December 3, 2022

How Did An Investment Pro Lose Money Investing In Gold?

Despite the recent set back in gold prices due to panic selling by investors, gold has still racked up an impressive 15.7% gain with a price increase of $218 per ounce since the first of the year.  So how does a hedge fund manager with one of the best track records in the industry wind up losing over 10% on his gold portfolio?

The man who can answer this question is John Paulson, famous for his billion dollar gains betting against subprime mortgages before they collapsed in price.  Making matters even worse, the set back in Paulson’s Gold Fund, although painful, pales in comparison to losses run up by the Paulson Advantage Fund, as reported by Bloomberg.

John Paulson, the billionaire money manager mired in the worst slump of his career, lost 10.5 percent in his Gold Fund this year even as the metal heads for its 11th straight annual gain, according to people familiar with the fund’s performance.

The fund, which invests in mining stocks and other gold- related securities, remains the best performer in Paulson’s $28 billion fund family this year. His Paulson Advantage Fund, which seeks to profit from corporate events such as takeovers and bankruptcies, has fallen about 35 percent. The performance numbers for the two funds are from Dec. 28, 2010, through Dec. 20, 2011, and may not reflect returns for all shareholders, said the people, who asked not to be identified because the information is private.

Paulson & Co., based in New York, has lost money this year on investments including Citigroup Inc., Bank of America Corp. and Sino-Forest Corp., the Chinese forestry company accused by short-seller Carson Block of overstating timberland holdings. Paulson, 56, cut the so-called net exposure in his main hedge funds to 30 percent last month and reduced bullish bets across all his funds.

Paulson’s frustrations with the losses on his gold portfolio mirrors that of other investors who have bet on gold stocks and lost despite the fact that gold bullion scored another impressive advance this year.

Paulson’s had large positions in Anglo Gold Ashanti (AU), Gold Fields Ltd (GFI), Nova Gold Resources (NG), Agnico-Eagle Mines (AEM), Iamgold Corp (IAG) and Barrick Gold Corp (ABX), all of which declined.  Agnico-Eagle Mines was the worst performer with a stunning decline of over 50% on the year.

It will be interesting to see if Paulson dramatically reduces his positions in gold mining shares over the coming quarters.  Given the fact that the fundamentals for owning gold are stronger than ever and gold mining shares are deeply oversold, it would not be surprising to see Paulson actually increase his gold stock holdings.

Smart Money Investors Assess Gold Market

Given the recent extreme volatility in worldwide financial markets, Barron’s interviewed their Roundtable Panelists for an assessment on where we are headed next.   Three of the smart money investment pros interviewed gave their insights on where they think gold is headed next.

Here’s what they had to say:

1.  Investor Felix Zulauf thinks that the stock market will see new lows in the fall and that eventually both the Fed and the European Central Bank will step in to support the financial system.  Although Felix feels that providing additional liquidity is not a solution, “if we don’t do it the system will break down.”  According to Felix, at some point, as the problems get bigger, central banks may hit the panic button and wind up “like Zimbabwe”.  The increasing price of gold reflects the loss of confidence in policy makers, central banks and the currency.  Felix’s recommendation for a bleak future – “own a lot of gold, and don’t have debt.”

2.  Fred Hickey, who is editor of The High-Tech Strategist, also sees the Fed being forced to initiate more quantitative easing as economic conditions deteriorate.  The drawback of more money printing, however, is that “the Fed…can raise the nominal prices of assets – but not the real prices, because inflation will rise.”   Hickey, who owns both bullion and gold ETFs think the better play right now is in gold mining stocks since they have lagged the price increase in gold bullion.  Hickey is recommending Agnico-Eagle Mines (AEM), Newmont Mining (NEM) and Yamana Gold (AUY).

3.  Marc Faber, Editor of The Gloom, Boom & Doom Report, sees a short term bounce in stock prices and a possible correction in gold of $100 to $150.  After a rally off oversold levels, Marc thinks stocks will drift lower due to concerns over sovereign defaults, a dollar crisis, continued social upheaval in the Middle East and developed countries in the West, recession, lower corporate profits and the possibility of a “bust in China.”   As for the gold market, Faber remains long term bullish saying that “As long as the trio of Obama, Geithner and Bernanke are in power, gold is destined to move higher.  Long term treasuries have no value.  They will default by paying interest in a worthless currency.”

Bill Gross, head of investment firm Pimco, while not specifically addressing the gold market, is also bearish on the economic outlook for the the United States and implied that the more quantitative easing is the only option left.  According to Gross, the recent Fed announcement that it will keep interest rates at zero for another two years “indicates that monetary policy has been exhausted, while fiscal policy is hammerlocked by the results of the debt ceiling debate.”

Gold is beginning to look more and more like the only safe haven in a dangerous world.

Is The Plunge In Gold Stocks Predicting A Drop In Gold?

American Gold Buffalo

Gold stocks have been under performing gold bullion for the past three years.

The poor performance of gold stocks is reflected in the sub par returns of gold mutual funds run by two of the countries largest investment companies.  The three year return on Vanguard’s Precious Metals Fund (VGPMX) has actually had a negative return over the past three years as the price of gold has soared by 80%.  The Fidelity Select Gold Portfolio (FSAGX) has returned only 16.2% over the past three years. (See Physical Gold Outperforms Vanguard and Fidelity Gold Mutual Funds).

Senior gold producers such as Newmont and Kinross Gold are increasing gold production and solidly positioned for significant earnings increases but their stock prices have not been able to match the returns of gold bullion.

Although there are many reasons to expect that gold stocks will catch up to gold and deliver large gains to investors, so far this has not been the case.

Adding fuel to the investor debate over the relative merits of gold stocks versus gold bullion has been the drastic price divergence exhibited since the beginning of 2011.  While gold has held virtually all of its gains, the price of many gold stocks has plunged.  An investor in gold stocks not tracking the price of gold would probably conclude that the price of gold had collapsed during 2011.

Since January 1st, the price of gold has gained $116 per ounce or 8.3%.  From January lst to recent June lows, the price of Newmont Mining is down  by $9.27 (15.2%), Kinross Gold is down by $3.96 (20.8%) and Agnico-Eagle Mines is down by $16.01 (20.9%).  A broad basket of gold stocks, as measured by the Gold Miners ETF (GDX) has declined by $9.69 or 15.8%.

Adding to concerns about the recent sell off in gold stocks is the especially wide price divergence seen since May lst.  Although many individual gold stocks have long lagged the returns of gold, the GDX, a broad based index of gold stocks has generally tracked the price movement of gold over the past several years.  Since the beginning of May, however, the linkage between gold stocks and gold completely broke down, leaving investors to ponder the significance of such a wide divergence.

 

STOCKS VS GOLD - COURTESY YAHOO.COM

 

 

On past occasions, weakness in the gold mining shares has been a harbinger of a sell off in the gold market.  Is the current weakness in gold stocks currently forecasting a decline in the price of gold?  The end of the Fed’s money printing campaign, the world wide debt crisis, concerns about deflation, a weakening economy and the decline in commodity prices lead some to believe that a liquidity driven crisis could result in lower gold prices.

Despite short term concerns over the price of gold, the reasons for remaining long term bullish on gold are numerous.  The fundamental problems of excessive debt, debased currencies, widespread insolvency among sovereign states and out of control spending by the U.S. government all suggest that we remain on the precipice of another economic crisis.  Governments and central banks have no solutions except for the printing presses, which will be turned up to full speed at the inception of the next financial crisis.

At the margin selling may temporarily drive down gold prices in the short term, despite the solid long term bullish fundamentals for gold.  The long term trend for gold remains higher and any temporary price weakness would be a buying opportunity for gold investors.