Is gold a bubble that is finally bursting? This is the big question on Wall Street after the metal dropped $104, or 5.6 percent, on Wednesday. It is down more than 7 percent after hitting an all-time high on Monday.
In fact, a number of hedge fund managers attributed to gold their gains in July, which was otherwise a difficult month in which to make money. They include include Greenlight Capital’s David Einhorn and Third Point’s Daniel Loeb, who cited gold as one of his five biggest winners in the second quarter.
For his part, Jim Cramer of CNBC says gold is not a bubble, arguing that it is a currency. He feels its price is being driven by strong demand, especially from central banks. His order of preference is bullion, then the GLD exchange-traded fund and then gold mining stocks.
Right now, all of these plays are plummeting. This could just be a correction before they resume their mind-boggling climb.
But if gold is truly a bubble that is now bursting — like energy prices did in mid-2008 after a stunning run-up in the first half of that year — a number of high-profile hedge funds stand to lose a lot.
No one is poised to implode harder than John Paulson, who has staked virtually his entire fortune on gold and related investments. And he can ill afford another big loser in his portfolio: Through August 12 his Advantage Plus fund was already down 33.5 percent year-to-date.
For one thing, most of Paulson’s personal money is in the gold share classes of his various hedge funds or his gold fund.
In addition, his funds are heavily exposed to gold. For example, at the end of the second quarter, his firm, Paulson & Co, owned nearly $6 billion worth of the SPDR Gold Trust ETF. Paulson had an additional $1.76 billion in AngloGold Ashanti, a major global gold producer based in South Africa.
These two positions made up 30 percent of Paulson & Co.’s equity assets alone. The hedge fund manager also had an additional $400 million invested in Gold Fields, another South African gold miner.
Meanwhile, at the end of July, Loeb said gold was his biggest investment.
Elsewhere, at the end of the second quarter, John Griffin’s Blue Ridge Capital was the largest investor in Market Vectors Gold Miners, an ETF that invests — you guessed it — in gold mines. Greenlight Capital was the third-largest holder. However, keep in mind that the ETF accounted for a very small part of the respective portfolios.
Some hedge funds took new positions in gold in the second quarter, suggesting they could be late to the game. They included Cobalt Capital Partners, which bought 360,000 shares of SPDR Gold Trust in that period, making it the ETF Cobalt’s fourth-largest holding.
Otherwise, while many investors have been talking up gold, few seem to have made the same big personal bet that Paulson did.
You get the feeling that 2011 will be the watershed year for Paulson’s long-term legacy.
