Beware of bubbleonians and dipsters
Fund manager Fleckenstein looks beyond gold's decline
By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:45 AM ET Mar 13, 2003
SAN FRANCISCO (CBS.MW) -- It's no wonder they call William Fleckenstein a contrarian's contrarian,.
The money manager and frequent commentator, known as a global bear for much of his investing career, isn't shorting the whole stock market right now. Yet he still believes stocks are headed for a heap of trouble, and Fleckenstein, president of Fleckenstein Capital in the Seattle area, likes prospects for gold, a metal whose spot price is sliding even as you read this article.
Next month, Fleckenstein will go one step further by speaking before the hungry gold crowd at the annual Las Vegas Precious Metals Conference. (See conference details.) The hedge fund manager, probably one of America's best-known short-sellers of stocks, is more than a little surprised at the thumping that gold is taking right now.
Gold in the spot market was down $10.50 to $335 an ounce Thursday morning in New York, a level more than 13 percent below the almost $390 the metal enjoyed earlier this year. Coming on the heels of a dismal past few weeks for the metal, that drop went hand in hand with a rally by the dollar.
Fleckenstein, a long-haired and successful hedge-fund manager, has a theory about all this. "The gold market has gotten caught up in the geopolitical backdrop," he says. "I had this notion that the selling of gold that was going to take place when the war started has already started."
He figures most investors are mindlessly retracing the steps the markets took back in 1991, the first time that America battled in Iraq. Back then, stocks soared and gold collapsed.
"A lot of people have the playbook out for the last time this happened, and the pressure has started because they say, 'Oh, the war is going to start and I have to sell my gold because the invasion will be successful.'"
However, war aside, "the problem is the bubble and the debt problems, and the overcapacity problems, and the consumer being overloaded," he adds.
Fleckenstein gets credit for creating an entire vocabulary of, well, Fleckisms. "Bubbleonians" are those who believe in a perpetual bull market. "Dipsters" buy mindlessly on dips.
"While we are all focused on the war,' says Fleckenstein, "most people figure, 'Well why we need gold anyway, especially if the U.S. is going to win."
Fleckenstein has two toes in the precious metals market. He is a director of Pan American Silver (PAAS). He also owns shares of Newmont Mining (NEM), the world's largest gold producer.
In his view, gold will replace the world's major currencies as central banks cheapen the value of their paper assets by borrowing, printing or buying securities that inflate their economies.
"The mania that we had in the 1990s that expressed itself was an expression of complete and total confidence in things that are paper," he says. "That pendulum has swung as far as it could when gold was $800 an ounce (more than 20 years ago). That pendulum will swing back the other direction as the world looks around for a place or a store of value."
Fleckenstein says he is not a gold "bug," someone who rabidly supports the metal or believes dark forces, like central banks, are conspiring to keep gold's price in the dumper.
"People will own gold because it is the only currency that is no one else's liability," he says. "I really thought the loss of extreme confidence in paper would tend to push people to own some sort of hard asset in their portfolio. After all, there are no real currencies left. The euro has a lot of issues, and so do the dollar and the yen. All of these countries are willing to debase their currencies."
Like many market watchers, Fleckenstein expects some kind of huge paper rally surrounding war developments. (He says he's shorting just one stock right now, but I neglected to ask him which one.)
"I suspect the paper market will have a big rally on the war, but I don't know if it will last five minutes or 90 days. Once we get past that, we start to look at the problems of debt ($31 trillion in all sectors of the American economy, or almost three times gross domestic product), none of these currencies are worth a damn thing. Why any foreigner would want to own dollars right now, I don't know."
He says investors want to see "the war stuff moving ahead, so we can see what everything looks like in a post-war environment. If they get Saddam out peacefully, the party will be that much bigger."
Will gold rally? Possibly, says Fleckenstein, in these highly irrational markets even as the dollar makes up for lost ground (such as on Thursday morning). That view runs against the traditional wisdom that says gold rises when the dollar falls. "But hey, gold was falling as the dollar fell. I think gold could dig in and go up in dollar terms even if the dollar rallies."
If that happens, gold in other currencies would rise even more than dollar-linked gold -- a sure sign that the metal's rally is back on track. |
