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Nov. 23, 2009, 11:44 a.m. EST · Recommend (6) · Post:
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- Gold has long been favored by a fringe of the investment world, but this year some of the world's leading hedge-fund managers have loaded up on the precious metal amid concern government efforts to avoid another Great Depression that could undermine major currencies and fuel rampant inflation.
"I have never been a gold bug," Paul Tudor Jones, chairman of hedge-fund giant Tudor Investment Corp., wrote in an Oct. 15 letter to investors. "It is just an asset that, like everything else in life, has its time and place. And now is that time."
Tudor has been building positions in gold and other precious metals in recent months and they now represent the firm's largest commodities exposure, he noted.
John Paulson's Paulson & Co., one of the world's largest hedge fund firms that made billions betting against subprime mortgages, is launching a new gold fund Jan. 1 and became the largest holder of the SPDR Gold Trust exchange-traded fund /quotes/comstock/13*!gld/quotes/nls/gld (GLD 114.11, +1.17, +1.03%) this year.
Greenlight Capital, run by David Einhorn, reversed a long-time aversion to gold, while Kyle Bass's Hayman Advisors LP held more than 15% of its portfolio in gold and other precious metals earlier this year. Eton Park Capital, headed by former Goldman Sachs /quotes/comstock/13*!gs/quotes/nls/gs (GS 171.85, +1.84, +1.08%) trader Eric Mindich, has also got in on the act.
"I can't remember in 20 years so many respected investors focused on a single strategy," said Bradley Alford of Alpha Capital Management, which invests in hedge funds. "Some of these people are icons of the industry with at least 15-year track records. It's a losing proposition to bet against guys like that. They aren't billionaires because they make bad bets."
It's not only hedge funds. Managers of mutual funds and insurance company portfolios are often limited in how much gold they can buy, but these investors have been purchasing the metal for their personal accounts, according to Ed Yardeni, president of Yardeni Research.
"A surprising number of level-headed folks, who I have known over the years, are confessing to me that they've become gold bugs," he said. "They're starting to give more respect to what was for a long time considered the lunatic fringe."
On Monday, the most active New York gold contract notched a new high of $1,174 an ounce. Read more on daily gold prices.
SPDR Gold gained 1.6%, bringing its November advance to 12%. Read about new ways to buy gold.
The original gold bugs have been fans of the metal for decades. They yearn for the past, when the so-called Gold Standard was the central cog of the world's currency system. A similar system known as the Bretton Woods Agreement tied the U.S. dollar, and all currencies pegged to the dollar, to the price of gold. When the system broke down in 1971, there was no longer a limit on the amount of money that could be printed by governments.
Gold bugs hung on grimly as prices dropped in the '80s and '90s amid quelled inflation and roaring stock markets. But gold prices began climbing at the start of this decade, when the Federal Reserve slashed interest rates to revive the U.S. economy in the wake of the dot-com bust.
That helped fuel a housing and credit market boom that came crashing down last year, triggering a global financial crisis and the worst recession since the Great Depression.
The Federal Reserve, headed by Ben Bernanke, responded by slashing interest rates to almost zero and spending more than $1 trillion buying long-term U.S. Treasury bonds and mortgage-backed securities and other debts from collapsed housing giants Fannie Mae /quotes/comstock/13*!fnm/quotes/nls/fnm (FNM 1.01, -0.01, -0.98%) and Freddie Mac /quotes/comstock/13*!fre/quotes/nls/fre (FRE 1.13, -0.01, -0.79%) . See latest on Fed's efforts.
That's stabilized the economy, but some leading hedge fund managers worry about the long-term consequences of this so-called quantitative easing and are using gold to protect themselves.
"The Fed is making loans collateralized by toxic waste and has now begun a policy called 'quantitative easing' -- a fancy term for 'printing money,'" Greenlight's Einhorn wrote in a January letter to investors.
Reuters David Einhorn of Greenlight Capital, Inc.
Printing so much new money will cut the value of the U.S. dollar, which could fuel rapid inflation. In such an environment, the solidity of gold could shine.
"If the chairman of the Fed is determined to debase the currency, he will succeed," Einhorn added. "Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself."
Einhorn initially invested in the Market Vectors Gold Miners ETF /quotes/comstock/13*!gdx/quotes/nls/gdx (GDX 51.58, +0.76, +1.50%) , which tracks shares of gold-mining companies. He'd also bought call options on gold, as well as buying the metal directly, according to Greenlight's January investor letter, a copy of which was obtained by MarketWatch.
Since Einhorn launched Greenlight in 1996, he's shunned gold and other broad economy-based trades in favor of tracking down under-valued and over-priced stocks.
"We never thought we would ever buy gold or gold stocks," Einhorn wrote in January, recounting the lesson he learnt from his grandfather's obsession with the precious metal.
"David's grandfather Benjamin was a gold bug," Einhorn recalled. "From the time David was 10, Grandpa Ben took every opportunity to tell David about the problems with fiat currencies and the coming inflation and advised that the only sensible thing to do was to buy gold and gold stocks."
Einhorn's grandfather followed his own advice for the last 30 years of his life and lost money.
"Being a patient investor is one thing. Being 'wrong' for three decades is quite another," Einhorn noted.
However, Greenlight Capital lost more than 15% last year -- its first ever annual loss -- as the global financial crisis rocked the hedge fund industry. Einhorn had rightly warned of the demise of Lehman Brothers /quotes/comstock/11i!lehmq (LEHMQ 0.11, 0.00, -2.93%) before it happened, but he underestimated the broader impact of such an event.
Frank Holmes, CEO of U.S. Global Investors, tells MarketWatch's Laura Mandaro that it's possible for gold to top $2,300 an ounce.
"The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture," he said during an Oct. 19 speech at the Value Investing Congress in New York.
At the same conference four years earlier, Einhorn advocated his Grandma Cookie's approach of investing in stocks like Nike /quotes/comstock/13*!nke/quotes/nls/nke (NKE 64.21, +0.29, +0.45%) , IBM /quotes/comstock/13*!ibm/quotes/nls/ibm (IBM 127.81, +0.85, +0.67%) , McDonald's /quotes/comstock/13*!mcd/quotes/nls/mcd (MCD 64.01, +0.04, +0.06%) and Walgreens /quotes/comstock/13*!wag/quotes/nls/wag (WAG 39.24, +0.27, +0.69%) , over his Grandpa's holdings of bullion and gold stocks.
"I explained how Grandma Cookie had been right for the last 30 years and would probably be right for the next thirty," Einhorn said. "However, the recent crisis has changed my view."
Gold should do "fine" until policymakers and politicians show more monetary and fiscal restraint. The metal will likely do "very well" if there's a sovereign debt default or currency crisis, he added. See how Einhorn is betting on a possible currency death spiral.
Einhorn said last month that he moved all his positions into physical gold because it's a cheaper, more-certain and more-liquid way of investing in the metal. Read about options for worried gold investors.
Hayman Advisors, a Dallas, Tex.-based hedge fund firm run by Kyle Bass, became another proponent of holding physical gold this year.
Most precious-metal investing has historically been done via paper futures contracts on COMEX, part of the New York Mercantile Exchange, owned by CME Group /quotes/comstock/15*!cme/quotes/nls/cme (CME 324.44, +1.45, +0.45%) .
However, Hayman expects more demand for physical delivery of precious metals. That could cause problems because there are only enough inventories in COMEX warehouses to supply 15% to 30% of open interest on futures and options contracts, the firm explained in a presentation to investors earlier this year.
"It is prudent to focus efforts on obtaining physical delivery of metals backing paper contracts 'while supplies last,'" Hayman wrote in its presentation, a copy of which was obtained by MarketWatch.
Bass, Einhorn and others are holding gold because they're concerned that a damaging bout of inflation will be triggered by the efforts of several central banks to stabilize economies by pumping lots of new money into the global financial system.
Reuters Hedge fund director John Alfred Paulson, president of Paulson & Co Inc.
Excluding Japan, the world's major currencies have experienced money supply growth of 15% to 55% in the past three years, Bass estimated in an Oct. 2 letter to investors.
The Hayman managing partner compared the efforts to a game of Monopoly in which the banker decides money is too tight, the "velocity" of the game is slowing down, or a few players are about to go broke.
- rojt88 | 1:38 a.m. Today1:38 a.m. Nov. 23, 2009
Gold bullion certainly appears to be exhibiting an impressive amount of strength in trading, with the nearby futures contract at late morning sporting a gain of some 2.1%, writes Mark Hulbert.
11:45 a.m. Today11:45 a.m. Nov. 23, 2009 | Comments: 13
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