Paulson Likes Gold

by Nigel Bolton-Shaw on August 16, 2012

Billionaire John Paulson is doing something right. After a number of stumbles, he’s found gold and is raising his exposure to an exchange-traded fund tracking the price of gold, according to Bloomberg.

He’s also selling other stocks, and thus according to a recent Bloomberg article, “leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion.”

Bloomberg tells us the billionaire bought 4.53 million more shares of the SPDR Gold Trust. It’s the biggest position the company currently has taken. It seems like a counterintuitive move as gold moved down hard this past quarter, but Paulson seems to believe that merely constitutes a buying opportunity.

Not only did he buy gold shares, but he sold energy, financial and auto-parts stocks, according to Bloomberg, and this “boosted the relative weighting of gold-related securities in his U.S. stock portfolio to the highest in three years.”

Here’s some more from the Bloomberg article:

Paulson had 33 percent of his U.S. stock holdings in gold- related securities at the end of the first quarter and 25 percent a year ago. The last time his stock portfolio had a bigger concentration in gold-related equities than last quarter was March 2009, when U.S. equities hit bottom. At that time, gold stocks equaled about 46 percent of Paulson’s $9.36 billion in reported U.S. stock holdings.

Gold slumped 4 percent in the second quarter, the biggest quarterly loss since Sept. 30, 2008. Prices fell as European Central Bank President Mario Draghi and Federal Reserve Chairman Ben S. Bernanke failed to increase stimulus measures, damping the outlook for global growth and demand for the metal as a hedge against inflation. The price is down 0.1 percent since June 30.

Paulson, who became a billionaire in 2007 by wagering against the subprime mortgage market, told clients in February that gold is his best long-term bet, serving as protection against currency debasement, rising inflation and a possible breakup of the euro. Gold miners are historically inexpensive, he said at a meeting with investors in April.

His hedge fund has been buying mining companies as part of the bet on rising gold prices, though losses by the stocks have hurt returns. Paulson added 4 million NovaGold shares, which slumped the most in more than three years last month after Barrick Gold Corp., the world’s biggest producer of the metal, said their Donlin Gold joint venture didn’t meet its investment criteria.

Interestingly, Paulson doesn’t seem to have a lot of exposure to silver, at least it’s not mentioned in the article. There does exist, however, a silver-gold ratio of around 15-1. Since the ratio of silver to gold is not currently anywhere near 15-1, it can be argued that silver has a lot further to climb in this golden bull market than gold does itself.

Beating the Fed’s Low Yield Racket

While in the midst of a recent morning routine of protein nourishment with frequent palate cleansings of espresso, I was swept into a vocabulary adventure. As I suspect many of you reading this also do, I was making the rounds of my favorite blogs. Clicking my way onto James Howard Kunstler’s always-colorful weekly posting, my eyes, passing over the prose, came to a screeching halt at the word “malaprop.”A quick visit to Wikipedia informs that a malapropism is the misuse of similar sounding words – often to a humorous end. “What are you incinerating (insinuating)?” and “He’s a vast suppository (repository) of knowledge” are two fine examples.

To those I would add “The Fed’s continued accommodative (accumulative) policy,” because there is little about this policy that accommodates those struggling to earn a fair return on their savings. And this malapropism leaves millions as the butt of a very cruel joke.

Read more…

Even if gold were to approach US$5,000 an ounce, which some savvy market observers think is perfectly possible given the length of this bull market, at US$1500 an ounce, the upside is only three or four times the current price.

However, if silver were to move to within say 10 percent of gold at US$5,000, the price of silver would move up to around US$500. This would be a more than 10X move based on the price of silver now.

Silver did make a move toward 10 percent of gold during the golden bull market of the 1970s, though it finished closer to the predicted ratio of 15/1.

There is perfectly clear logic behind these prices of course, and it has to do with the larger man-made business cycle. We live in a central banking economy and once central banks have over-printed money, first causing a boom and then a bust, the counter cycle begins.

People turn to gold and silver because they are not sure of the relative value of their fiat, paper currency. Often the assets that people bought with paper dollars are seen to decline, and this also precipitates a move toward money metals.

Once physical gold and silver are bid up, people often begin to buy gold and silver paper assets. Toward the end of the cycle, people often buy mining stocks.

Paulson has purchased mining stocks but run into the difficulty of finding the right stock at the right price. This is why he’s turned to purchasing shares in a gold index. He wants to “play” the business cycle itself without the added risk of stock choice.

One thing he’ll have to grapple with sooner or later is whether the system itself can even withstand, potentially, US$5,000 gold. Countries have a history of gold confiscation and nothing stops Western regimes from making such moves again.

But for now such ideas are hypothetical and Paulson obviously believes the upside of paper gold is more promising than the downside of confiscation.

Paulson because of the size of his investment, is managing his investments via paper gold. Many individuals are investing in physical gold and silver, and even taking delivery. At hand, gold and silver are harder to confiscate than if they are stored far away.

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