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Paulson's Golden Bets
Posted by: Fede Zaldua (IP Logged)
Date: December 18, 2013 11:57AM

Three years ago, and given the Federal Reserve's (correctly) aggressive expansionary policies, John Paulson was afraid of inflation in the U.S. He was dead wrong. Amid a persistent unemployment rate and a timid economic recovery, inflation – at least for now – did not pick up and his biggest inflation hedge, the gold bullion, did not stop losing value. Hence, Paulson's PFR Gold Fund is down by 63% year to date. That said, let's take a look at some of Paulson's biggest gold related bets. With gold prices down by around 27% year to date, is there money to be made on those names?

Healing from Second Quarter's Write-Downs

Along with all other South African miners, AngloGold Ashanti (AU) should benefit from the continued depreciation of the South African rand against the U.S. dollar – which I expect to persist towards 2015. Of course, the company has been suffering amid the fall of its basic commodity, but prices seem to be already reflecting the pain the company has been going through. AngloGold's shares are down by more than 61% year to date, and the company's sales have decreased by 15% year over year even when the company, which has been cutting costs and trying to streamline its operations, has boosted its production by 4% year over year. Overall, I think Paulson is right. After having written down $2.4 billion worth of assets in the second quarter of the year, AngloGold is a good idea if you want exposure to the yellow metal.

Gold's Top Performer

The Africa-focused gold miner Randgold (GOLD), which is down by 35% year to date, is my favorite gold bet, and it's not tough to guess why Paulson likes it too. The company is famous for meeting its tough self-imposed targets and being able to avoid writing-down projects. The reason is simple: Randgold's CEO, Mark Bristow, thinks that projects need to be profitable if gold prices go down to $1,000 per ounce, (still) well below today's prices. Randgold's output, which came up by 19% quarter on quarter, helped third quarter revenues surpass last year's revenues by 10%, even when gold prices were significantly higher then than now. Even when the company's EPS has fallen by a quarter year over year, I think Randgold is poised to outperform its market strongly going forward. 

Bottom Line

While I still believe gold prices shall continue to fall, I also believe you can always find opportunities in falling markets. Both AngloGold and Randgold look like winners within the gold producers space. However, I think Randgold's focus on low cost projects makes it a much better alternative in the current context, given that it will not be forced to write down projects unless gold reaches the $1,000 per ounce mark.

All the above being said, I think it's not the right time to bet on gold prices. If the Federal Reserve decides to start “tappering,” interest rates will rise and gold's related assets will suffer. If I had to recommend a trade I would suggest going long Randgold's shares and short on gold's most famous ETF, the SPDR Gold Shares (GLD). That way, you will bet on Randgold's outperformance over the commodity the company produces.

Stocks Discussed: AU, GLD, GOLD,
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