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What Guru Investors Are Doing with Gold, and Why
Posted by: Holly LaFon (IP Logged)
Date: February 28, 2013 10:55AM

As gold rallied again in the fourth quarter, several Gurus who had tremendous holdings in the metal began unloading, namely macroeconomic trader George Soros and Lone Pine’s Steve Mandel. John Paulson chose to maintain his position. Both Soros and Paulson have read economic signs and traded at just the right times to reap profits and avoid losses on gold in the past, adding significance to their recent decisions.

Only one Guru, Jeremy Grantham, substantially increased his holding.

Sellers: George Soros

George Soros, who made his initial fortune shorting the British pound, has judged the movement of gold quite accurately in recent years. He amassed more than 6 million shares of the SPDR Gold Trust ETF (GLD) in the latter half of 2009, the base of its historic multi-year run up, around $940 and $1,078 a share. He sold off much of the holding as the price increased, and had reduced almost all of it by the second quarter of 2011, when the price reached $1,470 on average.

Though gold went up for one more quarter, and touched its all-time high of $1,923.70 in the third quarter, it began to fall again, and was down to roughly $1,500 by the end of the year.

But Soros foresaw another rally in gold’s future and began buying again, building his stake to 1,320,400 shares in the third quarter of 2012. Again, he sold at approximately the peak, reducing almost 55% of the stake in the fourth quarter, when gold touched close to its 52-week high of $1,741. Gold shares had tumbled to $1,550 by Wednesday, Feb. 27, 2013.

Around the time of Soros’ 2009 investment in gold, he discussed his position at the World Economic Forum in Davos in January 2010, saying, “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold."

Interest rates may have again played a role in the fourth-quarter gold increase, as the World Gold Council explains: “The re-election of President Obama provided some support for gold apparently securing the continuation of existing Fed monetary-policy programmes - through an extension of Chairman Bernanke's term.”

Soros’ third-quarter purchase, his second-largest in almost three years, also came as the Federal Reserve launched QE3 in September.

On Jan. 31, Soros called for more Federal stimulus, but only if spent on programs that paid for themselves, such as infrastructure and education, to improve the economy.

Steve Mandel

Steve Mandel of Lone Pine Capital sold his entire position in gold in the fourth quarter. He initially bought 3,750,348 shares of the Gold ETF Trust in the fourth quarter of 2011 for $164 per share on average, and had sold over 1.1 million shares of it in the third quarter of 2012 in his only sale other sale.

Mandel has not publicly discussed his position on gold, but signs of an improving economy have influenced many investors’ decisions to sell. A relenting of the crisis in the euro zone, debt ceiling aversion, and a 3.1% increase in U.S. real GDP were strong factors.

U.S. GDP decreased 0.1% in the fourth quarter, however, according to data released by the Bureau of Economic Analysis on Jan. 30. Negative drivers were negative contributions from private inventory investment, federal government spending and exports, partially offset by personal consumption expenditures, nonresidential fixed investment and residential fixed investment.

Unchanged Position: John Paulson

Paulson, who bought 31.5 million shares of gold in 2009 at roughly $900 per share, purchased more shares for the first time since then in the second quarter of 2012. He added 4,526,600 shares for $1,570 per share on average. Unlike Soros, he kept his entire stake through the fourth quarter.

The massive 2009 purchase was made shortly after the Federal Reserve decided to spend $1.7 trillion in its first round of quantitative easing. “We were concerned that the unprecedented printing of U.S. dollars could lead to future currency depreciation and that gold offered the best currency alternative to protect wealth,” he wrote in his 2010 letter.

Paulson said that he kept gold ETF shares “exclusively to hedge the dollar exposure for the Gold Share Class,” in his third quarter 2009 letter.

In 2010, he launched his Paulson Gold Fund, which was his best-performing fund that year, increasing 35% net.

Similar to conditions during his 2009 purchase, the Federal Reserve announced a third round of quantitative easing in September. The new program consists of buying $40 billion in mortgage-backed securities each month, which combined with its existing Operation Twist policy, will amount to $85 billion in bond purchasing per month, with no end date scheduled.

The objective of the policy is to “put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the Fed said in its official statement.

Paulson also kept most of his foremost positions in gold miners unchanged in the fourth quarter, such as Novagold Resources Inc. (NG), Randgold Resources Ltd. (GOLD) and Gold Fields Ltd. (GFI). He did reduce his largest miner position, Anglogold Ashanti Ltd. (AU), in which he owns a 7.32% stake, by 0.07%.

Buyer: Jeremy Grantham Jeremy Grantham of $97 billion GMO LLC was GuruFocus’ only Guru to increase his stake in gold ETF shares. He bought 72,000 shares, increasing his stake by almost 45%, to 233,505 shares. The micro position comprises just 0.11% of his $33.63 billion portfolio.

“As inflation picks up, the real price of gold goes up,” Grantham commented in an early 2012 shareholder letter.

He expanded on his opinion in his fourth quarter 2012 letter: “There seems no particularly obvious reason to assume that gold should do any better than keep up with inflation over time, nor a reason to assume it will provide an extraordinary gain in either an inflationary period or during a depression. It is nicely portable if you think you might have to leave your home country in a hurry, but that is certainly not an argument for buying gold futures or ETFs.”

For more articles and data on the Gold Trust SPDR ETF, go here. Also see John Paulson’s portfolio here, George Sorosportfolio here, Steven Mandel’s portfolio here and Jeremy Grantham’s portfolio here.

Guru Discussed: George Soros: Current Portfolio, Stock Picks
John Paulson: Current Portfolio, Stock Picks
Steven Mandel: Current Portfolio, Stock Picks
Jeremy Gra: Current Portfolio, Stock Picks
Stocks Discussed: GLD, NG, GOLD, GFI, AU,
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