Paulson and Co. made an interesting decision last week:
"At the request of clients and consultants, we will be reporting the
performance of our Gold Funds separately to investors in those funds and
interested parties," Paulson wrote to clients. The firm's gold
investments "have received a disproportionate amount of attention over
recent months"—as gold prices plummeted—"and have detracted attention
from the performance and positive developments of our other funds."
They key instigation is that despite being only 2% of the firms assets, the Gold Fund's -47% performance (not a typo) is getting all the attention. This would make sense, except that most of his fund is gold-denominated (e.g. gold-share classes).
This means that even the funds that are doing well, such as the credit funds (up 16.7% ytd) are often overwhelmed by the gold losses. Roughly 85% of Paulson's aum is in gold share classes so that the best fund's 16.7% is usually realized as -30.3 = 16.7%-47%. In other words, gold does matter greatly to the Paulson & Co. as a whole.
I do believe this is a unique situation and opportunity to learn (and possibly profit) as it is a purely marketing and psychological move meant to soothe investors' and consultants' fears. Like a many trader when a large position moves against him/her, the natural instinct is to ignore and hope it comes back. This phenomenon is well-known and is inherent to us as humans.
In this case, it is Paulson & Co.'s unwillingness to truly consider a fundamental misunderstanding of gold. Indeed, the below statement shows the fallpack to general statements:
“Federal governments have been printing money at an
unprecedented rate creating demand for gold as an alternative
currency for individual and institutional savers and central
banks alike,” John Reade, a partner and gold strategist at
Paulson & Co., said yesterday in an e-mailed statement. “While
gold can be volatile in the short term and is going through one
of its periodic adjustments, we believe the long-term trend of
increasing demand for gold in lieu of paper is intact.”
As the the largest holder of GLD at 6.7%, it is not stretch to say that the first represents a large part of the gold bull arguments and crowd. What happens if the crowd realizes it can't take the pain?
Disclosure: I am short GDX.
(icon/picture source: http://sophlylaughing.blogspot.com/2012/03/home-cognitive-dissonance-ki…)
