Monday, August 19, 2013

John Paulson's inflation call and the price of gold

John Paulson is the epitome of staying power. Back in 2006 he formed the opinion, shared by a small number of others, that the inexorable rise in the price of housing in the USA  was actually a property bubble that was just waiting to burst spectacularly. As anyone who has read Gregory Zuckerman’s book, The Greatest Trade Ever, will realise, turning this insight into profit was anything but a straightforward affair. While he was not alone in chasing the same payoff, Paulson was the only one with the inner strength, resourcefulness and sheer staying power to make a success of it.

Now this staying power is being tested again. Three years ago he went public on his belief that rampant inflation was the inevitable consequence of US monetary policy, in particular the Quantitative Easing (QE) that has been undertaken by the Federal Reserve, which Paulson characterised as “printing money”. He predicted that the US would have double digit inflation by 2012 and urged anyone who listened to invest in gold in order to counteract such a dramatic fall in the purchasing power of cash money.

Naturally, he bought into gold himself and this strategy has worked well for him since the time he made those remarks, at least up to the end of 2012 (is there a connection – did other gold buyers take Paulson’s words that literally?), when the precious metal began to undergo a serious fall that has been sustained until very recently. And from the perspective of Technical Analysis the current rise is still no more that a retrace in a dominant downward trend.

It is now well known that Paulson has sold most of the gold he had held in the form of the SPDR Gold Shares exchange traded fund (ETF). This does not necessarily mean he has suddenly converted. The old obdurate streak continues in the fact that he has, reportedly, hedged this move by buying gold swaps on the over-the-counter (OTC) market. Apparently this is a cheaper way of backing his continued belief that inflation is still a real threat. It also, according to an article in the Financial Times, makes his gold holdings less transparent:

"Paulson & Co’s move to shift some more of its gold position into the OTC market will make its holdings less transparent. Fund managers must report positions in GLD in quarterly filings to the Securities and Exchange Commission, but not positions in commodity markets, such as the OTC gold market". 


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