity for money- mangers to pour money into gold funds.
This makes gold more volatile, as hot money chases “the next big thing.” But it also reflects the emerging knowledge among traders that gold is one effective hedge against all paper currencies. What it lacks in yield, it will eventually make up for in a capital gain of 50-100%, as the cross-border bets on currencies and interest rates unwind. At times like that, when a carefully calculated interest rate strategy blows up, gold’s stodgy stability will be its biggest asset. That, and the fact that is always and everywhere money.
Do you think Goldman’s Alpha fund owns gold? We wondered after writing briefly about the Alpha fund yesterday. With nearly $10 billion under management, you’d think at least some of that money has got be bullish on gold. But the problem the fund-and others like it-may be running into is that the easy money which has been so good for the fund industry may now actually be working against it. You can only trade divergences and counter-cyclical patterns when asset classes move relative to one another in opposite directions. With too much money, everything begins to move in the same direction-up-erasing the divergences and the lucrative directional bets traders like to make.
“The Arizona State Retirement System’s Kapanak says hedge funds such as Global Alpha, which follow various strategies and simultaneously bet that this price will rise while that price falls, are designed to make money when world markets move in different directions. When markets and economies move more or less in lock step, these so-called multi-strategy long/short funds struggle.”
“The test of a first-rate intelligence,” F. Scott Fitzgerald wrote in 1936, “is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” Fitzgerald wrote this in an essay called “The Crack Up,” in which he described his own personal crisis of confidence/nerve/physical stamina. People often quote that line as if holding two contradictory propositions-like being long and short-is a perfectly good and reasonable idea, and the sign of a “first rate intelligence.” But we submit that if you pack your brain with too many contradictions, you’ll eventually go insane, like Fitzgerald’s wife Zelda. Or, if you’re a trader, you’ll simply blow up.
It may be reasonable and perfectly rational to be short the Polish zloty and long the Yen at the same time. And there are certainly many other inter- market relationships that the quant and model-based trader can exploit for market-beating profits. But at a certain point, even the best traders will crack up. If keeping track of the inter-relatedness of global asset markets with computer models doesn’t do it, size will.
Exploiting opportunities to buy earnings at a discount or find assets on sale is only possible if you’re nimble enough to do it without attracting a lot of attention. But when you have a lot of money to spend, the sheer volume of cash on hand begins to attract attention and be a problem. The Alpha fund is running into that problem. And by extension, all the world’s money managers are running into the same problem-too much cash, too few assets.
It reminded us for some reason of a mistake we made as an ambitious and unsupervised five year-old. In the corner of our dad’s study was a decorative brass spittoon, bright shiny, and round. On a dare from one of our six older brothers, we stuck our head in the spittoon and danced a goofy little jig around the room, happy to make the older kids laugh. Then we realized they were laughing at us and not with us. And then we realized why.
The spittoon was stuck on our head. It stayed that way for about half an hour. For the first 15 minutes our older siblings took turns banging the spittoon (with our head still in it) against the wall, until our howls were so loud they made it out of the spittoon and into the hallway.
Then, after ten minutes of twisting and turning it, our father finally picked us up the head, holding onto the spittoon’s handles, until our melon squeezed out. “Remember Daniel,” he said to our tear-streaked, ear-stretched face, “getting into trouble is easier than getting out of it.”