Hedge fund that betted on subprime debacle is now very long on gold
Posted on 01. Dec, 2009 by Geert in Actualiteit
The physical accumulation by private and instituional investors of gold starts to be impressive.
One analyst calculated the amount accumulated by Paulson & Co., the hedge fund manager who betted correctly on the mortgage crisis between 2007 and 2009.
He now holds more gold than central banks of countries like Poland, Argentina and Brazil. In fact, the fund owns more gold than Brazil, Argentina and South Korea… combined.
Food for thought.
Nick Doms
02. Dec, 2009
I wish i could say i am surprised about this, but i am not.
As some of us have pointed out, the play on gold is a pure play against the USD at this point in time.
Gold will be short lived, as it has been in the past.
The markets in general are pure trader’s markets. Not investor markets.
In the aftermath maybe someone will call it speculation again.
But in a very simple comparison, the financial markets are like a black jack table.
Everybody plays the same game but if you know what seat to take at the table, you can impact everybody’s chances.
They will win when the bank takes a card.
Sincerely,
Theo
02. Dec, 2009
@ Nick Doms
I like that last seat too
TMR
02. Dec, 2009
Many investors who pay their gold in local currency tend to think the gain in gold’s value is just dollar-play. They assume the rising price would not affect their portfolio because the decline in the value of the dollar would offset the gains added.
This assumption might hold on several occasions, however, that is not now. The incentives of local currency central banks are to devalue their currency to adress inbalances grown along. For example, their export position may have been hurt because of the strong home currency. This way, it is like the USA is exporting devaluation of currency to other countries.
And so, we notice a rising gold price in all currencies. For those who don’t believe, look up a chart of gold in multiple currencies – it is like a copy of each other – , or notice the price of gold rising more than the EUR/USD. For example, if the EUR/USD rises 0.20%, gold going up 0.80%.
To conclude: don’t get fooled.
Koen D.
02. Dec, 2009
@ Nick
If you buy gold you have left the black jack table…
Roberto
02. Dec, 2009
As a matter of fact , gols is NOT a play on USD alone, it is a play against all FIAT currencies that are in big trouble the next 10/15 years.
Current gold performance is not speculative, as big quantities of metal are bought by institutions and central banks. This is like the purchase of gold by European central banks in the late 1960s.
We are far from a speculative bubble in gold, this is stil years ahead, when current sceptical commentators turn positive.
carl
02. Dec, 2009
India joins the club of US Dollar haters like Russia and China.The RBI (National Bank of India) decided to buy the block of 200Tons of Gold in SDR’s and NOT in US Dollars.
SDR are a basket of currencies,currently 44 % USD,34 % Euro’s,11% Yen and 11 % £.
IN the US the M3 (measure of money) is up 129 % late august 2009.
The printing of money is skyrocketing in the US.
Theo
02. Dec, 2009
@ Carl
What does it mean then, in practical terms, when the Central Bank of a country buys gold from the IMF with its foreign currency reserves, using a ratio of 60% USD and 40% Euro?
Could somebody explain that in proportion of the SDR basket of currencies
Thank you
Koen D.
02. Dec, 2009
Carl,
Not that I think it is that important, but are you sure about the sale in SDR?
The IMF press release states :
“The transaction, which is in the process of being settled, involved daily sales that were phased over a two week period during October 19-30, 2009, with each daily sale conducted at a price set on the basis of market prices prevailing that day. The total sales proceeds are equivalent to US$ 6.7 billion or SDR 4.2 billion. Under the Fund’s Articles of Agreement, all gold sales must be conducted at prices based on market prices, including direct sales to official holders as in the case of this transaction.”
-> the press release is not conclusive about the currency of settlement IMO.
I also immagine the RBI having way more USD in their reserves than other currencies .
thx
Theo
02. Dec, 2009
Very interesting indeed… Thank you for the info Geert.
On the other hand, given how the tonnes calculation was done… I think it’s safe to double it from 100 to 200. After all I don’t think he bought all of it @ $1100.
carl
02. Dec, 2009
@theo
Back in 1969 (40 years ago) the IMF creates a new kind of money called the Special Drawing Rights; SDR
You can’t shop with an SDR,nor trade it or even touch it.
The Montreal Convention states that if your bags have not reached you within 21 days of expected arrival,you can claim 1000 special Drawing Rights as compensation for the airline.
As today’s valuation that would mean you receive around 1500 dollar US or 770 £ or 995 euro or 159000 yen.Because yoy can not be paid in SDRs.In reality they don’t exist.Only a government-issued paper money can bring tge SDR’s valu into existence.
The SDR is an intangible unit that only holds value when turned into dollars,euros,yens or £.Gold remains a tangible and highly liquid asset across the world-qualities that the SDR so obviusly lacks.
The only time most people will ever come into contact with SDR’s is if an airline loses their luggage.
According to India’s leadingf business daily,Economic Times and according to an reserve Bank of India official now late november the purchase was OUT of the foreign currency assets and NOT SDR.But other sources speculate as follows : The gold for SDR swap confirmed.This first source was WSJ begin nov 09.
An IMF official said that the sale was concluded at an average price of about 1045 US dollar. an ounce.And that the transaction would be paid in hand currency
carl
02. Dec, 2009
and NOT in IMF SDR’s.(reuters.com)
One thing is sure and certain :
The Indian obsession with gold continues.
ANd :
When Bernanke prints more and more dollars,the gold price spurts…..
Nick Doms
02. Dec, 2009
OK, so we know India bought 200 tons of gold.
First in SDRs, which IMO was not plausible nor would that make any sense.
So they used a souvereign wealth fund to make the purchase which then explains why such purchase would not affect their reserve currency.
If a hedge fund purchases arge quantities of gold, then they obviously see the short term benefit. By the time the sole investor comes around (right about now) they will slowly divest and take their pofit.
It is the domino effect that happens all the time. Hang a cookie on a race track and the dogs will run fast.
Take the cookie away and the dogs don’t know where to go.
That is why a play on gold as an individual investor is so dangerous.
If you really want portfolio exposure to gold then invest in an ETF or individual mining stocks. Much safer.
Sincerely,
David
03. Dec, 2009
Guys,
Let’s get the facts straight, Paulson made more then 26 billion $ over the last 2 years. Let’s say he paid a pricy 1000 $/ounce for his gold. This would make for roughly 3,85 billion $. Considering his gains, is he really so long on gold? – reference to the title on this post?
Regarding currencies in trouble…Today or in the next 5 years is there an alternative to the USD? Perhaps the Eur with 20% spanish unemployment and a bankrupt Greece? or the Yen with Japan being in a recesssion for the last 2 decades? And i wont even begin about the RUB.
Sure the Rimini, Real and other currencies will gain in straingth just like the Deutsche Mark did. But does this mean the USD index will lose another 20% of it’s value from today? I think the contrary.
The bottom line is, there is no alternative for the USD today!
The US still has the political power (NATO, middle east, etc) and believe it or not economical power.
And to finish, don’t get fooled by the printing of money stunt, take a look at the total amount of outstanding consumer and corporate credit. Add it up to the amount of ‘printing of money’, read a basic book on macro economics and you will have your answer on the inflation/deflation debate and as a consequence the future of the USD.
I thank you.
David
03. Dec, 2009
- I do mean evolution over the past 2 years of outstanding consumer and corporate credit -
David
03. Dec, 2009
@ Nick Doms
I see you talk about safety?
Don’t forget that ETF’s or stocks of mining companies are PAPER with an certain ‘obligation’. The paper holds a value based on confidence to deliver on that obligation. Take the confidence out of the equazion mister Doms and your paper has the value of 0. Whereas gold is one of the few assets holding true tangible value, but yet you cal a play on physical gold ’so dangerous’.
What is dangerous, with all due respect, are guys, speaking heavy weighted words and spreading investment advices using words like safety and dangerous. These are the same guys that were heavy invested in high risk equities back in 2007, backed on words like ’sure thing’ and ‘confidence’.
Out of 100 financial analysits maybe not even 1 is turely capable of providing ‘investment advice’
I believe one should chose his words more carefully.
Nick Doms
03. Dec, 2009
I appreciate your comments although you take my words a little out of context.
That’s OK.
I am not just a technical analyst and yes i give investment advice to my clients.
On this blog however, i just write an opinion in response to other contributors.
Such are never meant to be taken as advice. Even my newsletters and publications are not investment advice, but they clearly state that.
I can’t do the same thing here, so just read my comments knowing it is just an opinion and a reaction….not advice.
With all due respect.
Sincerely,
David
04. Dec, 2009
Ok point taken.
It was never my intention to challenge your intelligence on posting opinions on this blog. However I do believe you ‘ hit ball in the wrong direction’ as we say in Belgium reference to your opinion on owning physical gold.
Anybody who regularly reads Geert’s blog (and truely values the content) should own some physical gold. Not as an investment but perhaps as a, and i dare to use the word ’safe’ insurance?
Theo
03. Dec, 2009
@ David
You are absolutely right!
That’s why think about this for a bit:
very few Institutional investors with CDOs have actually lost money, while all individual investors with property, which was used as “security”, have lost the value of their investment.
Paper Stone Scissors… do you know that kids’ game?
well, in the grownup version there are no Scissors.
TMR
06. Dec, 2009
Hi all,
For investors paying their gold or silver in another currency than the dollar, and who are afraid the rise in gold’s price is only a gain in the dollar value of gold, read the following article which explains it is not that way:
http://www.commoditypress.com/2009/12/05/nederlands-investing-in-gold-just-dollar-play-not-really/
good luck investing!
Bart
07. Dec, 2009
Gold is the best heat-reflector.
How apt, not only in physics. (and for all pov’s)
(thanks to the refreshingly political incorrect Top Gear for reminding me).