Gold's Bull Run Is Only Beginning

by Alex Dumortier - November 21, 2009 - 0 comments

That's what hedge fund manager John Paulson told investors at a meeting this week. What's more, he's going to plow up to $250 million of his own wealth into a new, dedicated fund to ride this bull. A word on Paulson's credentials: He made a huge betagainst subprime mortgages, producing a 590% return for one of his funds in 2007 and netting himself a total of $3.7 billion. Should investors saddle up and ride alongside him this time?

Placing his bets
In fact, Paulson & Co. is already one of the largest shareholders in the SPDR Gold Trust ETF (NYSE: GLD). At the end of September, the company's holding was worth $3.1 billion -- more than 15% of its shareholdings. Despite this, a partial motivation for Paulson in creating the new fund is to increase his personal exposure to gold.

Furthermore, the fund will invest in gold-related shares and derivatives with the goal of outperforming gold prices. Here again, Paulson & Co. is already a large shareholder in miners AngloGold Ashanti (NYSE: AU), Gold Fields (NYSE: GFI), and Kinross Gold (NYSE: KGC).

A value, a hedge, or a speculation?
Trained as a merger arbitrageur, Paulson is a value-driven investor. Meanwhile, it's difficult to put an intrinsic value on an asset that generates no cash flows. Another value guru, Berkshire Hathaway 's (NYSE: BRK-A) (NYSE: BRK-B) Warren Buffett, isn't a fan of gold, for example. Is Paulson stepping outside his area of competence?

Perhaps, but he isn't going it alone. Paulson is hiring John Reade, the former metals strategist at Swiss bank UBS (NYSE: UBS) and a repeat winner of the London Bullion Market Association's forecasting prize.

Two alternatives to gold
As I argue in " The Only Asset Worth Owning Today," the outlook for gold's supply-and-demand equation appears to favor further price increases in gold. As far as individual investors are concerned, some exposure to gold looks like a reasonable choice, but don't overlook other means to hedge your dollar/inflation risk, such as international stocksand high-quality dividend stocks.

Last edited by harsheeb on Sat, 11/21/2009 - 12:41 | Write to author: Alex Dumortier |