Gold prices have risen about 316% since 2005, from about $400 to $1,730 an ounce, and over 75% since the start of the financial crisis in the fall of 2007. As Tweedy, Browne commented, from a 1980 peak of $667 per ounce to its recent price of $1,500, gold has compounded at approximately 2.7% per year, compared to 3.2% for the Consumer Price Index. The S&P, an indicator of the performance of common stocks, compounded at an annual rate of 11%, including dividends, over the same period.
From Wells Fargo Market Update
Gold: Soros and Paulson Diverge Again in Second Quarter
Most famously, George Soros and John Paulson have taken virtually opposite positions on gold. After making billions on the housing bubble and then financials, Paulson reaped another $5 billion on gold in 2010.
Paulson initiated his gold position shortly after the Federal Reserve announced its first $1.7 trillion quantitative easing. “We were concerned that the unprecedented printing of U.S. dollars could lead to future currency depreciation that gold offered the best currency alternative to protect wealth,” he wrote in a shareholder letter. He also said he was “optimistic about Paulson gold over the next five years.”
In the first quarter of 2009, he purchased 31,500,000 shares of SPRD Gold Trust at an average price of $895 an ounce. The price soared past $1,470 an ounce in the second quarter, and today trades for $1,718 an ounce. As of June 31, 2011, he still retained his entire stake.
Jean-Marie Eveillard increased his gold position by 424,241 shares in the second quarter, and owns 2,863,749 in total. Daniel Loeb added 60,000 shares in the second quarter bringing his total stake to 285,000, and John Keeley initiated a position of 2,330 shares at the historic second-quarter prices.
Soros, however, told Reuters back in September 2010 that gold was attractive to him at one point, but he now saw it as “the ultimate bubble.”“It may go higher,” he said, “but it’s certainly not safe and it’s not going to last forever.”
Wells Fargo (WFC) also believes that gold is fast approaching its peak. “We believe that we have reached the point where we can confidently state that interest in gold investing has reached the level of a speculative bubble,” analysts said in a research note on Monday. “Prudent investors should be very wary of having substantial investment exposure to this precious metal in their portfolios.” They list their reasons as: volatile price movements, no cash flow potential, “Greater Fool” dependence, central bank uncertainty, overstated inflation fighting properties and lack of intrinsic value.
In the first quarter of 2011, Soros slashed his $800 million gold stake by 4,672,408 shares at an average price of $1,350 an ounce. He reduced even further in the second quarter, selling 6,600 shares for a sizable profit at $1,470.
AngloGold Ashanti (AU)
Paulson’s returns were helped by his exposure to gold-related companies, such as those involved in mining and exploration. Last quarter Paulson sold 1,111,592 shares of his second-largest holding, AngloGold Ashanti Ltd., at $45.75 a share, and John Hussman added 285,000 shares, bringing his total shares owned to 785,000. About four other Gurus own this stock. AngloGold Ashanti is Africa’s biggest gold mining company.
AngloGold Ashanti posted record earnings of $342 million in the second quarter, net of production and costs improved amid record gold prices. It also generated free cash flow rose 24% to a record $636 million, and it reduced net debt 22%. Last October, the company eliminated its last major hedge book, which helped cash flow and earnings as it is now more exposed to rising gold prices. Recently the company acquired an almost 20% stake in First Uranium, a company that produced sales of 260,000 ounces of gold and 300,000 of uranium in the year ended March 30.
Anglogold Ashanti Ltd. Ads has a market cap of $16.58 billion; its shares were traded at around $45.47 with a P/E ratio of 13.1 and P/S ratio of 3. The dividend yield of Anglogold Ashanti Ltd. Ads stocks is 0.5%.
NovaGold Resources (NG)
NovaGold Resources is a mining company that discovers and extracts gold from deposits in Canada and Alaska. It is another stock in which Paulson has maintained a large, long-time stake and George Soros exited in the second quarter.
NovaGold currently has a proven & probably reserve base of 19.5 Mozs gold and inferred resources of 4.7 Mozs gold, among other precious metal reserves. In the quarter ended May 31, 2011, NovaGold reported a net loss of $10.6 million compared to a net loss of $16.8 million year over year. It has not posted a yearly profit since 2008. NovaGold has $111.6 million in cash on its balance sheets. Revenue increased to $193 million from $67 million year over year.
In July, the company released a pre-feasibility study for its Galore Creek copper-gold project in Canada which found that it would take $5.2 billion to get the mine prepared for production. The report also estimates that the mine could produce 4 million ounces of gold, almost 66 million ounces of silver and over 6 million pounds of copper.
NovaGold Resources Inc. has a market cap of $2.36 billion; its shares were traded at around $10.11 with and P/S ratio of 3877.6. NovaGold Resources Inc. had an annual average earnings growth of 7.3% over the past 5 years.
George Soros liquidated his position in NovaGold in the second quarter. He sold his remaining 3,492,100 shares at $11.16, after selling 9,413,042 shares at $13.56 in the first quarter. He initiated his position in the second quarter of 2009 at $3.69 and made several other large purchases when the stock traded in the single digits. John Paulson bought 20,181,818 shares at $6.36 in the first quarter of 2010. The price increased to $11.16 a share in the second quarter, but he did not sell.