September 21, 2019

Gold is Hardly a Hedge for Paulson

Even with its continued rise in price, gold is hardly a hedge for Paulson

John Paulson’s hedge fund, Paulson & Co., is winding up a dreadful year. Its largest funds, Advantage Plus and Advantage, with a combined $11 billion in assets, fell 46 and 32% percent, respectively. A significant percentage of these funds were invested in gold and gold-related bets. But gold is hardly a hedge for Paulson, which until the last few months found relief in its high exposure to gold. Bloomberg‘s Kelly Bit reports that the hedge fund has been taking further losses with the drop in the price of gold over the last few months.

The SPDR Gold Trust (GLD) exchange-traded fund, of which Paulson was the largest shareholder as of Sept. 30, fell 10 percent from the end of last month, and all eight of his gold stocks slumped with a 9.6 percent decline for bullion. The declines would translate into a $672.1 million paper loss on those securities for Paulson & Co.

Paulson, who turned 56 yesterday, has lost money this year on investments including Citigroup Inc., Bank of America Corp. and Sino-Forest Corp. (TRE), the Chinese forestry company accused by short-seller Carson Block of overstating timberland holdings. Paulson cut the so-called net exposure in his main funds to 30 percent last month and reduced bullish bets across all his funds on stocks including gold companies.

Net exposure is calculated by subtracting the percentage of a fund’s short positions, or bets on falling securities, from its longs, or wagers on rising stocks and bonds.

Paulson & Co. held shares of SPDR Gold Trust and eight gold companies in the third quarter, according to its 13F filing. The firm, which uses the ETF to denominate the gold share classes of his funds, pared its stake in the gold trust to 20.3 million shares from 31.5 million as of June 30.

The firm was the largest holder of American depositary receipts in AngloGold Ashanti Ltd. (ANG), the third-biggest gold producer. Paulson also owned shares or ADRs of Gold Fields Ltd. (GFI), NovaGold Resources Inc. (NG), Randgold Resources Ltd. (RRS), Agnico-Eagle Mines Ltd. (AEM), Iamgold Corp. (IMG), Barrick Gold Corp. (ABX) and International Tower Hill Mines Ltd. (THM)

Gold’s plunge to a five-month low sent it below its 200-day moving average for the first time in almost three years, signaling more declines to traders who follow technical analysis. Bullion fell below $1,600 an ounce yesterday to settle at the lowest level in five months as a stronger dollar curbed demand for the metal as an alternative asset.

The metal was up about 12 percent in 2011 and still heading for an 11th straight annual gain, the longest winning streak in at least nine decades. It has outperformed commodities, global equities and Treasuries.

The Paulson Gold Fund, which can buy derivatives and other gold-related investments, rose 11 percent in this year’s first 11 months.

Many gold traders follow technical analysis, or market signals rather than underlying company financial analysis, to determine their next moves. With gold below its 200-day moving average, Paulson may want to scale back its gold exposure, as more traders may be selling. At the same time, Paulson is a huge player, and can significantly influence the price of gold-related investments through its buying and selling. Also, with gold at a recent low, it may be time to buy. Even though the past month’s price of gold is hardly a hedge for Paulson, the hedge fund manager is still one of the most respected and highest-followed is the business. 2012 may surprise investors and industry analysts.

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