Julian Robertson's Genius: Bonds Are Far More Liquid than Gold

Recently I mentioned Julian Robertson’s yield steepener trade. The yield steepener, which is a bet on rising long Treasury rates, is a really a bet on rising inflationary expectations.

This trade demonstrates Robertson’s genius. For most investors, a bet on inflation means a bet on gold, or other commodities. Here is what Robertson had to say about gold:

While Julian certainly thinks inflation is in our future, he is hesitant to buy gold. In the Value Investor Insight interview, he goes on to say that, "I've never been particularly comfortable with gold as an investment. Once it's discovered none of it is used up, to the point where they take it out of cadavers' mouths. It's less a supply/demand situation and more a psychological one - better a psychiatrist to invest in gold than me."

The bond market is infinitely more liquid
Whether the statement about being a psychiatrist is true or not, I don't know. For people like Robertson who run large hedge funds, liquidity is a far bigger concern. While mere mortals like us play around with gold (including the likes of John Paulson). Robertson has moved onto the far more liquid U.S. Treasury market.

To give you an idea of the differences in scale, the U.S. debt clock shows the total U.S. debt outstanding to be roughly $11 trillion. By contrast, Federal Reserve holdings of gold bullion (assuming that it’s not encumbered by gold loans) amount to a little over $200b, even at today’s prices. If we were to look at gold stocks, the total market capitalization of components of the Amex Gold Bugs Index (HUI) total about $120b, which is roughly the market capitalization of Cisco Systems (CSCO).

Robertson has enormous investment capacity in this trade, compared to investors who just play gold and gold stocks.

Now that’s genius.

Comments

[jeremiah74:]

a curve steepener if you believe in rising inflation, is hardly genius. its a pretty basic trade..

the genius is being right.

Jun 10 06:21 AM

[james123:]

how do u know paulson does have an interest rate trade on? just b/c he doesnt talk about it publicly; there is no comparison b/w the two; paulson made the greatest trade of all time; there is simply no topping that

Jun 10 07:28 AM

[james123:]

i meant how do you know paulson does not have an interest rate trade on; sorry


On Jun 10 07:28 AM james123 wrote:

> how do u know paulson does have an interest rate trade on? just b/c
> he doesnt talk about it publicly; there is no comparison b/w the
> two; paulson made the greatest trade of all time; there is simply
> no topping that

Jun 10 07:29 AM

[Dr. O:]

Liquidity is key in managing large positions. The rising interest trade has been and continues to be the obvious consequence of US fiscal policy.

Seems to me gold and silver have, over the longer term, been good stores of buying power. I don't have a chart handy, but i can say that a hundred years ago the US was minting and circulating $20 gold coins that presumably contained less than $20 in gold (at the time).

You don't issue coinage with an intrinsic value above the nominal value for general circulation. Those same $20 gold coins now sell for over $1000, not due to numismatic scarcity, but primarily based on gold content alone.

Some make the case for silver, as it is consumed in many industrial applications, and the actual amount "above ground" has been declining, not increasing, over the years.

Some make the case, and I'm starting to agree with them, that silver and gold ARE money, and there are a few thousand years of human civilization to support this. Paper currency is just that, paper, limitless in potential supply.

Jun 10 08:04 AM

[huangjin:]

Interesting that he doesn't like gold because it's almost never destroyed, yet he's worried about liquidity.

I think he has the right idea though. If you really believe big inflation is coming, you'll make more going short bonds because you can lever up, whereas your gold position will be unlevered. There's less counterparty risk because you get your money up front. The question is how does he hedge his profits against systematic risk? What good are dollar profits if the dollar is depreciating?

Jun 10 09:00 AM

[mbkelly75:]

Keep in mind that short selling can cost you everything if you are wrong - even in just your timing. A good use of puts and calls might be wiser - they have the effect of limiting potential losses - unlike short selling where you can have unlimited losses. Stop losses can limit that but set you up for being whipsawed instead if you do not set them right.


On Jun 10 09:00 AM huangjin wrote:

> Interesting that he doesn't like gold because it's almost never destroyed,
> yet he's worried about liquidity.
>
> I think he has the right idea though. If you really believe big inflation
> is coming, you'll make more going short bonds because you can lever
> up, whereas your gold position will be unlevered. There's less counterparty
> risk because you get your money up front. The question is how does
> he hedge his profits against systematic risk? What good are dollar
> profits if the dollar is depreciating?

Jun 10 12:50 PM