By Hedge Fund Insight staff
There is no doubt that the role of gold for hedge fund managers can be seen in the context of monetary policy, and specifically US monetary policy. Indeed this site has carried a number of gold-related articles in which the phrase “fiat money” has featured strongly.
Although Eric Sprott could make a claim, probably the hedge fund manager most closely associated with strong views on gold is John Paulson. “We view gold as a currency, not a commodity,” Paulson has said. “Its importance as a currency will continue to increase as the major central banks around the world continue to print money.”
Gold Price Over The Last Year (with volume and RSI)
Post the Credit Crunch gold has been Paulson & Co’s biggest investment idea. In April 2009 the firm initiated Gold share classes for all his funds – the event driven and arbitrage funds could be designated in gold rather than Dollars or Euros. By the end of 2010 38% of the firm’s AUM were in the Gold share classes. In January 2010 the Paulson Gold Fund was launched (since renamed the PFR Gold Fund). John Paulson also bought into gold within the portfolios of his funds: buying call options on large cap gold mining stocks, buying holdings in global miners like AngloGold Ashanti (in which Paulson is the largest single shareholder), and buying gold ETFs like the SPDR Gold Trust. Paulson has been the largest holder of this ETF, and the SPDR Gold Trust was Paulson & Company’s largest overall position at $3.4bn at the end of the 1Q.
But by the end of the 2Q of 2013 it wasn’t what it was in two ways. First the gold price has fallen – from $1,670 at the start of the year to a low near the end of June of $1,246 (see chart above). And Paulson sold over half of his position in the SPDR Gold Trust in the second quarter, as shown in this screenshot from the SPDR Bloomberg page.
source: Bloomberg LLP
Based on reports of a letter Paulson sent to investors earlier this month, it’s unlikely that Paulson will change his belief in his gold hedge/bet for his funds. He argued that the gold fund still offers the potential for strong returns in the long run, citing the need to protect against macroeconomic factors that could reduce the purchasing power of the U.S. dollar and major foreign currencies. However the sales of the 2Q mark the first time John Paulson has cut his gold ETF holdings since the last quarter of 2011. That is Paulson has reiterated his conceptual backing for the investment case for gold as he has reduced the position size of his largest exposure to it. It is a curiosity that Goldman Sachs did exactly the opposite.
In the fourth week of June analysts at Goldman Sachs predicted further falls over the next couple of years as the more stable economic situation and higher real interest rates encouraged investors to seek returns elsewhere. Even the growing popularity of gold as a wedding present in India, the biggest retail market for the precious metal, was not going to stop the price tumbling further according to the investment bank.
In the following monthly (issued on the 24th July) the Goldman’s analysts stuck to their average price forecasts for next year, but added “Specifically, we expect gold prices to trade around $1,300 until year-end given our economists’ expectation for lackluster growth near term.”
Of course we can’t know who was on the other side of Paulson & Co’s trades in the SPDR Gold Trust, but we can see when the most traded volume took place, i.e. see where the liquidity was best to half the largest holding of the gold ETF.
Price of SPDR Gold Trust Shares Over the Last Year (with volume peaks shown)
In the 2Q the Goldman Sachs Group position in SPDR Gold Trust jumped from 700,000 shares to 4.4m shares. Given the trading volume, it looks like the investment bank helped clear out the market at the end of June, creating a new low for the gold ETF, just as the concept of the Fed tapering the QE program was beginning to be fully discounted in the markets.
John Paulson remains conceptually committed to gold as a hedge of the de-basing of currencies, and indeed he still has significant holdings giving exposure to the yellow metal. Goldman Sachs looked to have surfed the flows around gold ETF trading exceedingly well. Paulson might be the sometime king of investment strategy, but Goldman Sachs are the better tactical traders of gold.