An Egyptian Billionaire Just Bet $2.85 Billion on Gold

Egyptian billionaire Naguib Sawiris has made a bold bet on gold by staking half of his entire fortune on the yellow metal. In his view, gold prices have another $500 left to climb as “overvalued” stocks run out of steam.

Sawiris Longs Gold

In a recent interview with Bloomberg, Sawiris said he believes gold prices will eclipse $1,800 a troy ounce as the global equity rally loses its luster. Although he did not specify when this paradigm shift could occur, geopolitics and Chinese consumption of the yellow metal are likely to push prices higher in the foreseeable future.

“In the end you have China and they will not stop consuming. And people also tend to go to gold during crises and we are full of crises right now,” Sawiris said. “Look at the Middle East and the rest of the world and Mr. Trump doesn’t help.”

Though many in the investment community share Sawiris’ general outlook on commodities and the stock market, few are willing to stake half their fortune on it. The Egyptian billionaire, who made his fortune by building one of the nation’s largest conglomerates, is prepared to allocate roughly $2.85 billion to bullion.

Gold Prices: Where We Stand

For bullion to reach $1,800 a troy ounce, it would need to rise 38% from current levels. Gold futures traded on the Comex division of the New York Mercantile Exchange settled at $1,305.10 a troy ounce on Tuesday, having declined 3.5% over the last two weeks.

One of the biggest arguments in favor of the gold bulls is the apparent overvaluation of stocks, which according to some observers, may have reached their final peak this past January. The year-long Trump reflation trade has given rise to fears of over-inflated values without the fundamentals to back them up.

Many would counter that point by appealing to corporate earnings. After all, they say, Wall Street earnings are on track for their best quarter since 2010. Though that may be true, it’s important to remember that earnings are compared against year-ago results. Equally important to remember is the fact that Wall Street recently emerged from one of its longest earnings recessions since the financial crisis. These facts have a dulling effect on the latest earnings rally.

Another factor to consider is rising interest rates. As Berkshire Hathaway Chairman Warren Buffett once said, interest rates “act on financial valuations the way gravity acts on matter.” In other words, ” the higher the rate, the greater the downward pull.”

And contrary to popular opinion, higher interest rates are not bad for gold. To understand why, it’s important to break away from conventional wisdom.

According to data provided by the Federal Reserve Bank of St. Louis, gold is more likely to rise if interest rates go up. Case in point: between 1986 and 2016, the probability of gold rising in the months that the Federal Reserve hikes interest rates is 55%.

Let’s also not forget that gold is a preferred hedge against rising inflation, which is the Fed’s primary reason for raising interest rates in the first place.

While it’s still too early to conclude that Sawiris has made a good decision, the fundamental picture tends to support his view. Investors should therefore keep a close eye on gold and other precious metals.

Featured image courtesy of Shutterstock.

Author:
Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi