Gold Gets A Paulson Boost

This is too Funny…

We have nothing against hedge fund manager John Paulson…after all, we don’t know the man. In fact, he is inter alia known for his philanthropy, having gifted $400 million of his not inconsiderable fortune to Harvard’s School of Engineering and Applied Sciences. But ever since hitting the big time by shorting assorted MBS prior to the 2008 crisis, he has frequently served as an excellent contrary indicator.

John Paulson looking at a recent chart of gold …

Photo credit: Bloomberg

First he bought bank stocks in 2010, announcing that he was betting on a rebound in growth that would ignite the sector. Not long thereafter, bank stocks began to decline sharply, as the euro area debt crisis went into overdrive. Paulson finally admitted that his strategy was a failure and sold the bulk of his exposure to banks in the fall of 2011 – literally within days of the sector taking off sharply.

Bank stocks and John Paulson – click to enlarge.

Gold investors should have realized that this represented a warning sign. Paulson had decided to jinx them in 2010 – 2011 as well. He announced his thesis on investing in gold and gold stocks in 2010 and eventually launched a dedicated fund for the purpose. He even offered a version of it that was denominated in gold, which we thought was actually a great feature.

And yet, the thesis should have been seen as a red flag – it contained nothing that wasn’t already perfectly well known at the time. Considering this fact, wasn’t it reasonable to suspect that the factors he based his decision on were possibly priced in already at the time? It turned out in hindsight that it was. His bet on gold did work out initially, at least in terms of the metal itself (many gold stocks had already begun to struggle). But in 2011 things began to go awry.

However, he probably remembered his foray into bank stocks and was still stung by the fact that he sold them right before his idea would have borne fruit. Thus Paulson decided to largely stick with his gold bet, although he did sell a good chunk of his GLD position during the gold rout in 2013 (we suspect there must have been sizable outflows from his gold fund at the time). Intellectually, we agreed with him. His arguments were sound in principle – but it became increasingly clear that the market had other ideas.