Soros and Paulson Take Opposite Positions on Gold
John Paulson created his Paulson Gold Fund at the beginning of January 2010. It was his best performing fund, rising 35% that year. As of Jan. 1, 2011, he has $9 billion in assets under management in his gold fund.
Gold is viewed as a preferred hedge against a weak dollar and inflation. Both Paulson and Soros agree that inflation is a danger this year. On May 18, 2010, the dollar index’s (DXY) was at $87, and a year later stands at $75.46. But the dollar index has been picking up steam lately – in the last five days it increased .23%.
In his 2010 investor letter, Paulson said he wanted to “outperform gold in a rising gold price environment,” and that he is “optimistic about Paulson Gold over the next five years" and believes it is an "ideal vehicle to hedge against the risk of the U.S. dollar depreciation that could result from quantitative easing.” He also said in a speech that he expected double-digit inflation by 2012, pushing gold up even further, according to Reuters.
In August 2010, the Fed renewed quantitative easing to stimulate the economy and bought $30 billion in 2-10 year Treasury notes a month. In November 2010, the Fed increased quantitative easing further, and announced it would buy $600 billion of Treasury securities by the end of the second quarter 2011.
In April of 2011, the inflation rate was 3.16%, higher than last April’s rate of 2.24%, and also increased from 2.68% in March 2011.
Soros also agreed that inflation is on the horizon in an interview with NBC: “Deflationary pressures have actually been avoided by quantitative easing. Now we are on the verge of tipping over to inflation,” he told a reporter.
In September 2010, however, Soros mentioned in a Reuters interview that he while he saw gold as an attractive investment at one point, its surge to record highs in the quarter has poised it as a bubble ready to pop. “It may go higher,” he said, “but it’s certainly not safe and it’s not going to last forever.”
Since his remarks gold prices have risen about 18%, reaching a 52-week high in May of $1536.10. After climbing to the 52-week high, gold began to slide and has since fallen 5%. The decline may have occurred in large part due to a gold margin hike which CME implements to offset risk in volatile periods. CME raised margins on May 9 from $18,900 to $21,600 to initiate a position, and from $14,000 to $16,000 for maintenance.
Warren Buffett has his own views on gold: “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything,” he said at his annual shareholder meeting in Omaha.
Paulson’s largest holding in gold is the SPDR Gold Trust (GLD). He bought 31,500,000 shares in the first quarter of 2009 at $89.46 per share and has not sold any to date. The price has risen to $145.60 per share. Soros owned 4,721,808 shares in the fourth quarter of 2010, and sold 4,672,408 shares in the first quarter of 2011, leaving him with a total of 49,400 shares.
Paulson bought 97,537 shares of his second largest gold holding, Anglogold Ashanti Ltd. (AU), in the first quarter of 2011 at $45.96 per share, bringing his total shares owned to $41,046,974. George Soros has never owned the stock. Anglogold Ashanti has exploration programs in both established and new gold producing regions around the world.
In 2010, Ashanti had net income of $129 million; the previous year it lost $268 million in net income. The company announced that it eliminated its hedge book last year “to reap the full benefit of record gold prices” which cost it significantly in charges last year but helped it earn $203 million in the first quarter of 2011.
Anglogold Ashanti shares have declined 8.17% year to date.