Billionaire John Paulson’s Latest Move

As you know, I often cover gold in my writings.  john-paulsonIt’s not because I am a gold bug, but because that is where I see the MOST potential for the next few years. If you want to find another bubble, in my opinion, this is it. Even George Soros said recently that “gold is the ultimate bubble.”  What he didn’t say was gold is currently in a bubble, and that is an important distinction. He also has purchased extensive gold financial instruments recently. You see gold is the “ultimate” bubble because if too much paper money is printed it devalues the money in existence. In history this has happened many times. In fact, a paper, or “fiat” currency has never NOT failed. The Central Banks have only recently become net buyers of gold, indicating gold has again become a currency. Many currencies are in trouble because they are all trying to devalue against one another to remain competitive.  Does that mean we’re going back to using gold as currency? Hopefully not, or our country’s problems will be unfathomable.  Rather, what happens is a currency gets devalued, changed, and/or backed by gold as a reserve currency.  It brings stability to a fiat currency because then it’s backed by something that has no counter party risk and not just a printing press.

So when John Paulson starts a gold fund with $250 million of his own cool cash, I’m not surprised that the man who made the world’s greatest trade by shorting real estate is looking in the right place to make the next killing that will unfold over the next several years.

For those who think gold is overvalued or in some sort of current bubble, I disagree. Yes, it’s volatile, and yes it may go down before it goes up more. But it’s the ONLY asset class that’s up in the last 8 years, and still it is not a part of most investment portfolios.  It’s not respected as it’s own asset class or even seen as a hedge to inflation. It’s not being talked about by everyday people at cocktail parties.  And the biggest sign it’s not in a bubble?  Paulson has only raised $90 million so far, even thought he’s invested $250 million of his own money.

The formation of Paulson’s gold hedge fund traces an eerily similar pattern to one of his prior hedge fund launches where he crafted an idea, launched a hedge fund based on that idea, and then made billions. Interestingly, he also had trouble initially raising money for that fund and later money began rolling in. (We’re talking of course about his shorting subprime). Paulson has made his next large bet and his new gold fund is the vehicle by which you can join him on the ride. His gold fund’s objective “is to outperform gold price in a rising gold price environment.” They will pursue this by investing in gold equities that are levered to the price of gold, as well as derivatives on the price of gold. Can Paulson be successful on two big bets back to back? We’ll have to wait and see.

Paulson’s investment in gold is notable not for the wager on inflation, but for the vehicle they have selected to hedge their exposure.  Many prominent hedge funds and market gurus have previously warned of inflation and have shorted long-term US Treasuries (TBT as mentioned last week).  The main point is that there is some big money betting on inflation coming.

In summary, Paulson & Co, has an interesting thesis for gold. They believe that the excessive printing presses in America and other countries will cause depreciation in paper currency. Second, they believe that demand for gold will go up, especially as a reserve currency. In fact, they think gold could become the primary reserve currency again as they have been looking at gold as currency, not a commodity. Third, their belief is that the supply of gold is small, which it is, causing prices to head higher. Will he be right twice in a row?

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