Stanley Druckenmiller closed his hedge fund to the public in 2010. His Duquesne Capital now manages just family money, but he still makes his holdings public.
He’s a pretty darn good investor too. For nearly 15 years before closing his fund to the public, Druckenmiller generated returns of close to 30% a year.
Druckenmiller has always been a “big bet” investor. If he finds something he feels strongly about he’ll bet a large part of his fund on the trend or stock. Well, a couple of weeks ago he announced his latest big bet is on gold.
Commodities have really been under pressure of late. The S&P commodity index is down 43% over the last year, and gold has been one of its worst-performing components. Gold is now at five-year lows.
Druckenmiller’s Gold Bet
Druckenmiller added the SPDR Gold Shares (NYSEArca: GLD) to his portfolio during the second quarter. But it wasn’t just any position: it’s now his largest holding and makes up 20% of the portfolio.
Back in April, I noted that Druckenmiller saw the biggest threat to the markets being the Federal Reserve’s policy of zero-interest rates. Thus, it only makes sense that he’d use gold to bet against the Fed and interest rates. Ultimately, Druckenmiller feels that the debt-fueled economy, driven by companies taking advantage of low interest rates, will be seriously hurt as rates rise.
Alternatively, instead of buying gold, one could buy the companies that actually dig the yellow metal out of the ground. The broadest way is with the Market Vectors Gold Miners ETF (NYSEArca: GDX), which is down 45% over the last year. The ETF’s top holdings are the likes of Goldcorp (NYSE: GG) and Randgold Resources Ltd. (NASDAQ: GOLD). It also has a significant allocation in the world’s largest gold producer, Barrick Gold Corp. (NYSE: ABX).
However, Barrick has been punished more than the others, with its stock down close to 80% over the last three years. This comes as a result of poor timing, as it took on a lot of debt to make acquisitions and start new projects. Still, Barrick has some of the lowest operating costs in the industry.
Buffett Begs to Differ
Yet these miners are beholden to the price of gold. And much of the market has a love-hate relationship with the commodity. Warren Buffett has said that gold is a way of going long on fear, but he doesn’t believe in owning.
While Druckenmiller and Buffett don’t necessarily agree on gold, one thing they do agree on is Wells Fargo (NYSE: WFC). Buffett has the big bank as Berkshire Hathaway’s (NYSE: BRK-B) largest public equity holding, which makes up nearly a quarter of its portfolio. Meanwhile, Druckenmiller has Wells Fargo as his third-largest holding.
Along those lines, Buffett was asked in 2009 where he thought gold would be trading in five years. He responded: “I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money.”
Gold is a great fear bet. If you believe that the correction we saw last week was a preamble of more pain to come, gold prices could finally be ready to move higher, given that it’s still a safe haven and flight to safety play. It would appear that Druckenmiller is making the bet that low interest rates have done more harm to the economy than good.
How Rockefeller really got rich
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