Paulson Gold Fund Down 65% In 2013

With spot gold prices down 28% year-to-date, it appears John Paulson‘s Gold Fund has managed to create some epic high-beta losses.

In a letter to investors, Paulson explains his fund fell 23% in June, is down 65% in 2013; but do not fear – as he concludes time and time again, the gold fund will “produce outsized returns in the long-run”.

From Bloomberg:

John Paulson, the billionaire hedge-fund manager seeking to rebound from losses tied to bullion, posted a 23 percent decline in his PFR Gold Fund last month, according to a letter to investors.

The drop brings losses in the strategy, formerly known as the Paulson Gold Fund, to 65 percent since the start of the year, the firm said in the July 3 letter, a copy of which was obtained by Bloomberg News. The fund, which consists mostly of Paulson’s own money, is the smallest strategy of the $19 billion money manager and the only one to post losses this year.

The firm reiterated its commitment to investing in bullion and stocks of gold producers for protection against currency debasement as central banks pump money into the global economy. Gold dropped 12 percent in June, the most since October 2008, after Federal Reserve Chairman Ben S. Bernanke said he may start reducing bond purchases that have fueled gains in financial markets globally.

“Although the timing is uncertain, if you have a long-term view we believe the funds offer the potential for outsized returns,” the firm wrote in the letter.

Armel Leslie, a spokesman for Paulson & Co. at Walek & Associates, declined to comment on the letter.

What is there to say.


Gold: Recent Data Points Are Becoming Headwinds

There has been a significant amount of outflows recently in gold-backed exchanged traded funds such as the SPDR Gold Trust (GLD). State Street (STT), which is the distribution agent for GLD, has seen outflows of 11% in the month of April alone. Also, there are various high profile investors that have cut their gold position. First, there was news out that billionaire investor George Soros cut his gold holdings in the first quarter of 2013. Then came news that gold-heavy investor John Paulson, who manages the $18 billion Paulson & Co, sold a portion of his gold positions. Paulson exited its $32 million stake in Barrick Gold Corp (ABX). This was on top of his gold holdings that he sold in the previous quarter, which included significant shares in NovaGold Resources, Iamgold Corp, Gold Fields Ltd, Randgold Resources, and Agnico Eagle Mines.

Gold as an inflation hedge

As equities continue their impressive climb up, gold prices have stayed muted. The climb in equities has come alongside a climb in the U.S. dollar. Gold may be losing its appeal as a hedge against inflation. The debate is whether inflation and the expectation of future inflation will increase significantly for that investment thesis to play out. Recent numbers for consumer prices in April doesn’t help that thesis, but rather goes against it. Even renowned bond guru Jeff Gundlach of DoubleLine has suggested investors should use silver instead of gold to hedge against inflation. Gold as an inflation hedge also loses a lot of its urgency as equities have regained their momentum and that shows in the flow of assets.

Negative perception from prominent figures

Dr. Nouriel Roubini, also known as Dr. Doom, has stated that gold is going lower based on a number of factors. Among his biggest argument is the fact that gold is not a means of payment and that you can’t pay for your groceries with gold. Even legendary investor Warren Buffett has publicly said that he is not a buyer of gold. With such influential investors and public figures such as Roubini and Buffett stating their concerns with gold, it creates a significant negative perception on gold and may be a factor in influencing other investors to get out of GLD.

Headwinds for gold moving higher

There are also recent data points that have become significant headwinds for gold and GLD.

  • The consumer sentiment index in May jumped from 76.4 to 83.7, exceeding expectations
  • The Conference Board’s leading economic index rose .6 to 95 in April which was stronger than expected
  • The ICE dollar index jumped from 83.606 to 84.245 on a one day move, close to a three-year high
  • Comments by San Francisco Federal Reserve President John Williams stating that the Fed could slow its bond buying program as soon as summer 2013. This would take out $85 billion a month in bond buying.

Source: Yahoo! Finance


Gold’s dichotomy: Investment demand plunges, but consumers keep buying

Today’s gold market is being defined by two trends: aggressive selling by investors in North America through exchange-traded funds, and aggressive buying by consumers in Asia.

Billionaire investor George Soros joined Northern Trust Corp. and BlackRock Inc. in cutting holdings of exchange-traded products backed by gold before a bear market in prices last month, while John Paulson maintained a stake that lost about US$165 million in the first quarter.

But for now, the ETF investors are overwhelming everyone else.

Gold prices settled below US$1,390 an ounce on Thursday, and after five rough trading days in a row, they are approaching the lows that were reached during last month’s dramatic collapse.

Amid that turmoil, the World Gold Council (WGC) issued a report that shines a light on how rapidly investors are dumping their holdings.

The report shows that overall gold demand fell 13% in the first quarter of 2013 compared to the same period a year ago. While that is not too bad on the surface, investment demand fell an astounding 49%. Investors sold a net 176.9 tonnes of gold through ETFs in the quarter, or roughly US$9.3-billion worth of the yellow metal.

The gold market is very small, with total demand of about 1,000 tonnes per quarter, according to the council. That means fluctuations in ETF holdings can have an outsized effect on the paper price.

“When the hedge funds and other investment funds turn negative, it just overwhelms the physical demand,” said George Topping, an analyst at Stifel Nicolaus.

Given that April was the most volatile month for gold since 2008, investment demand could wind up being even worse in the current quarter.

The ETF sell-off masked the fact that underlying physical gold demand has been strong. And in the case of China and India, it has been remarkably strong.

The WGC reported that Chinese consumer demand rose 20% in the first quarter, while Indian demand rose 27%. It is proof that Asian customers and investors are eager to jump into the market in search of a bargain whenever prices decline. That has been an ongoing theme throughout the gold bull market

Dhiraj Singh/BloombergA salesman counts gold chains at the Dwarkadas Chandumal Jewelers store in the Zaveri Bazaar area of Mumbai, India, on Monday, May 13, 2013.

In particular, Chinese gold imports have been going through the roof. Data released last week showed that China imported 223.5 tonnes (or 7.9 million ounces) from Hong Kong in March, crushing the previous monthly record of 114.3 tonnes that was set last December. Gold bugs have repeatedly pointed to these figures as evidence that underlying demand in strong, regardless of the price movements on the Comex.

Physical demand has been solid in other countries as well. In the U.S., the council said that demand for bars and coins rose 40% in the first quarter, while jewellery demand increased for the first time since 2005. Global jewellery demand reached a record 551 tonnes, or US$28.9-billion.


Central banks also added 109 tonnes of gold in the quarter, the ninth straight quarter in which they boosted their reserves.

“Overall, diverse gold demand across both sectors and geography remains strong and is likely to stay strong in the future,” Marcus Grubb, the council’s managing director of investment, said in a presentation.

But even if physical demand can be counted on to create a price floor when the investment funds sell, no one is certain what that floor is. Experts said that the next technical support level for gold is about US$1,300, but it broke through support levels last month when it plunged 13% in two days.

If prices fall to the US$1,200 range and stay there for an extended period, analysts have warned that gold miners will be forced into major restructurings of their operations, including mine closures. They are already slashing their capital spending budgets to preserve their balance sheets.