From the September 2013 issue of Futures Magazine • Subscribe!

Ben Davies: Turning adversity into gold

FM: What were some of the important trading lessons you learned throughout your time at Greenwich?

BD: I started off as a market maker, and I think that’s a great place for any young trader to start because you get an appreciation of risk. Often you’re put into positions that are not conducive [to] a positive outcome, the risk/reward isn’t necessarily conducive to a successful trade there and then. It was very much about mitigating loss rather than turning it into profit. The time horizons for a market maker are very different from [those of] a macro proprietary sort of longer-term investor where you can determine the timing of your trades, but nonetheless it gave me a huge appreciation for risk-taking. Trading for me ultimately is about having conviction and flexibility, which in many ways are at odds with each other. If you allow your conviction to boil over too much, it can border on hubris, but if your flexibility is too much that you cut risk at the first sign of trouble, then that’s not successful either. A lot of the subjective and discretionary risk-taking that I first learned at Greenwich Capital, and [from] my partner since, has been codified in [the] systems, we use as our parameters to ensure we have very good risk and dynamic money management.

FM: You just mentioned Greenwich’s position in the global securities market What did your time at Greenwich teach you about the global economy?

BD: It gave us a very unique, inside track as to what one of the largest players in capital and trade flows was doing, and that was China. In regard to the U.S., being the No. 1 dealer in bonds, agencies and mortgages, I was able to see firsthand this buildup of FX currency reserves, and see how they were impacting and driving down long-end rates. By driving down long-end rates, the U.S. was supporting mortgages and consumer credit, while at the same time creating a dearth of yield for pension and endowment funds, the symptom of which was financial engineering to provide 'artificial yield' or illusionary yield. 

The sub-prime crisis really was a product of Bretton Woods II, which I refer to as a semi-fixed exchange rate where the U.S. is centric . In essence the Asian countries are more or less pegging their currencies to the dollar without the backing of gold to maintain their relative competitive ability to sell things cheaply to the U.S. The defining nature of this whole international monetary system is financing the United States’ huge deficits, both fiscal and trade, and has done those at low interest while allowing them to finance the export boom of China. Really, it’s helped build up a huge amount of credit in the system. If we had been under a gold conversion or standard, there would have been restraint on that build-up of reserve currency, that would have been the natural equilibrating mechanism of the trade balance, but we haven’t had that. So, we’ve had this egregious proliferation of credit as a consequence. 

In many ways, this is what led us to setting up Hinde Gold Fund. It was our macro insight that led us to believe there is going to be an unraveling of the financial system or this credit bubble, and that the re-balancing of this vendor financing relationship ultimately would lead to the collapse of the credit bubble and the recapitalization or monetization by the private sector of gold. That’s what we are witnessing.

FM: Was this view pervasive among other traders at Greenwich?

BD: No, definitely not. Don’t get me wrong, I do think there was an inordinate [number] of people that understood there was something wrong with the financial system. All asset prices were rising, but they hadn’t necessarily put the macro picture together, which I felt that we had. And, certainly we had the conviction to set up a business. We created a unique long-only managed gold fund that was backed primarily by allocated gold held outside the jurisdiction of the banking system, and it garnered a lot of interest at the time. You have to remember that for CNBC and Bloomberg at the time, gold wasn’t even a ticker on the TV screen when we started, despite it being in a stealth bull market probably for about five years. Certainly the reaction from others suggested that this was a rather unique and insightful thought process, but I would say there were many who understood that something was fundamentally wrong.

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