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Tuesday, May 10, 2016

Gold Has Reason to Shine and Here's Why

Are central banks “increasingly aggressive and counterproductive” policies causing gold to continue to brighten? Here’s why the metal’s shine is likely just getting started.

Gold might have already posted its best quarter since 1986, but hedge fund manager David Einhorn is betting that there's more to gain from the metal: on Tuesday, he spoke with Bloomberg via phone about his views on central bank policies and how they might affect gold.

Einhorn was critical of how central banks are running things and warned about the direction they're headed in: he panned the European Central Bank's record-low borrowing costs, expanded asset purchases and borrowing subsidies, calling these a "kitchen-sink policy". Aside from Europe, Einhorn also touched upon the Bank of Japan's negative interest rates as well as the reduced U.S. rate hike forecasts. According to him, the status quo is good for the metal: "These increasingly aggressive and counterproductive monetary policies are bullish for gold," he said.

Einhorn's comments to Bloomberg echo sentiment from a letter that Greenlight sent to investors yesterday. "The Fed’s 'data dependency' doesn't appear to relate to employment, which continues to improve, or core inflation, which is now running above its two percent target," said the letter. "We believe the increasingly adventurous monetary policy is bullish for gold."

Those familiar with Einhorn and his Greenlight Capital Re Ltd reinsurance company know that they have traditionally held gold in high regard: the metal accounts for nearly 10% of Greenlight's portfolio and Einhorn has long believed that central banking stimulus will fuel inflation and boost gold. Furthermore, Greenlight named gold as one of their five largest disclosed long positions at the end of the first quarter or 2016.

At any rate, the company's faith in the yellow metal seems to be paying off: their stock has maintained stability and their shares have gained 15% this year, helping alleviate the losses from investing in Japanese lender Resona Holdings Inc. which dropped 32% in the first quarter due to the Bank of Japan's negative-rate strategy.

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