If you’ve been reading the popular press for the past 6 months, there’s been a slew of articles talking about deflation. I’ve been somewhat skeptical of the long term probability of deflation and have been investing in gold and commodities in anticipation of inflation. Looks like I was a little early to the game (which, on Wall Street is just the same as being wrong!).
Now however, it looks like we are warming up the printing presses and gold has hit $1,000 twice in a week in anticipation of future inflation. Legendary hedge fund manager John Paulson, who made $2.5 Billion last year from his trades, has been betting heavily on gold and his fund has nearly 50% of its assets in gold or gold-related investments like gold mining stocks and ETFs. The gold ETF, GLD reportedly makes up 30% of his fund! He has also taken a large 12% stake in AngloGold Ashanti (AU) making him the largest shareholder.
According to Reuters, this is not a bet on the company being acquired but rather a bet on inflationary pressures pushing up the price of gold. As opposed to the popular theory of rising prices being a cause of inflation, I like to consider it as an effect of inflation, which is caused by printing money, a side-effect of fiat currency. If you’re unaware about the effects of inflation and how it can ravage the economic (and social) structure of a society, I strongly recommend watching these excellent videos on hyper-inflation.
Another fund which has done well with the gold mining ETF is David Einhorn’s Greenlight Capital, which picked it up at the lowest point of last year and which has more than doubled its investment so far. They both join China in being bullish on gold. Between Paulson’s bullion dollar gold ETF purchase and China’s multi-billion gold bullion purchase, it’s no wonder gold prices have been trending upwards.