John Paulson bets on a gold company

John Paulson's fund has taken a huge stake in AngloGold Ashanti, a South African gold miner. For those familiar, Paulson is famous for making billions off his correct call of the housing meltdown. I know very little about his fund or his strategy other than the fact that he is a hot investor right now. Change Alley picked up the same story but there is an article in The Globe & Mail as well.

Paulson & Co. paid $1.28-billion (U.S.) yesterday for an 11-per-cent stake in AngloGold Ashanti Ltd., one of the world's largest miners of the precious metal.

The deal is just the latest example of a major international investor buying into bullion as a safe haven amid the global financial crisis.

As the economic meltdown has worsened in recent weeks and months, firms such as Eton Park Capital Management LP, Greenlight Capital Inc. and Hayman Advisors LP have been boosting their exposure to the yellow metal.

...


Paulson owns about 28 million shares of Toronto's Kinross Gold Corp. or about 4 per cent of the company, according to regulatory filings. Earlier this month, Paulson told clients it will offer investors a new share class pegged to the price of gold.

...


Paulson isn't the only hedge fund getting into gold in the belief that the metal will prove a store of value as some countries default on their debts, putting negative pressure on currencies. According to The Wall Street Journal, gold is the largest investment in the portfolio of Greenlight Capital Inc. The New York-based fund, which is led by David Einhorn, has been buying exchange-traded funds holding gold as well as gold futures contracts.

Hayman Advisors, another fund that boosted returns by betting against subprime mortgages, is also buying gold.


I'm not up to date on gold companies but from what I remember from a few years ago, AngloGold Ashanti (AU) was a high-cost gold producer with most of its operations in South Africa. Needless to say, it was hurt for many years by the decline in the US$ against the South African Rand. I don't know what their present situation is (maybe they hedged the currency--but this would have backfired last year.) Many base metal investors may not realize it but a lot of gold companies have been losing money all throughout the bull market in gold. I think AngloGold Ashanti has lost money for the last 5 years, even though gold went from around $250 to $1000. If my impression of AngloGold Ashanti as a high-cost producer is correct, this means that it has super-high leverage to gold. Small changes in gold price will significantly alter profits. It's not clear if the Paulson bet is a macro bet on gold rising much higher; or if it is a "value type" investment and a bet on AngloGold Ashanti recovering.


There are several hedge funds that are starting to bet heavily on gold and gold companies. David Einhorn of Greenlight seems to be betting his future on gold, now that it is the largest holding in his portfolio.


As for me, I'm bearish on gold and shorting gold may be one of my big investments this year. I'm waiting for gold to hit a speculative peak, like oil last year. Perhaps all these hedge funds jumping into gold--gold is a small market so hedge funds can easily distort prices--will be the catalyst to cause a mania in gold.

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