Three or four years from now, people will ask why they didn’t buy gold earlier.– John Paulson, quoted in “Profiting From The Crash”, Gregory Zuckerman, The Wall Street Journal, October 31
NOTE: Every week I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a 24-48 hour delay from time to time. Here is this week’s.
Hedge fund manager John Paulson is the hottest investor in the world right now. In 2007, he made $15 billion by shorting subprime mortgage backed securities (see “Trader Of The Year: John Paulson Made Billions Shorting Subprime Mortgages”, Top Gun FP, April 8, 2008). Gregory Zuckerman aptly titled his recently published book about Paulson’s trade The Great Trade Ever.
Now, Paulson is on to his next big thing. The biggest story in the market today is that Paulson is starting a new gold hedge fund. It will open on January 1, 2010 and Paulson will put up to $250 million of his own money into the fund, Zuckerman reported on The Wall Street Journal Online today.
It’s not like Paulson doesn’t have a lot of gold investments already, either. Every quarter, hedge fund managers are required to file a 13F with the SEC detailing their holdings. Most wait until the last possible minute and file at odd times to avoid attention. Paulson filed his 13F last Friday after the market closed.
In it, we learn that of the $20.5 billion in securities held by Paulson’s hedge fund, $5.8 billion are in gold and gold equities. That’s right: 30% of Paulson’s $20 billion in securities is in gold.
I don’t want everybody to run out and buy gold after reading this. Gold has rallied more than $200 in the last four months and everybody is talking about it. The Central Bank of India bought 200 metric tons from the IMF. The Central Bank of Mauritania just bought 2 metric tons from the IMF – and everybody is talking about that! The New York Times and Wall Street Journal ran headline stories on gold in recent weeks. Combine the price action with all the media attention and gold is showing all the markers of a short term top.
That’s why I took 1/3 of our gold positions off the table in early September. We missed 15% moves in both the GLD and GDX over the last 2 months but that’s okay. We still have a big position making up 20% of the overall portfolio. And I’ll be looking to move back to a full position into any correction.
Over the longer term, I expect gold to continue to outperform. I believe the current leg up with the burst through $1000 and all the media attention marks only the end of the beginning. That is, we are now just entering the middle stage of what is likely to be a secular bull market in gold with many more years to run.
Now isn’t a time to rush out and buy gold. But it is a time to start putting together a plan for accumulating it when the market gives you an opportunity. When it does, it won’t last long and you want to be ready. I know I’ll be.
Weekly Returns (11/9-11/13)
DJ Total: +2.14%
Top Gun: +0.32%
YTD Returns (through 11/13)
DJ Total: +23.26%
Top Gun: +7.36%
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