Monday, November 30, 2009

The Scale of Hedge Fund Gold Purchases

In case you missed it... early last week The Reformed Broker detailed the incredible amount of gold that hedge funds (in this case Paulson & Co.) have accumulated in a very short period of time:

John Paulson of Paulson & Co, the legendary hedge fund manager who made tens of billions betting on the mortgage crisis between 2007 to 2009, likes gold. He really likes it. He likes gold more than a friend.

To most market participants, this is not news, but here’s something you probably didn’t know: Paulson owns more gold than several major countries! Combined!

Retail investor (and more recently this hedge fund) support has made gold a one way bet for much of the past 6+ years. Thanksgiving's Dubai debacle however provided a glimpse into how quickly this may potentially all come to an end. Per the FT Alphaville:
Gold had at one stage dropped as much as 5 per cent as it responded to safe haven flows into the dollar. The precious metal has since recovered to trade about 3 per cent lower at $1,155.80.

Commenting on the sell-off, Davies — who had moved his fund to its maximum 50 per cent under weight gold position:
“It happened so quickly, I’ve never seen a quicker paper liquidation in gold ever.”
Don't fret... gold has snapped back / stabilized and now is once again within striking distance of new highs (chart below per Kitco).

Regardless of what is or is not a justified price for gold, the only thing that matters is the next price that a buyer or seller is willing to transact. And while I continue to expect to see a one-sided trade, when that one sided trade ends, it has the potential to get real ugly, real fast (though I think we are still a long ways away) as this "tonnage" hits the market.