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John Paulson's Gold Trade Gone Awry

April 17, 2013 | About:
John Paulson made the “greatest trade ever” against the subprime mess, netting $15 billion of profits for his firm and sealing his spot as top hedge fund manager. Impeccable timing is everything. Any hedge fund managers may have the best investment idea, but it may not be able to pull off the trades as markets can remain irrational a lot longer than you and I can remain solvent.

His subsequent trade idea on long gold since 2009 has not paid off, just like his initial short on the housing market through CDSs. The debacle in gold has lost Paulson $1 billion in just two days. Yet, he is still sticking with his guns, on his conviction that the only asset that would hold value is gold against government’s continuing printing of money.

Here's what John Reade, a "partner and gold strategist at Paulson & Co.," told Bloomberg yesterday:

“Federal governments have been printing money at an unprecedented rate creating demand for gold as an alternative currency for individual and institutional savers and central banks alike. While gold can be volatile in the short term and is going through one of its periodic adjustments, we believe the long-term trend of increasing demand for gold in lieu of paper is intact.”


The above correlation shows that if you had a basic idea that soaring gold prices correlates with expanding monetary base, you would have lost money in the 1980 to 2001 time range.


The above correlation depicts the total known ETF holdings of gold (measured in troy ounces) versus the gold price. Obviously, as Goldman correctly pointed out in its case for shorting gold, gold ETFs had experienced significant outflows that are not likely to abate soon.

The key takeaways are that investor sentiment plays a more crucial role in prices, as the unprecedented fall in the price of gold may be due to panic selling from margin calls, the consequence of the herd selling from retail investors in gold ETFs or investors waking up to reality that the shiny metal is absolutely “useless,” to paraphrase Buffett, in this muted inflationary environment.

Note: This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer to buy or sell any securities.

About the author:

Agnostic trader. CAIA and CHP charterholder. Twitter: @hedgefundtrades

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Rating: 5.0/5 (1 vote)


Shaved_head_and_balls - 4 years ago    Report SPAM
Somebody needs to tell the 1 billion residents of India that gold is useless. They're consuming the 25% of the world's supply of useless gold for weddings and silly investments. With some education, Indians will stop buying useless gold and spend more money on popular, useful American items like milk shakes & hamburgers, expensive dog breeds, and everything-but-the-kitchen sink car insurance plans from Geeko.

(Buffett needs to get out of Cornhole, Nebraska more.)

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