Why Gold Enthusiasm Is 'Cool' Again

Gold is glittering more than ever. All the fundamentals are in place for a big run in gold. The “hot money” has found a new friend: gold and gold stocks. As we looked at a few days ago, the big money pension and mutual funds are betting big on gold too.

The thing is, though, despite all of the attention gold is getting, 95% of investors will miss the biggest prize of all. Here’s why.

Gold is “Cool” Again

A few days ago the world learned that leading hedge fund manager John Paulson has started to place some very big bets on gold too.

Paulson has become one of the most closely followed hedge fund managers – and justifiably so. He personally pocketed more than $3 billion and made his clients a whole lot more by betting against subprime loans while the housing bubble burst.

So when Paulson makes a move, the entire financial world watches. This time, although he’s betting big on “boring” gold and gold stocks, was no different. The blogosphere and financial media lit up when Paulson’s firm disclosed how much gold and gold stocks it had bought.

Paulson’s firm said it had $2.8 billion in SPDR Gold Trust (NYSE:GLD) and $638 million in Market Vectors Gold Miners ETF (NYSE:GDX). It also had taken 2.6%, 4.4%, and 11.3% stakes in gold mining companies Goldfields (NYSE:GFI), Kinross Gold (NYSE:KGC), and Anglogold Ashanti (NYSE:AU) respectively.

With such a big bet, Paulson is almost single-handedly making gold “cool” on Wall Street. And gold stocks have been steadily climbing over the past month.

Good Things Come to Those Who Wait

No one can deny Paulson’s success. He spots an opportunity, gets a big leveraged position, waits for it all to unfold, and makes a fortune for himself and his clients in the process.

We all see the opportunity in gold though. Everything is there. We have the pending devaluation of the dollar. We have a very small gold market relative to the investment capital sitting on the sidelines. We have China quietly announcing it is going to buy a lot more gold (China said it was going to up its gold holdings to 3% of foreign exchange reserves from 1.6% - no timeline given).

It’s all there. And now Paulson is betting big too.

This run seems inevitable at this point. There is, however, one very big consideration a lot of folks following Paulson’s lead are forgetting. And that’s time.

You see, Paulson is good – really good. But a lot of investors are good at finding opportunities. The difference with Paulson is he’s patient and disciplined enough to maximize an opportunity. Just take a look at his bet against the subprime lending market.

According to Pensions & Investments magazine:

“Convinced that subprime mortgages would falter, [Paulson] did extensive research, hired staff with necessary expertise and in April 2005 began making a big bet, using credit default swaps to short the asset class.”

Think about that for a second. Paulson began betting against subprime mortgages in 2005. That was well before the housing market peaked and nearly two years before subprime markets started to falter in 2007.

He was right, but he was early. He stuck to his bet even though the housing market continued to do well. Eventually, it paid off.

Hot or Not?

How many investors do you know that are willing to wait two years or more for gold stocks to really pay off?

Two years is a very long time for Wall Street. And, when it comes to gold, there will be many “tests of will” (read: sharp corrections) which will sort out a lot of the weak hands.

First, the inflation/deflation battle is far from over. The deflationary forces of a credit contraction are incredibly strong. The Fed is printing a lot of money very quickly, but we haven’t seen much of an impact yet. Consumer prices still have barely nudged. Most of the run-up in gold and other real assets has come from expectations of future inflation.

Second, we’ve watched how the “hot money” hedge funds and traders don’t stick to a thesis for very long. Although the theses are completely justified, we have watched the average lifespan of a thesis decline to about two months.

For example, in the last six months sectors have fallen in and out of favor very quickly. Infrastructure stocks were very hot as the stimulus bill was being formed. The excitement hasn’t lasted. The for-profit education sector had a big run too. It didn’t last long though as expectations quickly exceeded reality. The entire sector quickly started to decline even though companies were releasing stellar quarterly results. Now we’re seeing the “fix-it-yourself” thesis which ran auto parts store stocks to lofty highs come to a slow and painful end as well.

The theses just don’t last very long. And when stocks in the sector quit making new highs every week the “hot money” sells out and moves on. The dominant gold thesis will likely run its normal course in the short-term as well.

Finally, it’s going to take a long while (I’m expecting a few years) for the gold story to play out completely. The economy is still in a tough spot. Investors are still more than willing to lend to the U.S. government. Every element of an inflationary firestorm is in place, but there haven’t been any sparks yet. Gold looks great, but it’s just attracting a bit too much attention at the moment for me.

The Price of Impatience

That’s why I’m not running in to “Buy gold NOW before it’s too late!!!”

Right now, gold is the hot sector. Expectations are soaring and it is only a matter of time until the “hot money” finds something new. Gold is glittering now and it will do so in the future, but it’s best to buy it when it’s not being watched so closely.

Yes, I’ve bought gold and gold stocks in the past. I will be buying gold stocks again in the future. It’s all part of my personal investment plan which I’m sticking too.

Inflation is coming. Real assets and shares of producers of real assets will do exceptionally well in the years ahead. For now though, it’s best to look for value in the real asset sectors.

The recent run-up in gold stocks has made many other real assets look downright cheap. There is much better value in other real asset sectors.

For instance, silver stocks haven’t kept up at all with gold’s recent rise. Oil has done well, but it could do much, much better than gold in the short-term if the economy does show some signs of life over the summer. Probably best of all though, is the opportunity shaping up in agriculture.

In the end, gold is good. If you don’t have any exposure, get some. If you do, just let the rally play out and stick to your plan. Chances are, this time isn’t “the big one” for gold, the rally will fizzle out, and there will be another long dry spell where gold is no longer very “cool.”

In the end, Paulson didn’t get to where he is by running with the herd. He got it by identifying an opportunity, consistently buying into it, and then waiting for the big payday. That’s something we can all take away.

Comments

[JBP:]

I mostly agree with your comments which go hand in hand with the thoughts of Jim Rogers. Jim thinks gold could fall back down to the 700's if the IMF starts selling some of their gold.

May 22 11:34 AM

[DONE_SONZ:]

AAA down grade and inflation are both very real.Win win for gold.

May 22 11:39 AM

[PastTense:]

"How many investors do you know that are willing to wait two years or more for gold stocks to really pay off?"

Actually I think most investors. I myself am considering retiring in 5 years and expect to be dead before 25 years are up--so that is the timeframe I am worried about.

I think the OP and most of the Seeking Alpha posters and readers are traders--not investors--though and expect much quicker returns.

May 22 11:52 AM

[20smoney:]

Really good article and excellent point about how patience is needed.

May 22 12:24 PM

[History Buf...:]

I beg to differ the IMF gold sale which keeps getting thrown out is about as irrelevant as it can get. They've been talking about this for what, the last six months now? And still no gold sale?

Greenspan used to try and talk the markets down when they got too overheated, it would sometimes work for a day or two. The central banksters have been trying to talk gold down for a much longer time. They were able to pull it off until 2001, then it stopped working.

I do agree, though, patience is needed in just about any kind of investing environment. But I will leave you with this.

Two years ago gold was around $650 an ounce. Today it's at $950.
Two years ago the DJIA was at 13,500, today it's at 8300. S&P500, two years ago, 1500. Today, less than 900. Nasdaq, two years ago, 2600, today 1700.

Look at those numbers and tell me which trend is your friend now?


On May 22 11:34 AM JBP wrote:

> I mostly agree with your comments which go hand in hand with the
> thoughts of Jim Rogers. Jim thinks gold could fall back down to the
> 700's if the IMF starts selling some of their gold.

May 22 12:43 PM

[cihat:]

I think there is a point missed:
These are not ordinary times, we are going through the worst recession and the only global recession of our lifetime.
So it is very wrong to treat technical charts etc. as if this is a normal market movement period.

The only greens seen are a result of one time TARP, incentive packages, spendings etc. which I was expecting to happen..
We call it ..wellness observed just before death....

This is like a bankrupt person finding an extra 10.000USD, so we cannot judge him with the times while he is spending the last 10.000 he found.

I personally expect that, we are not even at the beginning of the real destruction to come. If this was all, I would fire all the economy professors at the universities who scared all of us for nothing..(US jobless rate is still less than the small economic slump a few years ago)


So finally although gold hit 960 an ounce today it is merely a result of USD loosing value against Euro etc.

Can you guess what will happen when Euro and Yen also start their collapse in a year??

In local Turkish currency I did not make a penny yet gold going from 750 to 960 USD an ounce.. A gold coin worth 320 TL is stil 320 TL.

Real profit in Gold will begin when my country will also get to the point of printing its own money. They will have to, because they can't compete with a over valued currency and continue exporting like before..
Current decline in USD is all investors run away from USD.
.Buy anything but not USD..

Oil, Gold, Coffee, developing country stocks (after all stocks also have 'real assets' owned by their companies).. Soon this run will evolve into run away from all currencies and buying anything tangible they can find...Even houses will appreciate in value within 6-9 months due to 'Desired but not announced' inflation to explode worldwide...

May 22 01:00 PM

[GMiki1:]

Gold has gone up every year for the past nine years. According to Elliot Wave analyst Alf Field, we're in a powerful wave three up right now. True a lot of institutional investors have attention deficit disorder, but considering the fundamanetals such as return on investment, I expect gold--and silver--to pop this year.

As for the IMF boogie man--furgid about it. I'm surprised someone as generally astute as Rogers takes that seriously, but I guess he hasn't looked too deeply into it.

May 22 01:32 PM

[Mad Hedge F...:]

It won't go away. I can’t think of a better reason to keep a core long term position in gold than the prospect of the US losing its triple “A” rating. The chatter about this yesterday took the barbaric relic up to a two month high of $958, a mere $50 from an all time high. Quite honestly, I never understood why the American rating has stayed this high for this long. If any other entity had increased their debt from $5 trillion to $11 trillion over the last eight years, then boosted it to $13 trillion over the last three months, their rating would have been slashed ages ago. Like to the level of Zimbabwe. Is it any surprise that gold demand soared by 38% in Q1, according to the World Gold Council? And now the Russian Central Bank is allowing other banks there to pledge gold as collateral. Keep your gold position so you don’t miss the inevitable gaps up, as well as miners, like Barrick Gold (ABX).

May 22 01:46 PM

[GMiki1:]

The ratings agencies should have been more than ripped. They should have been indicted.

May 22 03:35 PM

[Roger Knights:]

Gold hasn't yet become a hot thesis among hedge funds. Few of them own it. It's just beginning to become institutionally fashionable--so it has a good ways to run before it becomes too hot.

Second, gold has an appeal to conservative funds beyond being a hot sector that attracts daring funds like Paulson's: It has a negative correlation with virtually all other sectors, including having only a weak correlation to commodities. This makes it a valuable stabilizing component of a portfolio. As I like to say, "Gold is a beta blocker." Funds are just beginning to add a pinch of gold to their holdings, but as it becomes conventional to do so, they will buy on dips, providing support that gold previously lacked and reducing its volatility. (Which will in turn make it even more attractive to conservative funds.)

May 22 04:35 PM

[Gtarras:]

All of a sadden the US AAA rating is the hottest subject. Shows once again, that investors are sheep. Your rhetoric is unreal. So what that debt jumped to $11 trillion? It is still 86% of GDP. After WWII the ratio for the US was about 150%, and still AAA rating was there. BTW, Japan's today ratio of debt to GDP is 220%....

Apparently, the herd needs to hear from Bill Gross (who, as usual, is talking his book), to start screaming that AAA rating is about to get slashed... Really? Then WHO/WHAT deserves AAA rating? Germany? Assured Guarantee? And what is a "AAA" rating???

Also, inflation is real?? When???


On May 22 01:46 PM Mad Hedge Fund Trader wrote:

> It won't go away. I can’t think of a better reason to keep a core
> long term position in gold than the prospect of the US losing its
> triple “A” rating. The chatter about this yesterday took the barbaric
> relic up to a two month high of $958, a mere $50 from an all time
> high. Quite honestly, I never understood why the American rating
> has stayed this high for this long. If any other entity had increased
> their debt from $5 trillion to $11 trillion over the last eight years,
> then boosted it to $13 trillion over the last three months, their
> rating would have been slashed ages ago. Like to the level of Zimbabwe.
> Is it any surprise that gold demand soared by 38% in Q1, according
> to the World Gold Council? And now the Russian Central Bank is allowing
> other banks there to pledge gold as collateral. Keep your gold position
> so you don’t miss the inevitable gaps up, as well as miners, like
> Barrick Gold (seekingalpha.com/symbo...).

May 22 04:52 PM

[InvestBaboo:]

All this theorization is good but I hasten to point out that Gold has strong buy signals and technical metrics on both daily and weekly charts. Every single listed Gold miner I could find is a buy on the charts. So I shut my eyes and loaded up on a bunch of Gold miners a couple of weeks back, posted as such on my blog urging readers to buy, and was handsomely rewarded for trusting the charts. During the same time the major indices retrenched a bit so what should have been a loss week actually became a profitable week thanks to the investment in Gold. What this points out is that Gold is a great hedge against MARKET UNCERTAINTY. Infllation while not a threat now is coming down the road. The massive decline in supply side investments in commodities with the current economic downturn will come to haunt us a few months down the road in terms of scarcity and higher prices. So there are plenty of reasons to buy Gold now.

May 22 08:53 PM

[BiggisNikk:]

Come on, Gtarras, You think this economy is as poised for an economic boom as we were right after WW2? And Japan, a creditor nation vs, our lame debtor's club? And just so you get a little learning on credit ratings, they are not relative-to ratings. It is possible that all the governments of the world could be downgraded. There is no "grading on a curve." As for inflation, try measuring it the way we used to before they started massaging the statistics at shadowstats.com.

May 23 06:55 AM

[cihat:]

By the way ths IMF gold sales did you ever bother to calculate how much it will be?
1 Metric ton = 32150 Ounces
If they sell 403 metric TOns (G-20 Meeting) mentioned
403 tons = 32150 x 403 = 13 Million ounces
13 Million ounces x1 ounce 950 USD = 12,3 Billion USD TOTAL

Assuming only TARP was 700 Billion USD , IMF Gold sale of 12,3 Billion USD is only Peanuts... Even Turkeys 3 month deficit is more than that amount....IMF gave more than that to even under developed countries...

If IMF sells all of its gold holdings 98 Billion USD (3200 Tons) it is still peanuts compared to TARP,
as there is so much paper worthless money from all countries flying around us.... I hope they sell it and we can buy more of it in the feature...If China and Russia don't before us...

I tell you what, if everyone asks and gets their gold in Physical Gold, Gold will be above 6000USD an ounce Today.....
The gold bought and sold on forex etc. with 400 times leverage does not exist on earth....

IMF Gold Sales is only a scarecrow when you calculate it !!!

May 23 09:49 AM

[Barryyes:]

@cihat:

Try this with Silver and you're talking about $50 Silver by next Friday!

May 23 10:10 AM

[sandspider:]

I just can not help myself. I went and bought some more gold and silver, despite the naysayers. On my end of the world we have the UAE wanting all of their gold from the London banks. And they want it now. London is pissed and dragging their feet. Does the UAE know something others don't. UAE is wondering away from Saudi some say because they are to much in bed with the US. Either way there will be at least two large gold consortium's here in the M.E. within a year. One will be in direct confrontation with Comex. Got to love it! And word on the street has it that Germany just told the US that they want their gold returned and no longer want to store it over in the America's. And they are dragging their feet. Hmmm, and now we have China making deals with several Third tier countries to trade for commodities in their currancies. Other words on the street is that China is using some of those good ole US treasury notes and junk bonds as collateral for hard goods which they are stock piling like mad. Examples being iron ore, copper etc. They even told the IMF go ahead and sell your gold.... I take that as "we got the money and we are buyers". Take that with the small amount of gold being offered and IMF will either put up or shut up. Doubtfull the bastards will shut up but I don't think they are going to cast into the waters either. There is so much out there that shows gold and silver are going to be going up. Yeah summer is on us and it may drop back but this fall I can not see even the manipulator sisters of JPM and their brothers in crime being able to take enough shorts this time to keep it down. I could be wrong no doubt. But between China, Russia, Middle East and all our other "friends there is a lot of money out there and it is going for the gold.

May 23 10:41 AM

[OLD CRONE:]

ALL EXCELLENT POSTS , ..TOTAL AGREEMENT , HOLD REAL''GOLD''...I DO NOT TRUST ETF`S..JMHO

May 23 12:30 PM

[Gtarras:]

My conviction is that all of you guys who are betting on negative things to accelerate (seems to be majority on SA), are going against the FED.. Do you really need to fight this gorilla?? The US govt is not at all interested in economic conditions worsening, and will do whatever it takes. Most importantly, the rest of the world govts will comply and help. I am also convinced that the agencies (of course under pressure if needed), will do the right thing. Same with bankers. There is a lot of tongue-in-chick gaming going on, I am so sure of that after 15 years on the street.. Bet against it all you want. Complain here, write the smart articles. The US wont crash. There is no inflation now. It will pick up later, but the FED has tools to suck it out of the system. Anyway, i am swimming with the biggest shark of all.


On May 23 06:55 AM BiggisNikk wrote:

> Come on, Gtarras, You think this economy is as poised for an economic
> boom as we were right after WW2? And Japan, a creditor nation vs,
> our lame debtor's club? And just so you get a little learning on
> credit ratings, they are not relative-to ratings. It is possible
> that all the governments of the world could be downgraded. There
> is no "grading on a curve." As for inflation, try measuring it the
> way we used to before they started massaging the statistics at shadowstats.com.

May 23 03:12 PM

[one eye:]

Paulson is also Buying BAC hand over fist, Fast Money, Friday afternoon.

Is he right on One and Not the Other? Which one?

May 23 04:16 PM

[Gold Barron:]

Gold is a great long term investment. Keep your portfolio at about 10-20% in physical gold. Dont go all in!

Silver is probably the top commodity investment over the next 20 years.

Traders should buy GLD, long term investors should buy physical gold.

May 23 06:17 PM

[MrZack888:]

I'm waiting for the IMF to dump their gold, and gold will go below 600/ounce; and when China starts buying it from the IMF, that is when I will be loading up on bullion and gold type stocks.

May 30 05:16 PM