Hinde Capital’s Ben Davies On The Gold Market

Zero Hedge recently posted several insightful pieces from Hinde Capital, among which the fund’s presentation on the ECB’s role as the European Commission’s whore, and more recently, its presentation on Gold as the “currency of first resort” (recreated below). Last week, fund manager Ben Davies, who previously ran trading for RBS Greenwich Capital in London where he managed a macro portfolio, gave a must hear interview to King World News, in which Ben covers various in depth topics on the gold market and shares his views on “unimaginable price possibilities for the final culmination of the gold bull.” Among the things covered are the Andrew Maguire whitsleblower case, David Einhorn’s transition from paper to physical gold storage (he notes the storage and indemnification risk), on whether the US government actually owns the hold it represents to holding (noting the demonstrative busting of the very unimpressive Russian spy ring), Russian gold reserve accumulation, where he detours into noting that while gold was 25% of Russian reserve holdings in 2000, it has since plunged to just 5% even as the country has been hoarding gold indicative of the massive currency creation across the world – as currency reserves have grown globally by $7.5 trillion. Ben touches upon the recently popularized concept by Jim Rickards, about an alternative currency basket (aka a new China-Russia-Germany axis) backed by actual physical resources (a modified version of the much dreaded gold standard): “there will be a standardization, a basket of currencies somewhere in the world, that will then become a competing reserve currency very quickly overnight.” Most relevantly, Davies answers what he thinks the fair price of gold is: “between $10,000 and $15,000.”

He continues: “If you took all the global monetary bases, and I take the G-20 in that case, we currently have a currency that is only backed by gold at 0.26%, and if you look back on a historical precedent, back in the ’40-’60’s, banks typically have a backing of 40%. In the 1980’s that backing got back to 120-140%.” This indeed shows that in the 1980s gold was overvalued, at least from an M1 standpoint. The same can not be said about our current mad money printing period.

So what does Ben think the FV of gold is? “If I said gold is to be at 40% just in terms of US encumberment, you can argue for a case of $70-80 trillion’s worth of dollars, then we would have a price of $36,000. And if were to halve that, we would have a price of between $10-15,000.

How would the repricing mechanism occur? “If we were not to get a standardization before, I believe like all bull markets, there would be a mania point. There is an eligibility for gold, and it is being considered as money. Gold has really been considered a barbaric relic – I was ridiculed on the floor in 2003, 2004 for even trading gold. When people like Faber asked the question how many actually hold gold, only 2-3% put their hands up. If we see more QE2, if we see more purchases of assets [by the Fed], it would horrendously denigrate the balance sheet of the Fed, which is already not worth the paper it is sitting on, I think in that situation gold is going to be considerably higher.”

Much more in the full interview.

Full interview with Ben Davis can be found here, while below we repost the fund’s most recent extended letter on gold, for those who may have missed it the first time around.

Hinde Capital June 2010