This is too Funny…

We have nothing against hedge fund manager John Paulson…after all, we don’t know the man. In fact, he is inter alia known for his philanthropy, having gifted $400 million of his not inconsiderable fortune to Harvard’s School of Engineering and Applied Sciences. But ever since hitting the big time by shorting assorted MBS prior to the 2008 crisis, he has frequently served as an excellent contrary indicator.

 

John-PaulsonJohn Paulson looking at a recent chart of gold …

Photo credit: Bloomberg

 

First he bought bank stocks in 2010, announcing that he was betting on a rebound in growth that would ignite the sector. Not long thereafter, bank stocks began to decline sharply, as the euro area debt crisis went into overdrive. Paulson finally admitted that his strategy was a failure and sold the bulk of his exposure to banks in the fall of 2011 – literally within days of the sector taking off sharply.

 

1-BKXBank stocks and John Paulson – click to enlarge.

 

Gold investors should have realized that this represented a warning sign. Paulson had decided to jinx them in 2010 – 2011 as well. He announced his thesis on investing in gold and gold stocks in 2010 and eventually launched a dedicated fund for the purpose. He even offered a version of it that was denominated in gold, which we thought was actually a great feature.

And yet, the thesis should have been seen as a red flag – it contained nothing that wasn’t already perfectly well known at the time. Considering this fact, wasn’t it reasonable to suspect that the factors he based his decision on were possibly priced in already at the time? It turned out in hindsight that it was. His bet on gold did work out initially, at least in terms of the metal itself (many gold stocks had already begun to struggle). But in 2011 things began to go awry.

However, he probably remembered his foray into bank stocks and was still stung by the fact that he sold them right before his idea would have borne fruit. Thus Paulson decided to largely stick with his gold bet, although he did sell a good chunk of his GLD position during the gold rout in 2013 (we suspect there must have been sizable outflows from his gold fund at the time). Intellectually, we agreed with him. His arguments were sound in principle – but it became increasingly clear that the market had other ideas.

 

2-gold and HUIGold and the HUI index since 2010 – click to enlarge.

 

From a trading standpoint, being stubborn is generally a bad idea. The time will of course come when a trend has gone too far and is ready to reverse. The market is by no means “always right” as the old saying goes. On the contrary, near major turning points, it is always completely wrong.

However, when buying into a sector at already elevated prices (the HUI had gone up by more than 1,800% between late 2000 and its peak in 2011), one needs to be careful. Stop loss levels need to be taken into consideration, which Paulson apparently failed to do. Ever since, it has been a running joke between us and several of our e-mail correspondents that the easiest way to answer the question “when will gold’s bull market resume?” was “the day Paulson sells”.

Well, wouldn’t you know…as Reuters reports today, “Paulson slashed bullish gold bets before prices rocketed” – and so did a number of other hedge funds apparently.

 

“John Paulson, one of the world’s most influential gold investors, slashed his bullish bets on bullion at the end of last year, just before the beleaguered market took off for its biggest rally in years, a federal filing showed on Tuesday.

The New York-based hedge fund Paulson & Co, led by the longtime gold bull, cut its stake in SPDR Gold Trust, the world’s biggest gold exchange-traded fund (ETF), by 37 percent in the fourth quarter. It was Paulson’s third cut to its SPDR stake in 2-1/2 years.

The recent cut brought the stake to 5.78 million shares worth $585.9 million on Dec. 31, the U.S. Securities and Exchange Commission filing showed. It followed a heftier cut in the second quarter 2013 when Paulson almost halved his stake from 21.8 million shares, during gold’s historic sell-off. The move by the single largest SPDR gold shareholder highlights how investors shunned gold as the U.S. Federal Reserve prepared to cut interest rates [Ed note: sic – they probably mean to write “hike”] in December for the first time in a decade.

Paulson’s view on gold has been closely followed since he earned roughly $5 billion on a bet on the metal in 2010, following a similarly successful $4 billion payday on his bet against the overheated housing market in 2007.

Others, like Soros Fund Management LLC and Jana Partners LLC, which had already eliminated large stakes from Market Vectors Gold Miners ETF earlier in the year, stayed out. Also in the quarter ended Dec. 31, Caxton Corp eliminated its stake in Market Vectors Gold Miners ETF, having held 31,733 shares worth $436,000 in the third quarter, the filing showed.

 

(emphasis added)

We should add to this that Paulson most definitely did not “earn $5 billion in 2010” with his bet on gold, given that he eventually sold at lower prices in 2013 and again more recently. Paper profits don’t count – the actual outcome was a big loss (the loss in his positions in gold stocks was even greater).

Reuters also mentions that at least one big hedge fund correctly recognized the emerging opportunity and took it:

 

“In contrast to Paulson, CI Investments Inc an investment manager of Toronto-based CI Financial Corp, raised its stake in SPDR to 944,579 shares worth $95.8 million, according to a filing earlier this month.”

 

We guess these guys deserve to be designated the “smart money” this time around.

 

Conclusion

It seems now that Mr. Paulson did after all manage to repeat in the gold sector what he did with respect to bank stocks in 2011. He removed the last obstacle to the market’s revival by finally capitulating.

 

Charts by: StockCharts

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “Gold Gets a Paulson Boost”

  • vfor:

    I think this is exactly what is happening now, i.e. a turning point for gold. During the pullback in gold over the last few days, miners held up quite well and some even rose. I guess that major miners lead at the start of a new bull run with explorers a distant second. That is what seems to happen now too.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Financial Markets – Alarm Bells are Ringing
      A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com