Saturday, December 12, 2009

John Paulson Apparently Really Hearts Gold

A blogger has estimated quite a factoid about the hedge fund manager John Paulson and gold in
John Paulson Likes Gold…More Than a Friend. Here are excerpts:

Based on several analyses of his filings, Paulson's wagering roughly 15% of his $30 billion hedge fund in the precious metal ($4.3 billion). His investment is spread out between ETFs, physical bullion and shares of gold mining stocks, but for the purpose of this discussion, we're going to look at them in the aggregate as representational of a bet on gold (which they are).

As can be seen in the chart above, Paulson holds more gold than many nations with individual populations in the millions and economies in the hundreds of billions. His reasoning for being so bullish is that there are roughly $200 trillion investable assets (in dollars) in the world, but only $800 billion of that wealth is in gold.

No guarantees, but I'd rather be joined by this Paulson (forget Hank) as a gold investor than be on the other side of any of his positions, especially an uber-long one that he has researched up, down and sideways.

Meanwhile, re short-term-ism, Mark Hulbert has a caution in Beware the Goldbug Infestation:

THE GOLD MARKET HAS suffered an enormous amount of volatility over the last few trading sessions. From its high trade on Thursday, Dec. 3, through Tuesday's close, Comex's spot gold contract shed $75, or 6.1%.

Unfortunately, according to contrarian analysis, we are likely to see more downside volatility over the next several weeks.

This sobering assessment can be traced to the high levels of bullishness that currently prevail among gold market timers. Current bullishness is higher, in fact, than on the occasion of each of the last four intermediate-term tops in the gold market.

Let's put Hulbert's info in a larger time frame. He goes on to say:

To put the HGNSI's current level in context, consider that in early October, which is when I last wrote about gold sentiment for, this sentiment benchmark stood at 32.2%, or less than half of where it is today. That low level of bullishness was a bullish sign, as I wrote then, suggesting that "higher prices are in store." (See Hulbert on Markets, "Climbing the Golden Wall of Worry." Oct. 8, 2009.)

Spot gold on the Comex stood at around $1,050 per ounce when I wrote that column.

Gold is not all that much higher already. Also, Hulbert cautions:

Let me hasten to add that this contrarian concern only applies to the short-term horizon -- the next month or two. That's because contrarian analysis, to the extent it works, is only a short-term market timing tool; my statistical analysis of the HGNSI shows that it sheds little light on where the market will be in, say, one year's time or even in six months.

Putting the above together along with some technical analysis that I am not at liberty to share, my working hypothesis is that gold probably has more downside action, perhaps under cover of a rising U. S. "fiatsco" (i.e. U. S. dollar loses value more slowly than that of other countries' fiatscos and thus the USD "rises") as the money-printing plus normal business cycle effects provide upside surprise on our economy, but that the gold price breakout above the winter 2008 highs (GLD around 100) was powerful and considering that it has already survived one chart test of said breakout as recently as late October, a one-month pullback from giddy breakout highs is entirely normal in the context of a larger move.

No matter where the stock market averages are, the Fed will remain "easy" all December, our housing market will remain dependent on Fed/government largesse, the Federal deficit will remain gigantic, unemployment will remain elevated, and thus all the political priorities of the Party of Government will work against sound money. Do you think that having apparently built a very large position in gold, John Paulson will suddenly sell his gold because it has dropped 10-20% vs. fiat "money"? Will David Einhorn say that he was bamboozled the way he could have said had he gotten AIG wrong as it was dropping (not that Einhorn was in AIG)? No. No way, no-how. If anything, they saw what I saw and trimmed their holdings at the top.

Now, anyone who has almost all of his/her retirement savings in gold is taking quite a gamble. This is not what I am advocating.

But if on a 5-year horizon, your choice is a T-note in which your $100 today will turn into $111 in 5 years, do you think it is likely that at some point within 5 years, gold will rise in price a mere 11% from what it is today? Heck, if you're a nervous holder, you can buy GLD and sell a call option at a bit over today's price and bring in 13% by agreeing to sell your GLD a mere 13 months from now. If it's not called away, you have 4 years to sell more options or just wait for GLD to at least get back to today's price and you will have beaten the T-note.

No guarantees, but a la John Paulson, David Einhorn and other superstar money managers, gold is at today's relative valuations a "forever" asset class within a diversified portfolio.

I went to zero on my GTU holdings over $48 and bought a core GLD position given what was then an overvaluation of GTU. These holdings have been added to as gold price collapsed recently. Given that I believe that gold (and GLD etc.) is now moving from weak to strong hands, I expect to increase my GLD/GTU holdings if gold continues to fall in price this month (I prefer GTU but want its premium over NAV to come in just a bit more).

Also, given the cyclical strength in the economy and my distrust of bank financial strength, I am inclined to increase my speculation in silver and platinum through direct metal ownership in ETF form. Note this is speculation rather than investing.

We may well be a bit late in the precious metals move, as we are 8 years from the bottom, but we are nowhere near a dangerous price level based on prior peak prices of these metals (but who knows what the future will bring!). Thus investors and speculators may have a comfort level with long-term ownership of these assets as I do, and as I had for stocks between 1979 and 2000 but have not had ever since the mother of all bubbles that peaked nearly 10 years ago.

Copyright (C) Long Lake LLC 2009

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