Paul Tudor Jones (Trades, Portfolio) is a hedge fund manager known for ability to read macro-signals in the market. Although he is a trader more than an investor, he typically takes a longer-term view based on fundamentals more so than technical signals. In a recent interview with Bloomberg, he offered his perspective on gold, saying that it would outperform equities in the next few years, and claiming that the trade war is going to realign global markets in a very significant way.
The value of gold
Gold has traditionally been a store of value and a hedge against volatility. Given the general increase in investor skittishness and risk-on sentiment, it’s unsurprising that Tudor Jones is bullish on the precious metal. It’s not just about increased risk, however. Many people expect the Federal Reserve to cut rates this year, perhaps as much as three times.
Interest rate futures markets are currently pricing in a 49.6% probability of two rate cuts by September and a 35% probability of three cuts by year-end. While these are not good predictions for what will actually happen, they do represent what investors think will happen, which is often just as important. Lower rates mean a cheaper dollar, and increased inflation, and gold is a good hedge against those scenarios too, which is why Tudor Jones is positive on it:
“I think one of the best trades is going to be gold. I think that if it goes to $1,400 it’ll go to $1,700 rather quickly. It has everything going for it in a world where rates are going down in the United States. Remember, we’ve had 75 years of expanding globalization and trade, and we’ve built the machine around the belief that that was the way the world was going to be. Now, all of a sudden, it’s stopped and we’re reversing that ...So that would make one think that it’s possible that we go into a recession. It would make one think that rates in the United States will go back down to the zero-bound level, and of course in that situation, gold is gonna scream.”
The impact of tariffs
For Tudor Jones, the main catalyst for the gold run would be the implementation of the next round of tariffs:
“I would say if they get implemented, if we go to the $500 billion, certainly it’s possible that that could tip us into a recession. We’ve never seen anything like this in 75 years ...There’s no playbook. You have this interconnected global economy that for the first time in 75 years we’re seeing free trade not being expanded, but being diminished. So we just don’t know, because we haven’t stress-tested this system yet, what the impact is going to be. I’m more conservative so I think it’s going to have a bigger impact economically than what the market thinks.”
In other words, we have entered uncharted territory, and therefore any prediction based on past data on how bad the fallout from an escalating trade war might be is likely to underestimate the actual damage. Of course, if the U.S. and China come to an agreement, all of this might end up being a blip in economic history. However, the recent U.S.-Mexico deal is likely going to incentivize the Trump administration to continue using tariffs as a negotiating tool. For this reason, trade uncertainty seems destined to continue, at least until the 2020 election.
Disclosure: The author owns no stocks mentioned.
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