Time to follow the top hedge funds and buy gold?
Posted on 19 May 2009 with no comments from readers
So the two top holders of the gold ETF are revealed as hedge funds in their first quarter regulatory filings.
Paulson & Co, whose founder was the highest paid fund manager in 2007 thanks to a well-timed bet against sub-prime mortgages, bought 31.5 million shares in GLD, the gold exchange traded fund, in Q1. Meanwhile, Lone Pine was not far behind with its purchase of 26.5 million shares.
But Paulson has also acquired stock in AngloGold Ashanti to the tune of a cool $1.3 billion. The man who called the US housing market correctly is clearly hoping to do exactly the same with the gold market, and for the record he achieved a double-digit gain in 2008, along with a few stars like George Soros while the average hedge fund loss was 19 per cent.
Follow the stars
Is this hedge fund star on to another winner, or will commodity price deflation send this good fortune into reverse? Former performance is no guarantee of future performance but it is often the best guide we have.
In 2007 few called the US housing market turn, and yet with hindsight this was a bubble that ought to have been obvious. Could we not say the same now of the bubble in US bonds? Interest rates are too low, and the inflation risk too high.
Next boom asset class
Therefore the cleverest hedge fund manager is going to be the one with the largest exposure to the next boom asset class. For once the bond market breaks where will the money go? Straight back into equities with company profits now facing a long recession and slow recovery?
Surely gold also offers a hedge against deflation or inflation. If the printing of money creates an inflation then gold benefits as a currency with a fixed supply. If the recession deepens into deflation then gold will again prove its worth as a currency that rises in purchasing power.
Moreover, if equity markets tank then investors suddenly face an acute dilemma if the bond market no longer looks an alternative true safe haven. Then gold, gold stocks and the poor relation silver will be the place to go. And since when did following the smart money prove a dumb option?
no Comments posted by readers:
Unless you are a billionaire, like Mr. Paulson, be careful investing in gold at todays price. Yes, with the coming inflation, it will probably go much higher. The problem is, several years could pass before the inflation starts. The price could go down a good bit in the meantime. Remember, gold is something everyone wants, but noone needs. On the other hand, everyone needs energy, industrial metals, and fertilizer to grow food. I don’t see inflation starting to take off until 2011 because the crash in US commercial real estate has just begun. And, next year, a lot more people in the USA will be unemployed than today. The housing meltdown is just beginning due to rising unemployment. The unemployed auto workers will be unemployed for a long time, and will eventually default on a lot of home loans, as their unemployment benefits run out. Even if they do find work, their salaries will be far below those in manufacturing. I think that Big Oil stocks, and the energy pipeline stocks, are a much safer investment than gold. They pay dividends, and will go way up when oil demand recovers in a few years. Anyway, I’ve speculated enough and have to go ride the lawnmower before it gets too hot here in South Louisiana.