Balestra Capital on Gold and Inflation: Quarterly Commentary ~ market folly

Thursday, February 23, 2012

Balestra Capital on Gold and Inflation: Quarterly Commentary

James Melcher's hedge fund Balestra Capital focuses on thematic global macro investing and has seen a compound annual growth rate (CAGR) of 24.3%. They're out with their quarterly newsletter where they discuss gold, inflation, and the evolution of money.

On Gold

On the precious metal, Balestra writes that,

"While gold does not pay interest or a dividend, unlike fiat currencies, it cannot be created in infinite amounts ... Gold deposits have become harder to find and far more expensive to mine and process. Central banks have recently been building their gold reserves, instead of selling them. Gold is not substantially held across the worldwide spectrum of investors. Nevertheless, if for no other reason than that the global store of gold is limited while paper money is rapidly proliferating, gold's role as a store of value is expanding, and its investment profit potential is rising."

Gold has been a popular investment among numerous hedge funds, though John Paulson's gold fund probably got the most media attention, as betting against the US dollar was his 'next big wager' after his successful subprime short.

However, what's interesting is the rising number of long/short equity portfolio managers that have allocated a percentage of their portfolios to either physical gold, the SPDR gold trust (GLD), or various gold miners.

David Einhorn's Greenlight Capital owns both gold and gold miners. Dan Loeb's hedge fund Third Point continues to hold gold as its second largest position. Stephen Mandel's Lone Pine Capital just started a position in gold last quarter ...and the list goes on.

Balestra's macro focus has led them to own physical gold and gold derivatives since 2002 and it's been their single largest asset. The main difference between all these hedge funds that own gold is their rationale for doing so. Some are using it as a hedge against fear and uncertainty, while many others (like Balestra) are using it as a vehicle to bet on currency debasement and inflation.

Summary of Balestra's Viewpoints

The hedge fund has summarized their macro views as follows:

1. The developed world is overly indebted.
2. So far, there is little indication that heavily indebted countries will be able to grow their way out of debt.
3. Recent measures to cut government spending will create further headwinds to near-term economic growth.
4. Failure to provide added monetary stimulus will likely risk a fall into a debt deflation spiral (this risk is heightened by the Euro zone situation).
5. Central banks will continue to 'print money', as needed, to prevent debt deflation

All of these point to one main conclusion in Balestra's eyes: more monetary stimulus is on the way and gold prices are going higher.

Embedded below is Balestra Capital's commentary on gold & inflation courtesy of ValueWalk:

For more on the topics of gold & inflation, be sure to also check out:

- Gold versus gold miners

- Oaktree Capital's Howard Marks on gold

- Best investments during inflation

About Balestra Capital

James Melcher founded Balestra in 1979 and has had a long career in the hedge fund and asset management industry. He received his Bachelor of Arts degree from Columbia University. Since January 1999, the hedge fund has returned 1625.62% and has seen a CAGR of 24.3%. Balestra returned 1.71% in 2011, -3.18% in 2010, 4.22% in 2009, 45.78% in 2008, and 199.82% in 2007.

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