July 6, 2022

Will John Paulson Cut His Losses On Gold?

gold1Hedge fund investor John Paulson, who made billions shorting mortgage securities ahead of the financial crash, lost 13% on his gold holdings in May after taking a blood bath in April. 

Billionaire John Paulson, the hedge-fund manager trying to recover from losses related to bullion this year, posted a 13 percent decline in his Gold Fund last month, according to a letter to investors.

The drop brings losses in the strategy to 54 percent since the start of the year, the firm said in the letter, a copy of which was obtained by Bloomberg News. The Gold Fund is the smallest strategy of the $19 billion money manager, with about $360 million, or 2 percent of assets, most of it Paulson’s own money.

Gold fell 5.4 percent and gold equities declined 3 percent in May on speculation the Federal Reserve will scale back its bond purchases, reducing the attractiveness of bullion and related securities as a hedge against inflation.

Paulson holds most of his massive gold positions in the SPDR Gold Trust (GLD) and had increased his position in mid 2012, bringing his total holdings to 21.8 million shares.  The  April 2013 gold crash resulted in losses on Paulson’s gold positions of over $600 million.   Even as other large hedge fund traders such as George Soros  liquidated large gold positions, Paulson remained committed to his gold positions and has told investors to remain invested in gold since current valuations provide a “significant upside.”

At December 31, 2012, Paulson’s position of 21.8 million shares in the GLD was valued at $3.4 billion.  Based on yesterday’s closing price of $133.25, the value of Paulson’s GLD shares would be worth $2.9 billion for a decline of $500 million, a serious loss even for a billionaire.

Seasoned stock traders know that “cutting your losses short”  is the most important rule of investing and often the toughest rule to follow.  Does Paulson know something about the gold market that no one else knows or will he wind up closing his gold positions to avoid further losses?   Since Paulson is the largest investor in the SPDR Gold Trust with an ownership position of 6.5%, liquidation of such a large position is almost certain to put additional downward pressure on the price of gold.

Maybe gold investors should hope that Paulson dumps his entire position in the SPDR Gold Trust.  Even brilliant investors like John Paulson can pull the trigger at exactly the wrong time.  After holding a massive position in both Bank of America and Citigroup for almost two years, Paulson liquidate his entire position in the stocks at the end of 2011 right before both stocks soared.  Since the end of 2011 Bank of America is up almost 300% and Citigroup is up around 100%.  Bottoms are made when the last seller capitulates.  Since gold is incredibly oversold at this point, a Paulson capitulation could be the trigger for an explosive move up in the SPDR Gold Trust.

gld

Courtesy yahoo finance

John Paulson Remains Bullish On Gold With $4,000 Target

John Paulson, hedge fund titan, seemed invincible in the opening days of 2011.  Based on a huge bearish position in mortgage bonds, Paulson’s hedge funds earned an astonishing $15 billion during 2007.

Paulson’s winning streak continued for three years and by the end of 2010, Paulson’s success had attracted huge amounts of new investor money.   By the end of 2010, the amount of money under management in Paulson’s funds had swelled to  over $32 billion.  During 2010 Paulson personally made $5 billion and had become an investment legend.

No one, least of all John Paulson, could have imagined the disaster that was ready to unfold during 2011.  Paulson’s two largest funds got crushed during 2011 with the Paulson Advantage fund down 36% and the Paulson Advantage Plus fund down a staggering 52%.  Bad bets involving financial stocks and a large investment in Sino-Forest, a Chinese timber company, proved disastrous during 2011.

Although Paulson is well known for his long term bullish bets on gold this did not save him during 2011.  Despite a 10% increase in the price of gold during 2011, Paulson’s positions in gold stocks contributed to his losses  as gold shares dramatically underperformed gold bullion.

In a wide ranging interview with Bloomberg Businessweek, Paulson explained why 2011 turned out to be the year of pain for both himself and fund investors.

The firm had made four major mistakes, according to Paulson, “overweighting long event equity,” underestimating Europe’s debt crisis, overestimating the U.S. economy, and some plain-old terrible stock picking. “Our performance in 2011 was clearly unacceptable,” he wrote. “However, we believe 2011 will be an aberration in our long-term performance.”

Despite the huge losses of 2011, Bloomberg notes that Paulson still registered gains of $22.6 billion for investors over the lifetime of his funds, the third best in the hedge fund industry.

Paulson told Bloomberg that he considers 2011 an “aberration” and expects his long term strategies, including his large bet on the gold market to rack up large gains going forward.  During an interview in October 2010 at the University Club in New York, Paulson predicted that the price of gold would hit $4,000 per ounce.

Paulson explained his view on gold during the Bloomberg Businessweek interview as follows:

“We view gold as a currency, not a commodity,” Paulson says. “Its importance as a currency will continue to increase as the major central banks around the world continue to print money.” He adds that as the market keeps shuddering, demand for gold will stay high, and soon enough all of his depressed gold holdings should shoot up. He also thinks that anyone in Greece, Italy, and France should pull all their money out of the banking system and purchase gold bars before the Continent collapses.

Although Paulson remains committed to gold long term, he did substantially reduce his holdings in the SPDR Gold Shares ETF (GLD) during 2011.  At March 31, 2011, Paulson’s funds held 31.5 million shares of GLD valued at $4.4 billion but by the end of 2011, the position had declined to 17.3 million shares valued at $2.85 billion.   In Paulson’s latest Form 13-F filing with the SEC at March 31, 2012, Paulson’s position in the GLD remained unchanged from 2011 year end holdings.

GLD - courtesy yahoo finance

In hindsight, Paulson should have gone “all in” on gold during 2011 as he did with his bearish mortgage bets in 2007.  Gold closed at $1388.50 on the first day of trading in 2011 and closed the year at $1,531.  Had Paulson been 100% in gold bullion or the GLD during 2011 his portfolios would have increased in value by about 10.3%.

2011 Gold - courtesy kitco.com

Bearish Outlook On Gold Signals Buying Opportunity

Despite the fact that gold has outperformed virtually every other asset class for the past decade, the September correction in gold prices has caused market sentiment to turn decidedly bearish.  As measured by the London closing fix price, gold reached an all time high of $1,895 on September 5th.   Within the next three weeks, gold had plunged by almost $300 per ounce, closing at $1,598 on September 26th.

Did September mark a turning point in the decade long gold rally, as many have suggested, or is it a buying opportunity?  A review of the factors contributing to the September sell off suggest that from a contrarian and fundamental point of view, the groundwork is being laid for a move to new highs in gold.

Extreme volatility in global equity markets due to the European debt crisis resulted in losses and subsequent margin calls for many leveraged investors who indiscriminately liquidated whatever they owned, including gold investments.

In mid November, SEC documents disclosed that Paulson & Co., the hedge fund run by legendary investor John Paulson had liquidated 11.2 million shares of the SPDR Gold Trust (GLD) during the quarter ending September 30th.  Paulson’s exact motives in selling the GLD remain unknown, but is was reported that huge losses in his hedge funds had resulted in the forced selling of SPDR Gold Trust shares.

Besides helping to drive down the price of gold, investors may view Paulson’s large sale as a bearish signal from an investor who has an incredibly successful long term track record.  Paulson, however, still remains the largest shareholder in the SPDR Gold Trust with a position of 20.3 million shares at September 30th.  In addition, Paulson reportedly remains long term bullish on gold and may have large positions in physical gold through allocated bullion accounts.

In addition to the factors mentioned above, gold may simply have gotten ahead of the fundamentals.  Every long term bull market experiences episodes of sharp price corrections and consolidation.  Over the past decade, with a brief exception in 2008, gold has found solid support at the 200 day moving average.  In April 2009, July 2010 and February 2011, gold experienced a sustained multi-month rally after correcting down to the 200 day moving average.  Currently, a retreat to the 200 day moving average would bring gold down to the $1,600 level.

 

Gold - courtesy stockcharts.com

Mark Hulbert, of the Hulbert Gold Newsletter, who tracks investor sentiment on gold says that the bearish sentiment on gold is reaching extreme levels.  Hulbert says “According to contrarian analysis, this is building a strong foundation for a fresh assault on gold’s recent all-time high above $1,900 an ounce.  This doesn’t guarantee that gold will rise from here, of course, or that it will do so right away. But it does mean that contrarian analysis is currently on the side of the bulls”.

Patient long term investors in gold have been well rewarded.  Despite the September correction, gold prices have advanced by $364 per ounce in 2011, for a gain of 26%.

 

Soros Sells Gold But Also Bought Lehman Brothers and Countrywide Right Before Their Collapse

Countrywide Financial Corp

The $28 billion Soros Fund Management disclosed in SEC filings that it had sold virtually all of its holdings in the SPDR Gold Trust (GLD). At the end of the March, the Soros Fund, run by renown George Soros, owned only 49,400 shares of GLD after selling 4.7 million shares in the first quarter.

Rumors of GLD liquidation by Soros has been public for weeks now and may have contributed to the recent decline in the price of gold.

George Soros is one of the world’s most prominent hedge fund investors with a great track record, but like any investor, some of his stock picks have been disastrous. In late 2007, as financial stocks were swooning due to disclosures of huge mortgage loan losses, Soros acquired shares of Countrywide Financial. In the quarter ending September 30, 2007, the Soros fund picked up 1.8 million shares of Countrywide, acquired at an estimated average price of $25. As financial markets collapsed in 2008, Countrywide’s price plunged and it was ultimately acquired by Bank of America at $7 per share.

As markets plunged in 2008, Soros apparently could not comprehend the severity of the financial crisis. During the quarter ending June 30, 2008, Soros increased his stake in Lehman Brothers to almost 9.5 million shares from only 10,000 at the end of March. By mid August 2008, Lehman Brothers stock had plunged 80% on the year as losses on toxic debt holdings climbed into the billions. Shortly thereafter, when the Fed refused to bail out Lehman Brothers, they collapsed on September 15, 2008.

Time will tell if the decision by Soros to liquidate his gold position turns out to be another disastrously ill timed move.

Meanwhile, hedge fund manager John Paulson, who made billions during the financial crisis by shorting subprime mortgages has not reduced his massive $4.4 billion investment in the SPDR Gold Trust.

Soros may be playing the role of a short term trader while Paulson waits for the big payoff as he did with his bets on subprime mortgages.   Trader sentiment in both commodities and precious metals had become massively bullish  and with markets vulnerable to a sell off, perhaps Soros simply decided to take some profits short term.

Ultimately, market fundamentals suggest much higher gold prices and it would not be surprising to see the Soros Fund reestablish gold positions at some later date.

John Paulson Maintains Huge Holdings in SPDR Gold Shares Trust (GLD)

In 2010, John Paulson personally earned $5 billion, vaulting him into the ranks of the world’s wealthiest persons.  Incredibly, this was not a one time event precipitated by a heavily leveraged bet that just happened to turn out right.  Mr. Paulson had previously made another brilliant call prior to the financial crisis.  Based on his analysis of the subprime mortgage market, Mr. Paulson had the acumen to establish a major bearish position in mortgages, prior to the mortgage meltdown, that resulted in billions of dollars in profits.

It was how Mr. Paulson made $5 billion during 2010 that makes his every move the object of  intense scrutiny by gold investors worldwide.  Mr. Paulson believes that the Federal Reserve is determined to re-inflate every asset class possible, using whatever means necessary.  Without the “benefit” of inflation, the crushing levels of national debt would eventually lead to massive defaults and an economic disaster.   Based on this conviction, Mr. Paulson invested heavily in gold futures, the SPDR Gold Shares Trust (GLD), and other gold structured investments that resulted in his massive paycheck for 2010.

Last October, while speaking at the University Club in New York, Mr. Paulson predicted that the price of gold could easily reach $4,000 an ounce.

With Mr. Paulson’s track record, any change in his gold holdings would obviously be of great interest to gold investors worldwide.

Mr. Paulson directs most of his investments through his hedge fund, Paulson & Co, and is required to report major holdings to security regulators with 45 days after the end of each quarter.   The latest regulatory Form 13-F filing shows that Mr. Paulson’s position in the SPDR Gold Shares Trust was unchanged for the latest quarter.

At December 31, 2010, Mr. Paulson’s holdings in the GLD amounted to $4.37 billion dollars or about 8% of the total value of the Gold Trust.  The value of the GLD’s holdings are currently $53.95 billion.

Other big time successful investors also maintained or increased their holdings in the GLD.  The Soros Fund Management at year end held $655 million of GLD while PIMCO (run by super star bond manager Bill Gross) had holdings of $307.7 million.

Four Approaches To Gold Investment

In its quest to determine the best way to make money from investing in gold, the Wall Street Journal recently took an in depth look at four different gold investment strategies. Each was represented by a preeminent investor, one whose method has seen some success recently.

Here’s what they had to say:

1. The first investor was John Paulson, who made his money by anticipating the economic crisis and acting accordingly. His current method of gold investment is to buy shares of large mining and exploration companies. The idea at work here, according to Paulson, is that “if gold prices do well, the miners will do even better . . . the higher gold prices go, the more miners can profit from potential and existing projects.” The downside here is that mining for gold is an expensive proposition, so the miners must make enough money to cover that expense before turning a profit.

2. The next investor discussed was billionaire Thomas Kaplan. He is focusing his investment funds on junior miners rather than the big mining companies that Paulson is currently interested in. His argument? These smaller companies are “sitting on valuable assets . . . providing the greatest leverage to a bull market.” He believes that these junior miners have a greater potential to go along with their greater risk.

3. The third investor, John Burbank prefers a different route. He focuses his attention on gold bar investment. Since the bars are an actual physical investment, he believes that they are more likely to return his investment than shares and contracts. According to Burbank, “If investors become concerned that shares and futures contracts aren’t fully backed by physical gold, or if inflation surges, they may begin to demand delivery of the metal, sending the price of physical gold soaring.”

4. The final investor, David Einhorn is also interested in bars, but in addition, he chooses to invest in exchange trade funds that own gold miners. He has also purchased call options or gold futures, which require a relatively small investment to control a large gold position.