We’ve been keeping a close eye on John Paulson’s recent fund management woes, brought about in large part through his holdings in gold and related stocks….
In our May edition of SBM we published an article (see page 18) about Paulson’s holdings based on his funds’ 13F filing with the U.S. SEC, relative to the fourth quarter of 2012. Unlike Louis Bacon, for who risk management is everything; John Paulson is more of the bet-the-ranch style trader, in contrast to his early years managing funds when he was more risk aware and was principally involved in arbitrage bets. But, as portfolio funds grew into the billions, he started taking more chances. It is clear that he became more emboldened following the billions he reaped in betting against the subprime market but, it’s fair to say, that hubris has also played a part in his recent difficulties…
With more than 20% of Paulson’s entire portfolio committed to gold & gold related assets, the question is will he blink as the price slides lower and more importantly, is he right? Let’s take a closer look at what he’s doing.
Firstly, we must disclose here that we need to simplify and make some assumptions in order to analyse his 13F filings. These filings report the hedge funds holdings at the end of each quarter and are released around 45 days after that quarter ends and so means that we only have an historic picture of what they’re doing. At the time the funds fill in the form they may actually own a completely different portfolio.
In order to compare Paulson’s holdings, we assume that any changes occur just at the end of the quarter. For example, Paulson increased its holding in Sprint during 1Q2013. For our computations we assume that only happened at the end of the quarter, precisely at the end of March. For simplification purposes we only look at top 10 holdings too instead of the whole portfolio. These holdings represent more than 50% of Paulson’s total portfolio however.
Let’s then look at holdings at the end of 4Q2012.
Assuming he held all the above investments until the end of March 2013, he ended the quarter with a profit of around $194 million on his top 10 holdings. His bets, apart from gold, have all been winners. But, the part which concerns us is gold. He lost $165 million in SPDR Gold Trust and an extra $220 million in Anglogold, a senior gold miner, for a total loss of more than $385 million. Do you remember those two black sessions on April 12th and 15th, when gold declined more than 10%? Well, Paulson certainly remembers it as he lost more than $500 million over those two sessions!
Let’s now look at his holding as reported in the latest 13F filing.
Again, we assume the holdings at the end of March are kept over the second quarter. This way the profit/loss column refers to the current quarter potential gain/loss. Paulson is revealed as having trouble with gold once again. The SPDR Gold Trust wiped out $445 million from his portfolio and AngloGold an extra $170 million, for a total gold-related loss of $614 million. If we add the Q1 loss of $385 million, Paulson has lost $1 billion with his gold bet this year.
In general terms, we believe that the thesis behind Paulson’s team to bet on gold is actually sound and reasonable. With central banks, in particular in the United States and Japan, printing money as never before, there’s a sound basis to his expectation that the US dollar is being steadily debased,that inflation will ultimately pick up and that the gold prices will explode. That has happened in the past.
Unlike under the gold standard (which we write about extensively in the latest edition of our magazine), and when there was no real way to generate inflation, the ability to print at will by central bankers will always ultimately act as a depressant on a currencies value – just look at what the Japanese are now doing. Problem is the inflation pipeline is clogged and it’s taking its time to make its presence felt…
Inflation hasn’t picked up yet and the FED is in fact now making noises about decreasing or even put an end to QE3. If that happens before the end of the year, gold may suffer further and thus Paulson’s portfolio will be at risk again. For someone willing to risk everything on gold, it may just be better to buy the SPDR Gold trust instead of investing in Paulson’s portfolio’s and paying a 20% fee on profits!
If you want to know more about the risks of inflation and the gold standard, make sure you read the next edition of our magazine out soon. Stay tuned!