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


Hedge fund chief loses big on gold

Hedge fund billionaire John Paulson is emerging as one of the biggest losers in this year’s gold rout, further tarnishing his once legendary status in the US$2 trillion (NZ$2.36t) hedge fund industry.

Paulson’s US$700 million (NZ$827m) gold fund lost a whopping 27 per cent in April, when the price of the metal plunged 17 per cent over a two-week stretch, according to performance figures provided by a person familiar with the fund.

The jarring one-month decline in the Paulson gold fund brings the year-to-date loss for the fund to about 47 per cent, the source said. The fund’s losses were magnified by the fact that its bullish bet on gold was enhanced with leverage, or borrowed money, and derivatives tied to the price of gold.

The majority of the money invested in the Paulson gold fund is believed to be the billionaire’s own.

Paulson rose to fame after he made US$15 billion for his firm in 2007 by betting against subprime mortgages before the housing collapse.Since then, however, he has struggled to duplicate that success, and several of his portfolios have lagged in recent years.

Assets under management at his Paulson & Co firm have dropped to US$18 billion, down from US$38 billion in early 2011, due to investor redemptions and poor performance.

To be fair, the April selloff in gold was particularly fierce and came as a surprise to many hedge fund managers who were long either gold bullion or the SPDR Gold Trust, the most popular gold exchange-traded fund.

Hedge fund manager David Einhorn said on a conference call on Tuesday, “We were somewhat surprised by the swift decline in the price of gold in April.”

Paulson disclosed the gold fund loss to investors on Monday along with results for his other funds, the source said.

Over two weeks in April, the price of gold plunged 17 per cent, from US$1603 (NZ$1895) per ounce to a low of US$1321 (NZ$1562) on April 16, before starting to rebound. As of Tuesday, the metal was trading near US$1446.

Regulatory filings show that at the end of last year Paulson’s firm was the largest holder of the SPDR Gold ETF, with 21.8 million shares. Paulson has not yet disclosed its latest position in the gold ETF. Since the beginning of the year, the gold ETF has fallen about 14 percent.

Paulson’s hedge funds also are large investors in shares of gold mining companies, which similarly have sold off this year.

Until this year, gold had been a solid investment. In the wake of the financial crisis, a number of hedge funds began buying gold as a hedge against inflation. But inflation has yet to materialise, despite the Federal Reserve’s aggressive purchases of Treasuries and mortgage bonds to stoke the economy.

Paulson’s more widely held Advantage fund declined 0.8 percent in April, largely because of its gold positions, the source said, and is up 2.5 per cent for the year through April.

The Advantage fund and a leveraged version of it were once two of Paulson’s most popular funds but now have less than US$5 billion in assets.

The average hedge fund is up a little over 3 percent this year, while the Standard & Poor’s 500 is up about 13 per cent.

It’s not been all bad news for Paulson. Two other funds managed by him are performing well this year and far outpacing the returns of the average hedge fund.

His credit-focused fund, which invests in mortgage securities and bank debt, is up 11.9 per cent for the year. The Paulson Recovery fund, which invests in some insurers and asset management firms, is up 21.8 per cent. And a merger-focused fund is up 7.1 per cent.

Paulson will be one of the featured speakers at this week’s SALT Conference in Las Vegas, a popular event with wealthy investors. The conference, sponsored by Skybridge Capital, begins Tuesday night.