Has gold suddenly lost its luster? George Soros seems to think so.
The Wall Street Journal reported that the 80 year-old Hungarian is lightening his exposure to gold, which earlier this week surged to a
record high of more than $1,575, as well as silver, which also hit a record high.
Answer our poll question (to the right of this story) about which commodity will rise most in price.
Meanwhile, on April 29, BofA Merrill Lynch told client in a report that the risk-reward favors stocks over gold, noting that stocks are trading at their cheapest valuation relative to gold since 1982. It also pointed out that gold has reached BofAML’s target price.
One person who has made a significant commitment to gold has not wavered from this conviction despite gold’s gargantuan climb—John Paulson.
The hedge fund manager, who has virtually 90 percent of his personal wealth tied up with the metal, told clients several weeks ago at The Advantage Conference that gold is not in a bubble. Rather, it is an alternative to the US dollar.
Unlike Soros, who is a macro trader, Paulson’s bet on gold is based on a forecast of higher inflation over next three to five years. He told clients the price of gold is correlated with the money supply. Paulson is concerned about the effects of the Federal Reserve’s Quantitative Easing on inflation. He explains the price of gold increases faster than the money supply in inflationary times, as the value of paper currency decreases.
So, he is hedging with his gold shares of his funds, his $1 billion gold fund, as well as with interest rate swaptions and real estate through the Paulson Real Estate Recovery Fund.
Sources assure Paulson, who takes a longer term approach to investing, has not wavered from this conviction.
Despite his inflation fears, Paulson is also bullish on the US stock market. He believes the market is undervalued, pointing out that the price-to-earnings ratio on the S&P 500 Index is close to historic lows. He figures it is currently 21 percent below its historical average over the last 25 years.
Paulson’s Gold Event Portfolio accounts for 15.9% of Advantage’s assets, which comprise nearly half of the firm’s $37.5 billion in assets. He believes gold producers in Advantage will add to returns while protecting against inflation.
AngloGold Ashanti, the third largest gold producer in the world, is the largest position in the Advantage Funds. Paulson reportedly told clients he believes AngloGold is the best managed gold company.
Overall, he believes gold stocks, with embedded leverage, will outperform a rising gold price.
On the other hand, he sold Osisko as it reached its target price.
