3: Andy Krieger
It was 1987 and Andy Krieger, a 32-year-old currency trader at Bankers Trust, was carefully watching the currencies that were rallying against the dollar following the famous Black Monday crash. As investors and companies rushed to sell the American dollar and buy other currencies that had suffered less damage in the market crash, there were bound to be some currencies that would become overvalued, creating a good opportunity for profit. The currency Krieger targeted was the New Zealand dollar, also known as the kiwi.
Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions of dollars. In fact, his sell orders were said to exceed the money supply of New Zealand! The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply. It yo-yoed between a 3 and 5% loss while Krieger made millions for his employers.
One part of the legend tells of a terrified New Zealand government official calling up Krieger's bosses and threatening Bankers Trust to try to get Krieger out of the kiwi trade. Krieger later left Bankers Trust to go work for George Soros.
2: Stanley Druckenmiller
Stanley Druckenmiller made millions by making two long bets in the same currency while working as a trader for ...you guessed it -George Soros. Druckenmiller's first bet came when the Berlin Wall fell. The perceived difficulties of reunification between East and West Germany had depressed the German mark to a level that Druckenmiller thought extreme. He initially put a multimillion-dollar bet on a future rally until Soros told him to increase his purchase to 2 billion German marks. Things played out according to plan and the long position came to be worth millions of dollars, helping to push the returns of the Quantum Fund to over 60% for the year.
Due to the success of his first bet, Druckenmiller also made the German mark an integral part of the greatest currency trade in history. A few years later, while Soros was busy breaking the Bank of England, Druckenmiller was going long in the mark on the assumption that the fallout from his boss' bet would drop the British pound against the mark. Druckenmiller was confident that he and Soros were right and showed this by buying British stocks. He believed that Britain would have to slash lending rates, thus stimulating business, and that the cheaper pound would actually mean more exports compared to European rivals. Following this same thinking, Druckenmiller bought German bonds on the expectation that investors would move to bonds as German stocks showed less growth than the British. It was a very complete trade that added considerably to the profits of Soros' main bet against the pound.
1: George Soros
The British pound shadowed the German mark leading up to the 1990s even though the two countries were very different economically. Germany was the stronger country despite lingering difficulties from reunification, but Britain wanted to keep the value of the pound above 2.7 marks. Attempts to keep to this standard left Britain with high interest rates and equally high inflation, but it demanded a fixed rate of 2.7 marks to a pound as a condition of entering the European Exchange Rate Mechanism (ERM).
Many speculators, George Soros amongst them, wondered how long fixed exchange rates could fight market forces, and they began to take up short positions against the pound. Soros borrowed heavily to bet more on a further drop in the pound. Britain raised its interest rates to 12% and promised to push them to 15% to tempt investors to buy pounds. All this in one day. The problem was that investors simply didn't believe them.
Paying out interest costs money, however, and the British government realized that it would lose billions trying to artificially prop up the pound. It withdrew from the ERM and the value of the pound plummeted against the mark. Soros made at least $1 billion from this one trade. For the British government's part, the devaluation of the pound actually helped, as it forced the excess interest and inflation out of the economy, making it an ideal environment for businesses.
The US was on a bi-metal or 'gold standard' up until the 'Nixon Shock' of 1971.
What would the value of gold per ounce need to be today to backstop the amount of US currency currently in circulation?
While it is a purely hypothetical exercise at the moment, the answer may surprise you.
As many readers will know, the US monetary system is based on paper money which is backed by the federal government. The US currency is no longer valued in, backed by, nor officially convertible into gold. It is backed by the Government in whom we must trust.
Yet through much of American history, the United States had a currency that was linked to a metallic standard of one variety or another. The first devaluation of the US dollar was a result of the Coinage Act of 1834. This Act changed the 15:1 ratio of silver to gold to a 16:1 ratio by reducing the weight of the nation's gold coinage. The value in gold of the US dollar was thus reduced by 6%.
The Gold Standard
Through the years many developments, including large silver discoveries in the US and the Civil War affected the bi-metal backed US dollar. Yet the US dollar link to both gold and silver persisted until March 14, 1900 and the passage of the Gold Standard Act, which asserted that:
'the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard'...
At that point, the United States was on a 'gold standard', a standard which guaranteed the dollar as convertible to 1.5 g (23.22 grains) of gold.
The Nixon shock
There were many more twists in US dollar policy until the danger of a run on US gold reserves was deemed too high. As a result, in 1971 President Nixon issued Executive Order 11615, which ended the direct convertibility of US dollars to gold.
He said, 'we must protect the position of the American dollar as the pillar of monetary stability around the world. I am determined that the American dollar must never again be a hostage in the hands of the international speculators'.
This became known as the 'Nixon Shock' and marked the US dollar's transition from the gold standard to a fiat currency.
What price today?
What would the price of gold be today had the US remained on the gold standard as opposed to being backed simply by the 'full faith of the US government?' While this is a hypothetical exercise, it is important for three reasons.
1. The US dollar is currently recognised as the world's 'reserve currency' of choice and dominates payments in global trade transactions.
2. Gold is globally priced with the US dollar as the reference. The 'full faith' of the US government has arguably been compromised with the election of Donald Trump as President. With statements such as, 'the US dollar is too strong', 'I love debt', and the suggestion to renegotiate US sovereign debt. This, combined with Trump's opposition to commonly accepted 'big systems' like the Euro-zone, NATO, and trade pacts like NAFTA, as well as a relationship with Putin that at best is odd and at its worst quite disturbing. Do we still have 'full faith'?
3. To accurately answer the question of the price gold needs to trade at in order to back-stop the US currency, we need to know how much gold the US government really holds, as well as how much currency it has issued.
US Gold Reserves
According to the US Treasury, the federal government currently holds a total of 261,498,926.23 troy ounces of gold. However, some analysts and politicians question whether or not the US government truthfully reports its gold holdings considering the holdings have not been independently audited. In 2011, US Representative Ron Paul introduced a bill to audit the Fed's gold holdings. Paul, who was running for President at the time and pushing for the US to return to the gold standard, said, 'this is one of the few legitimate functions of government. To check our ownership and be fiscally responsible and find out just what we own and whether it's really there'.
The bill failed. It failed a Senate vote in early 2016 when Ron Paul's son once again pushed to audit the Fed's gold supply. As a result, we'll have to take the US Treasury's word for it, and use the figure of 261,498,926.23 troy ounces.
US Outstanding Currency
According to the Federal Reserve, as of January 11, 2017 there was approximately $1.5 trillion in circulation - $1.46 trillion of which was in Federal Reserve notes.
With $1.5 trillion in circulation it means that each ounce of gold held by the US government would need to be valued at $5228/ounce. Gold is currently trading at only $1230/ounce.
Market madness (again)
You could be forgiven for wondering what was going on currently. We have a reality TV star as the US President, a man who dictates policy through Twitter like a tipsy teenager.
Equity markets have surged to new highs and more people are trading them than ever before. Wages are stagnant, asset prices are bloated, debt is everywhere and people have never been more miserable. Perhaps I should try to be more upbeat about things.
I firmly believe that recent highs for US share markets are nothing more than the US being seen as the lesser of two evils. US markets are not cheap on a historic basis (average trailing price/earnings ratio of 25 times) and only look 'safe' compared to the mess that is Europe. In fact, the kindest thing you can say about the markets is that they are not as expensive as they were in 1929 and 2000.
Should France, Italy or The Netherlands decide to leave the European experiment, it would clearly put Germany in a very awkward position. US markets are assuming all Trump promises on tax and the removal of red tape will come to fruition. They won't, but that's a story for another day.
Many recent advances and changes in the way we live our lives in 2017 are of course fantastic. We are able to communicate more efficiently than ever before, (if we could just remember to actually speak to each other now and again). Having said that, we are unlikely to return to boxy black and white TV's anytime soon and phones won't ever have tightly wound cords linking them to a wall socket again. Booking a flight no longer takes a drive to the travel agent, booking a table for dinner can be done in seconds and transferring money is simple and fast. Wonderful.
Some things won't change however. Overpriced, over hyped and desperately 'fashionable' stocks will come to market. They will make their founders hugely rich. The shares will rise and then fall. It will make lots of people look very silly.
The only problem with fashion is that it changes so quickly, and never more so than today. What looks like a great buy in rosy times can quickly look like a moment of madness once storm clouds start to gather for the economy. Let’s take a look at Snap Inc, the largest and most anticipated (by who, we are not sure) IPO since 2014.
The young founders of Snap turned down an offer of $3bn from Facebook a few years back and at the time, many could barely believe their chutzpah and arrogance. At the market close last week, the company was worth just under $23bn. Smart move boys! They even kept their voting rights to the company, the shares they floated (sold) did not have the same rights as the ones they retained - it's brilliant really. Each is worth $5bn today. Impressive stuff indeed.
The IPO prospectus describes the business as 'a camera company'. This is not really true. Snap is a messaging application for smartphones - you send someone a picture or video, and it deletes itself shortly after the recipient has read it. They also allow users to manipulate pictures with various graphics. That's it in a nutshell. The shares floated at $17 and rose to $27 a few days later.
Facebook has 4bn users and a worth of $400bn. Snap has 158m users and a current worth of $23bn. Facebook users spend 50 minutes a day using the site, Snap users spend half that amount. Facebook made $8.6bn in advertising revenue last quarter, Snap made $165m. However, and this is the most important number, Facebook made $20 advertising revenue per user, Snap pulled in just $2.15 per user.
Could Snap grow and attract a mainstream middle-aged audience? Possibly, but it would be costly and risky and the prospectus suggests it won't even try.
Growth in China will be difficult as it is doubtful whether China would be happy with Snap's delete function because it would be so hard to police. Instagram recently launched a rival to Snap, called Stories. It signed up 100m users within 4 months, Snap has 158m in total remember.
Facebook and Google are both bigger and less risky, and both trade on far cheaper valuations. The founders, Evan Spiegel and Bobby Murphy, were very brave to turn down that $3bn offer in 2012, but even smart, brave billionaires have been known to push their luck.
James Sanders is a London based trader and investor. He founded the UK’s largest independent derivatives broker in 2001 and left the City in 2009.