Gold’s Pullback
- What’s the scuttlebutt?
- Paulson’s dilemma
- Really, really good news
Thank Mr. Paulson for gold’s recent stutter step.
No, not Hank Paulson, the former Treasury Secretary and Goldman Sachs (NYSE: GS) Chief Executive. Although, you can make a pretty good case that easy money from Hank Paulson in concert with easy money policy before him (thanks to Fed Chairman Ben Bernanke and Alan Greenspan) certainly helped contribute to gold’s intrepid climb…
But I’m
talking about John Paulson; the brilliant hedge fund manager with the huevos to
bet against sub-prime mortgage securities (and make $20 billion in the
process). Wall
Street Journal reporter Greg Zuckerman calls this move “The Greatest
Trade Ever.”
And no wonder. Paulson took a reasonably sized $12.5 billion hedge fund and nearly tripled its holdings to $36 billion in less than 18 months between July 2007 and November 2008. That was a time when everyone else was losing their shirts as the DOW dropped by nearly 50 percent.
Right now, if you own gold, you’re in good company. About 10% of Paulson’s hedge fund, Paulson & Co., now holds various gold securities as well as physical gold.
So how is he responsible for this pullback in gold?
You might have heard the news on Friday about Goldman Sachs’ recent trouble with the SEC. The SEC is suing Goldman for defrauding investors of collateralized debt obligations (CDOs). The fraud comes in because Goldman (allegedly) did not disclose to CDO investors that Paulson & Co. helped put together these investments while at the same time betting against them.
That’s kind of like a car dealership selling you a car that was assembled by a mechanic who also happens to be betting the drive train will fail.
It seems that Paulson’s foresight in betting against mortgage backed securities issued by Goldman Sachs has his fund under scrutiny from the SEC as well.
This scrutiny is making some people nervous about owning the same gold securities as Paulson & Co – which is having a downward effect on all gold securities, not least of which is gold itself.
But even if Paulson wasn’t embroiled in this lawsuit, his fund still owns 2 million shares of Goldman Sachs. He bought the shares back in August, 2009 when they were worth $320 million. Paulson’s Goldman holdings hit a high of $382 million, but the recent news brought them back down to $320 million. That’s not a trade the hedge fund manager can be pleased with.
*****Will he sell off his substantial gold holdings to take the sting out of his Goldman trade? I don’t think so. If Goldman Sachs is in real trouble, it’s more likely that Paulson would sell Goldman and buy gold.
Will his fund get liquidated by the SEC if he’s found to be complicit in Goldman’s crime?
I doubt it – for the very reason that I just don’t think Paulson & Co. did anything wrong. The fact that they consulted with Goldman to package together mortgage securities into CDOs doesn’t make them liable for Goldman’s deceit.
The good news – in fact, the great news is that I think this grave situation for gold prices is nothing but another great buy opportunity for gold investors.
It’s important to never believe you can time the market perfectly, but if you believe in a trend, it’s best to buy in dips.
Take a look at this chart showing gold prices for the year:
I’ve included three lines that represent what’s called a Raff Regression Channel.
This
channel (by no means set in stone) basically represents the current trend in
gold prices. It shows where the yellow
metal is likely to continue trading if the trend stays in place.
If all this “bad news” about Paulson and his gold holdings moves the price down, but it still stays within the channel, prices will likely bounce off of the $1100 mark in the next two weeks.
If gold prices break below that mark, it could signal lower lows for the near term.
In any event, it’s wise to use this opportunity to add to your position in gold. I’ve said to buy on pull-backs before, but we really don’t get many great chances like this to buy in substantial dips. I wouldn’t back up the truck under $1100, nor would I forego buying above that price. The best way to accumulate a position (in any security, really) is to buy in tranches. They call it “averaging in” to a position.
You might add to your position at $1150, and again at $1100 – and if it dips below that mark, make another addition.
To do so, I’d suggest buying shares of gold companies for their ability to multiply gains in gold. You can click here to read about this tendency in a recent issue of the Resource Prospector. It’s helpful to use the price of physical gold as a benchmark for building positions in gold stocks. It’s not a perfect method, but it’s certainly better than building a position with randomly timed purchases.
If you’re interested in investing in gold stocks, I recommend taking a trial subscription in Global Commodity Investing. Some of our recent gold recommendations are up 102%...51% and 35% so far. You can see what Global Commodity Investing is all about by clicking here.
Good investing,
Kevin McElroy
Editor
Resource Prospector
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