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U.S. investment-manager guru says silver a good bet

Jeffrey Gundlach makes three simple calls: buy silver; pick up 30-year U.S. Treasury bonds; invest in Japanese stocks.

Jessica Rinaldi/Reuters

Every few months, star U.S. investment manager Jeffrey Gundlach gives a webcast outlining where in the world he sees the best money-making opportunities.

In his latest webcast, Mr. Gundlach made three simple calls. Buy silver. Pick up 30-year U.S. Treasury bonds. And for stock investors, go to Japan. That Asian market, even though it's surging, could rise more than 20 per cent in U.S. dollar terms this year.

You could do worse than paying attention to Mr. Gundlach, who was once dubbed the King of Bonds for his winning ways in fixed-income markets, although he's been branching out quite a bit from his credit-market specialty.

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I listen to a lot of forecasts by investment gurus, and some are so dull and equivocating I often fear I'll need a trip to the office defibrillator to jolt myself back to consciousness afterwards.

Not so with Mr. Gundlach, who is always bright. He's founder of his own Los Angeles money management firm, DoubleLine Capital, which he set up after being abruptly fired in 2009 from Trust Company of the West. His main fund at TCW regularly ranked in the top 1 or 2 per cent in the performance sweepstakes and he's continued to outperform at DoubleLine.

Mr. Gundlach is going against the hedge-fund herd on his silver call, which is based on his bullish view on gold. In recent months, gold ETFs have experienced some of their largest outflows in years, and some noted hedge-fund operators, such as George Soros, have cut their positions in the yellow metal. By going on the other side of this trade, Mr. Gundlach is sticking his neck out in a high-profile way.

Of the two metals, he favours silver because it has a high beta, meaning in a bull or bear market it moves disproportionately compared to other precious metals. It is for this reason that silver is often described as gold on steroids, so if he's right, his investment will yield far greater returns than an equal dollar amount of gold and far great losses if prices slide. The reason he's bullish on gold is money printing by central banks. Over time, he expects the metal to rise in tandem with the expansion of central-bank balance sheets.

Over the past 18 months, the relationship between central-bank currency debasement and gold has broken down, with the yellow metal trading sideways as bank balance sheets expand. For Mr. Gundlach, the sideways trend is temporary, allowing value to build up in the precious metals space.

"Silver was very much in favour two years ago. Now it's very out of favour," pointing to the previous highs near $50 (U.S.) an ounce compared to the present level around $29. He said current prices for precious metals represent a reasonably good entry point for investors who don't have positions.

Another contrarian call is to be long U.S. government bonds. Mr. Gundlach has been scooping up the haven investment, reasoning that the recent back up in yields from their record lows of last July during the euro collapse scare means they represent good value, compared to pricey investment grade corporate and high-yield bonds.

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Things seem calm now, but Treasury prices could rally if financial jitters re-emerge, which he says "is almost inevitable at some point in time."

Many players on the Street are on the other side of this trade, reasoning that the threat of inflation from money printing or a decent economic recovery will rattle the credit market. Mr. Gundlach believes central banks, fearful of the fragility of the economic system, will be providing additional liquidity for years, keeping a bid in the market for government bonds. He estimates that central bank buying of government debt has supported deficit spending in the U.S. and several other major countries engaged in quantitative easing by about 3.5 per cent of GDP in recent years.

"I don't think that there is any confusion that the Fed is going to keep this going, not for months, but for years," he says, predicting that money printing will go on "as far as the eye can see."

Mr. Gundlach likes the Japanese stock market, although he figures it may be a bit over extended after a sharp recent rise. In general, he views the country as the "pace car" for the world's race to super loose monetary policy, and pointed out as extremely noteworthy for investors that the country's electorate recently elected a prime minister who pledged to create inflation.

"Imagine if [Republican presidential hopeful] Mitt Romney or [President] Barack Obama, a few months back, was running around the United States saying that their plan was to inflate," he observed.

Inflation in Japan, if achieved, will drive the yen lower and stocks higher. Mr. Gundlach says that since the Japanese stock market crash in late 1989, $1 invested there would have shrunk to only 55 cents due to capital losses exceeding dividends. Over the same period, a dollar invested in the S&P 500 would have risen to $5.84, suggesting to him that U.S. stocks are overpriced.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More


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