When Will It Glitter, Mr. Paulson?

Chidem Kurdas

Chances are, John Paulson does not know when gold will become a profitable investment. Neither do his clients nor really anyone else.

But the Paulson funds remain significantly invested in the metal. Presumably the clients – among them large institutions – want this exposure.

Paulson & Co. funds not only have $987 million in the SPDR Gold Trust but own shares of various gold producers, including but not limited to $205 million of Anglogold Ashanti Ltd and 129 million of Novagold. Altogether it comes to almost $1.4 billion in gold-related investments.

This interest in gold by Paulson and his investors is not new, but what is the current rationale?

In other words, why are pensions and other institutions holding gold? It’s down about 10% for the year and shows no evidence of recovery.

Three types of explanation are common:

  1. Gold is now cheap.
  2. It diversifies your portfolio.
  3. You need a safe haven.

The third item is the convincing answer. The price may be low but it can stay that way for decades—it did so in the past. And people usually don’t diversify into assets that have bad prospects. But if you fear another credit crunch, you may want to hold gold.

If credit markets get panicky, then gold will probably gain and diversify a portfolio beneficially.

We don’t know if that will happen in 2016, although falling junk bonds are suggestive.

In the meantime, one loses money on gold. You could buy protection in other ways, say via credit default swaps. But those aren’t cheap either and they are not as solid as gold.

So it is an intriguing question that goes beyond Paulson & Co. holdings. Gold is an indicator of sorts.

You’ll recall that Mr. Paulson made a fortune by correctly predicting the collapse of the property bubble. Perhaps he suspects the high-yield bond bubble is close to collapse. That would make gold glitter.

 

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