May 23, 2024

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.


Courtesy yahoo finance

Lowering Gold Stock Portfolio Risk Through Diversification

There are numerous investment strategies available to capitalize on the gold bull market.  Gold investors have the option of investing in gold bullion, gold coins, gold ETFs, gold mutual funds and individual gold mining stocks.

Although many gold investors prefer to exclusively hold physical gold, diversifying into selected gold stocks can dramatically increase total returns.  Although gold stocks as a group have recently underperformed bullion, selected gold stocks have outperformed gold bullion.

Well managed gold mining companies with large ore reserves and increasing mine production have provided investment returns far in excess of the gain in gold bullion as seen below with the examples of Randgold Resources (GOLD) and Gold Resource Corp (GORO).  Both of these gold mining companies have vastly outperformed gold bullion when compared to the SPDR Gold Trust (GLD) which tracks the price of gold bullion.

GORO, GOLD vs GLD - Courtesy

Selecting the gold stock that will outperform bullion is difficult, however, as seen by the lagging performance of the PHLX Gold/Silver Sector (XAU) when compared to the GLD.  The XAU Gold/Silver Sector is a broad based index of sixteen large precious metal mining companies.  The GLD has outperformed the XAU by three times since 2009.

GLD vs XAU - courtesy


As with any stock portfolio, diversification is required into order to avoid the risk of under performance.  An example of the risk of holding a gold portfolio with only a small number of stocks was seen today when the price of Nevsun Resources (NSU) collapsed by almost 31% after the company unexpectedly announced that gold production will plunge by nearly half in 2012 due to a reduction in estimated gold reserves.

Since selecting individual gold stocks can be a daunting task for investors, a better alternative would be to invest in an actively managed gold stock mutual fund with a proven record of superior investment returns.  Past performance has shown that an actively managed gold stock mutual fund has outperformed passively managed gold index funds.

One gold fund that should top the list for investors to consider is the Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway.  The Tocqueville Gold Fund has a remarkable average annual return over the past ten years of 23.3%, almost double the gain in the Philadelphia Gold/Silver Index.


Although gold bullion has outperformed gold stocks since 2008, Mr. Hathaway’s outlook for gold remains extremely bullish and he expects that as gold continues to increase in price, gold stocks should once again outperform the returns of gold bullion.  In his latest Investment Update, here is what Mr. Hathaway had to say.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

Disarray in Europe is, in our opinion, a slow motion version of the global market meltdown in 2007. It appears to us that the U.S. Fed is once again acting as the lender of last resort to European central banks in their efforts to save the euro. As in 2007, U.S. sovereign credit will be substituted for failing credits, in this case, peripheral European states. The fig leaf to justify such action on the Fed’s part is sado-fiscalism, or extreme austerity packages administered by technocrats. Tough restraints on profligate public spending, which has become a way of life in all Western democracies, will not go down easily. These measures are deflationary and will be ultimately met by howls of protests from mobs demanding renewed money printing and deficit spending. In our opinion, the fundamentals for gold are stronger than ever because the outlook for paper currencies is dire. The difficult correction of the last four months has shaken out all but the strongest holders, a perfect set-up for advances to new all-time highs in 2012.

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

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%.


SPDR Gold Trust And iShares Silver Trust Holdings Decline

Gold holdings of the SPDR Gold Trust (GLD) declined slightly on the week by 24.54 tonnes after a gain of 10.22 tonnes in the previous week.   GLD  gold holdings have declined by 8.74 tonnes since the beginning of the year.   The all time high holdings of the GLD occurred on June 29, 2010 when the Trust’s holdings reached 1,320.47 tonnes.

As measured by the closing London PM Fix Price, gold started the year at $1,388.50.  Gold closed in Wednesday trading at $1,790.00 for a gain of $401.50 or 28.9% on the year.  Gold has been in a steady, virtually uninterrupted uptrend since late 2008.  At the beginning of July, the price trend of gold entered an accelerated uptrend.



Although a pullback is possible after an almost vertical rise of $256 since July 1st, it is just as likely that gold could confound the skeptics and continue to rise.  The increase in gold prices for the past  decade has reflected widespread apprehension over the value of paper currencies.  The world economy never recovered from the financial crisis starting in 2008 despite the borrowing and printing of trillions of dollars by world central banks and governments.  The increase in the price of gold is reflecting the growing realization that governments and central banks no longer have the ability to contain a second full blown financial crisis.  Under this scenario, gold effectively has no ceiling price.

The GLD is the largest gold exchange traded fund with 40.9 million ounces of gold.  According to Bloomberg, the total holdings of all  major gold  ETFs worldwide amount to 70.7 million ounces of gold.  Holdings of all gold ETFs worldwide have increased by 4.1 million ounces or 6.2% since the beginning of the year.

The SPDR Gold Trust currently holds 40.9 million ounces of gold valued at $73.2 billion.  For perspective, the entire value of the GLD would fund less than 18 days of US Government deficit spending which is projected to exceed $1.5 trillion this year.



The GLD closed the day at $174.42, fractionally below its all time high of $175.13

GLD and SLV Holdings (metric tonnes)

August 17-2011 Weekly Change YTD Change
GLD 1,271.98 -24.54 -8.74
SLV 9,727.10 -45.46 -1,194.47

Holdings of the iShares Silver Trust declined by 45.46 tonnes on the week after a decline of 86.36 tonnes in the previous week.  Since July 1st, the SLV has gained 190.95 tonnes.

After a price correction in early May, silver has recovered in price and is building a base in the $40 range before the next move up.  Silver has gained $6.17 or 18.2% since July 1st, rising from $33.85 to $40.02.



The SLV currently holds 312.7 million ounces of silver valued at $12.5 billion.  Investors in the SLV have had an annual rate of return of 25% over the past three years.

Gold And Silver ETF Holdings Show Little Change On Week

Holdings of the iShares Silver Trust (SLV) were unchanged on the week after dropping by 505.10 tonnes in the previous week.

After extreme price volatility at the beginning of May, silver prices were little changed over the previous week.  Based on the closing London PM Fix price, silver closed at $37.17 on May 25th compared to a closing price of $37.95 on June 1st.

The price of silver has now recovered by 16.7% or $5.45 from the low of $32.50 on May 12.  Silver reached a high for the year on April 28th closing at $48.70.  The price correction should be viewed as a buying opportunity since the fundamentals of the silver market have grown stronger with each passing day.

The debt crisis in Europe and the U.S. appear to be on the verge of spinning out of control.  The latest batch of economic reports show weak employment numbers, decline in the manufacturing sector and a continued collapse in U.S. real estate values.  Economies overburdened by debt desperately require higher economic growth which is simply not happening.  The prospect of continued economic weakness was finally acknowledged by previously bullish stock investors, as sellers pushed the Dow Jones down by almost 280 points for a 2.2% loss.

The latest sales figures from the U.S. Mint indicate that many investors see silver as a better store of value than paper currency.  Total year to date sales through May 31st of the Silver Eagle bullion coins totaled 18.9 million ounces, the most since 1986.  Comparable sales of the Silver Eagle for 2010 were 15.2 million ounces.

U.S. Mint sales of the Silver Eagles during May totaled 3.65 million ounces up from 2.82 million ounces in April.  If sales for the rest of the year continue at the average month’s sales volume, U.S. Mint sales of Silver Eagles would total 45.4 million ounces, valued at over $1.7 billion based on today’s closing price of silver.

GLD and SLV Holdings (metric tonnes)

June 1-2011 Weekly Change YTD Change
GLD 1,212.87 -1.21 -67.85
SLV 9,941.33 00.00 -980.24

The holdings of the SPDR Gold Shares Trust (GLD) decreased by a modest 1.21 tonnes over the past week, after gaining 22.74 tonnes in the previous week.   The GLD currently holds 38.99 million ounces of gold valued at $59.8 billion.  The price of gold gained slightly on the week, closing at $1,533.75, up $7.50 from May 25th.

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.

Are Gold Stocks Really Underforming Gold Bullion?

Depending on which gold stock investor you talk to, gold stocks have either been under performing or outperforming gold bullion.

Theoretically, given the earnings leverage associated with gold miners, a big move up in gold bullion should translate into handsome gains for shareholders of gold mining companies as earnings per share increase.  In the real world, however, the cost of exploration and development, mine depletion and the energy intensive process of gold mining and refining can result in costs that exceed the increased revenue from higher gold prices.  Gold mining companies with operations in less developed countries with weak property rights can also wake up one morning and discover that the government has expropriated their mines.

So which is it?  Would it have been better to own gold stocks or simply buy a gold ETF or take physical possession of gold bullion?  Like many things in life, it all depends, and the result reinforces the argument to maintain a well diversified portfolio.

Gold miners that have been able to translate higher gold prices into higher profits have done very well while other gold miners with poor results have significantly lagged the gains seen in gold bullion.   The results have been company specific.  A gold stock investor who was correct in predicting higher gold prices but picked the “wrong” gold stocks fared poorly.

Here’s a sample of the relative performance of some of the largest gold miners compared to the price of gold, using the SPDR Gold Trust (GLD) as a proxy for bullion prices.  Two major gold miners, Newmont Mining Corporation (NEM) and Kinross gold Corporation (KGC), dramatically under performed the GLD, while Goldcorp (GG) tracked the GLD performance.  If you were lucky enough to own Randgold Resources (GOLD), your profits would have been twice the gains on the GLD.


The bottom line is that unless an investor has considerable expertise in assessing the gold mining industry and specific company prospects, the better choice was to go with a gold ETF or stash gold bullion in a safe deposit box.  If the biggest gains in gold prices are yet to come, as I believe, an investor with a 100% allocation to individual gold stocks should consider reassessing his portfolio allocation.

The last option that should be mentioned for those seeking higher returns from the leverage of owning gold stocks instead of a gold ETF, would be to invest in a gold mutual fund with a solid track record of investment success.

Tocqueville Gold Fund Performance vs. GLD

The Tocqueville Gold Fund(TGLDX) is a highly regarded mutual fund with solid portfolio managers who have had a very successful track record in picking the right gold stocks.  Over the past two years, the TGLDX has outperformed the GLD and with far less volatility.