by Paula Schaap ,Senior Reporter , September 9, 2010
Hedge fund managers are getting into gold in a big way.
Not another week goes by when names like John Paulson, George Soros and David Einhorn are said to increase their shares in gold ETFs or mining companies.
Articles expounding one hedge fund managers’ views or another on the pluses of owning gold, or gold-related investments, whip up frenzy in the investment manager world. Not to mention those smaller investors commonly referred to as “gold bugs.”
Gold is viewed by many as a hedge against inflation and as a bulwark against economic chaos, in general. Then, there’s the fact that, as a precious metal, it’s so darned pretty.
But, as the Fed keeps interest rates at close to zero and the U.S. economy remains on a too-slow track to recovery, is gold still the investment panacea that it’s touted to be?
Shelley Goldberg, the director of global resources and commodities strategy at Roubini Global Economics (RGE), says, “Gold tends to do well on either side of the fat tail being: either, one, a depression or a deep and long recession or, two, a growing strong economy with fear of or actual inflation.”
“A year ago, people were buying gold because of fear of inflation,” Goldberg says. “The more probable feeling now, on the other side of the fat tail, is a long recession or double dip. That’s why you’re seeing a lot of money pouring in.”
At first glance, hedge fund manager Eric Mindich’s investment in the SPDR Gold Trust would seem to bear out the general rush toward the metal. His investment in the gold ETF fund was valued at about $800 million in the second quarter, according to a regulatory filing.
Except Mindich, being a hedge fund manager, has put and call options on his trade in gold, according to the filing. Although what these options mean in dollars can’t be calculated because there’s no information about his strike price, it shows that the Eton Park Capital Management founder is, in some way, hedging his bet.
That is exactly what volatility trader Bruce Gwyn, founder of commodities hedge fund firm Level III Trading, has to say about gold.
“I’ve been looking for entry points on the short side of gold, with a risk point,” Gwyn says. “Trading might go $500 higher from here -- I don’t think it will -- but if that happens, from a trading perspective, we’ll look for an opportunity to sell it on a rally.”
“And if it doesn’t work out and the market goes around me and we exit with a small loss, I’ll be on the sideline again watching,” he says.
Yet gold bugs everywhere are sure that they have the answer to what ails the economy, or, at least, their corner of it.
Gold spot prices are up 47% since January 2008, closing at close to $1,250 per troy ounce in London during the opening days of September, in line with thinking that as the economy fails to recover, or even worsens, gold is being sought out by investors as the one true metal.
There are many ways to invest in gold, including buying the metal itself, investing in the equities of mining or related industrial companies, or buying gold ETFs. One of the most popular ETF funds is the SPDR Gold Trust, whose price, like the metal, has shot up since it was introduced Sept. 8, 2009: up 25% at its close of $122.08 on Aug. 31.
Goldberg says each of the ways money managers can invest in gold have their limitations.
Take mining, for example. Goldberg says that the mining industry in general, be it energy or metals, has gotten to a point where the easily-reached deposits have already been mined.
“You have to go down three miles now to find gold in sizeable veins,” she says. “The cost of building a mine is up about 50% in the last five years.”
ETFs on the other hand, which are based on physical gold or futures, present a different set of challenges.
“If they’re based on physical gold,” Goldberg says, “there should be enough gold supply to back them. But what if there isn’t?”
“If they’re based on futures, and all of a sudden, all these funds start to sell, like any futures, the price will fall precipitously,” she says.
But the big question, no matter what the manner of gold investing is, has it reached the end of its play?
Gwyn says he isn’t sure the rally will last.
“During the last two weeks, the managed money guys, who are big trend followers, have been very reluctant to buy this rally,” he says. “And I’m not saying that’s good or bad, but it’s different.”
RGE is forecasting the probability of a double dip recession at about 40% now, Goldberg says.
Still, the firm believes that while there is still strength in gold, “it’s not the ideal long-term prospect for investment,” she says.
“While gold is still a good investment in times of fear and uncertainty, most of today’s thinkers are in the middle of those two fat tails; with the biggest cushion on the depression/deflation front being emerging markets,” Goldberg says.
But what about the Paulsons, Mindichs, Einhorns and Soroses of the world and their big buy into gold?
“[Big managers] are always trying to throw people off the trail. They say one thing and they could be maneuvering a little differently,” Gwyn says. “As a trader, I would never build a big position and go out and tell everyone about it.”
“I think it’s all a big hype and from a technical, from a trading aspect, I look for chinks in the armor and make a trade from that,” he says.
Related Stories
Paulson Flagship Down in Aug, But Gold Up
Guest Article: Gold Top?
Not another week goes by when names like John Paulson, George Soros and David Einhorn are said to increase their shares in gold ETFs or mining companies.
Articles expounding one hedge fund managers’ views or another on the pluses of owning gold, or gold-related investments, whip up frenzy in the investment manager world. Not to mention those smaller investors commonly referred to as “gold bugs.”
Gold is viewed by many as a hedge against inflation and as a bulwark against economic chaos, in general. Then, there’s the fact that, as a precious metal, it’s so darned pretty.
But, as the Fed keeps interest rates at close to zero and the U.S. economy remains on a too-slow track to recovery, is gold still the investment panacea that it’s touted to be?
Shelley Goldberg, the director of global resources and commodities strategy at Roubini Global Economics (RGE), says, “Gold tends to do well on either side of the fat tail being: either, one, a depression or a deep and long recession or, two, a growing strong economy with fear of or actual inflation.”
“A year ago, people were buying gold because of fear of inflation,” Goldberg says. “The more probable feeling now, on the other side of the fat tail, is a long recession or double dip. That’s why you’re seeing a lot of money pouring in.”
At first glance, hedge fund manager Eric Mindich’s investment in the SPDR Gold Trust would seem to bear out the general rush toward the metal. His investment in the gold ETF fund was valued at about $800 million in the second quarter, according to a regulatory filing.
Except Mindich, being a hedge fund manager, has put and call options on his trade in gold, according to the filing. Although what these options mean in dollars can’t be calculated because there’s no information about his strike price, it shows that the Eton Park Capital Management founder is, in some way, hedging his bet.
That is exactly what volatility trader Bruce Gwyn, founder of commodities hedge fund firm Level III Trading, has to say about gold.
“I’ve been looking for entry points on the short side of gold, with a risk point,” Gwyn says. “Trading might go $500 higher from here -- I don’t think it will -- but if that happens, from a trading perspective, we’ll look for an opportunity to sell it on a rally.”
“And if it doesn’t work out and the market goes around me and we exit with a small loss, I’ll be on the sideline again watching,” he says.
Yet gold bugs everywhere are sure that they have the answer to what ails the economy, or, at least, their corner of it.
Gold spot prices are up 47% since January 2008, closing at close to $1,250 per troy ounce in London during the opening days of September, in line with thinking that as the economy fails to recover, or even worsens, gold is being sought out by investors as the one true metal.
There are many ways to invest in gold, including buying the metal itself, investing in the equities of mining or related industrial companies, or buying gold ETFs. One of the most popular ETF funds is the SPDR Gold Trust, whose price, like the metal, has shot up since it was introduced Sept. 8, 2009: up 25% at its close of $122.08 on Aug. 31.
Goldberg says each of the ways money managers can invest in gold have their limitations.
Take mining, for example. Goldberg says that the mining industry in general, be it energy or metals, has gotten to a point where the easily-reached deposits have already been mined.
“You have to go down three miles now to find gold in sizeable veins,” she says. “The cost of building a mine is up about 50% in the last five years.”
ETFs on the other hand, which are based on physical gold or futures, present a different set of challenges.
“If they’re based on physical gold,” Goldberg says, “there should be enough gold supply to back them. But what if there isn’t?”
“If they’re based on futures, and all of a sudden, all these funds start to sell, like any futures, the price will fall precipitously,” she says.
But the big question, no matter what the manner of gold investing is, has it reached the end of its play?
Gwyn says he isn’t sure the rally will last.
“During the last two weeks, the managed money guys, who are big trend followers, have been very reluctant to buy this rally,” he says. “And I’m not saying that’s good or bad, but it’s different.”
RGE is forecasting the probability of a double dip recession at about 40% now, Goldberg says.
Still, the firm believes that while there is still strength in gold, “it’s not the ideal long-term prospect for investment,” she says.
“While gold is still a good investment in times of fear and uncertainty, most of today’s thinkers are in the middle of those two fat tails; with the biggest cushion on the depression/deflation front being emerging markets,” Goldberg says.
But what about the Paulsons, Mindichs, Einhorns and Soroses of the world and their big buy into gold?
“[Big managers] are always trying to throw people off the trail. They say one thing and they could be maneuvering a little differently,” Gwyn says. “As a trader, I would never build a big position and go out and tell everyone about it.”
“I think it’s all a big hype and from a technical, from a trading aspect, I look for chinks in the armor and make a trade from that,” he says.
Related Stories
Paulson Flagship Down in Aug, But Gold Up
Guest Article: Gold Top?
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