Despite Losing Big, John Paulson Still Loves Gold

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Hedge fund titan John Paulson has received a lot of negative press in recent months over his firm’s gold position. Paulson’s fund, Paulson & Co., maintains a sizable investment in gold.

But as gold has tumbled, Paulson’s gold holdings have performed terribly. According to Bloomberg, in June, Paulson’s gold fund was down as much as 65% this year.

Despite suffering enormous losses, Paulson sees no reason to give up. At CNBC’s Delivering Alpha Conference last week, Paulson said the case for owning gold hasn't changed

Paulson’s gold holdings

As of his firm’s last 13F filing, Paulson held numerous gold-backed positions.

Notably, Paulson had a huge stake in the SPDR Gold Shares (NYSEMKT: GLD). In fact, it was the firm’s single biggest position, with over 21 million shares held at a market value of over $3 billion.

Paulson also owned a number of gold miners. AngloGold Ashanti (NYSE: AU) was his fourth biggest position with over 28 million shares, while NovaGold (NYSEMKT: NG) was down at number 29 with just under 36 million shares. But even being his 29th largest position, NovaGold was still better than average -- Paulson holds over 100 different stocks.

The gold ETF

GLD isn’t the only gold-backed ETF, but it is by far the largest. Its $37 billion of assets dwarf the $11 billion held by its iShares Gold Trust rival.

GLD has an expense ratio of 0.40%, meaning that investors who hold GLD in place of gold bullion have to pay a fee for the privilege. Nevertheless, buying and selling gold bullion can often be difficult and time consuming. For many, holding shares of GLD may be preferable to owning the actual metal.

GLD’s performance has matched spot gold prices fairly well. Over the last year, GLD is down about 18.6%, while spot gold prices are down about 18%.

For the most part, GLD should be expected to perform roughly in line with the actual price of gold going forward.

Paulson has argued for AngloGold Ashanti in the past

Paulson has been a vocal proponent of AngloGold Ashanti in the past. At last year’s Ira Sohn Investment Conference, Paulson pitched AngloGold as one of his best investment ideas.

Back then, he argued that it was cheaper to own AngloGold than it was to own GLD, arguing that owning AngloGold was equivalent to owning gold at $133 per share. Unfortunately for Paulson, that investment hasn’t worked out. Shares of AngloGold are down nearly 60% in the last year, worse than the actual metal.

Labor unrest may have intensified the selloff. AngloGold is primarily a South African company, and the country has seen a recent wave of labor strikes, which remain unresolved. Last week, South Africa’s gold mining companies offered a 4% wage increase -- far below what labor had been demanding.

To its credit, AngloGold remains a remarkably low-cost producer. Last quarter, it cost the miner only $894 to produce an ounce of gold -- below the industry average of $1,100-1,300.

But as long as labor issues remain unresolved, AngloGold investors could continue to suffer.

NovaGold lacks geopolitical risk

As for NovaGold, it’s a relatively small miner (its market cap is under $1 billion), but it doesn’t carry the geopolitical risks of a company like AngloGold, as its mines are in the US and Canada. Yet, that hasn’t saved the stock; NovaGold has actually performed worse than AngloGold over the last year, falling a bit more than 60%.

Although it might not have the geopolitical risk, it doesn’t have the earnings -- AngloGold is profitable, NovaGold isn’t. Last quarter, the company lost over $10 million.

NovaGold has two main assets -- its property at Galore Creek, and its “flagship” Donlin Gold project. Management admits that it's shopping Galore Creek, though it has said it's in no hurry to dump the asset. Meanwhile, Donlin Gold remains undeveloped, still in the permitting stage.

Overall, NovaGold is a speculative bet on gold prices going higher.

The case for owning gold

Nuances of Paulson’s individual gold holdings aside, the fund manager believes the case for owning the yellow metal is still as strong as ever. He remains unsure of the timing, but believes that gold still carries the potential for outsized returns.

As Paulson explained last Wednesday, the amount of money printing undertaken by the world’s central banks has been unprecedented in recent years. In particular, the US Federal Reserve has tripled base money through its quantitative easing programs.

Paulson believes that -- eventually -- inflation will pick up, and when it does, it will be very good for gold. He thinks that gold’s recent selloff is largely attributable to investor restlessness.

Some investors, having seen consistently low inflation readings, may have abandoned the precious metal believing inflation isn’t coming. Paulson disagrees, believing instead that investors ought to remain patient.

Investing in gold

Gold has not been the best investment in recent years. Since August 2011, spot gold prices are down more than 30%.

Paulson’s investments in gold have likewise lagged, though the legendary hedge fund manager thinks investors ought to remain patient. There’s no question that central banks have printed a lot of money in recent years, and eventually that will trigger inflation -- though it’s anyone’s guess as to when.

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