According to Robert Smith of Smith Diversified Capital, gold still has not yet run out of steam. He continues with saying that gold is the best hedge against deflation and also believes that gold will hit $2,400 by election day.
Robert Lenzner, Forbes Staff
9/27/2011 @ 3:32PM
Forbes
Deflation is coming, says my bond guru Robert Smith of Smith Diversified Capital, who hasn’t been wrong on any of his prescient calls the past few years. I went to see him this morning to pick up a little skinny and see whether he’s still bullish on long term treasuries.
Indeed, he is. Smitty believes the 30 year bond, yielding 3.10 today, will be selling at 2.10% in a year– giving you a 21% total return without any leverage. That ain’t chopped liver. He’s willing to feel surer about a 2.50% yield– which would return 14%.
The 10 year bond, trading at 1.99% today, is likely to sell at 1.25%– for an 8.5% return.
Besides creeping deflation, what makes Smith bullish on bonds is their growing scarcity. “Look at the calendar,” he points out. “Small treasury offerings, fewer corporate issues, smaller municipal issues, no more CDOs or CLOs,– a deleveraging that is causing a drastic shortage of product for fixed-income investors.”
“There’s a voracious demand for government securities from all over the world, both for investment and for collateral for the shadow banking system– for financing repos and the collateral behind derivatives, ” Smith went on, enlightening me in a new, fresh way about the fixed income market.
As for economics, Smith sees a “ deflationary crawl,” an IMF that has to raise considerable new funds and a Federal Reserve that has totally run out of ammunition.
Nor does Smith think gold has run out of steam. He has been pairing his Treasury positions with a 5-10% gold bullion position– which has given his average account a return of 8-10% so far this year– a time when the stock market indexes are off about 6%.
“Smith is “pleased that the speculators are being driven out of the gold futures market by higher margin requirements, and sees the globe’s central banks as increasing their buying as stronger holders tghan the public or even hedge funds. He reckons gold is the best hedge against the “deflation crawl,” and will hit $2400 a share by November 1, 2012. “Look,” he tells me,” “gold is up 16% this year and an average of 19% each year for the past 11 years.
You believe in Smith? Buy Treasuries and lever them with gold.
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