At the end of 2009, John Burbank's hedge fund Passport Capital took possession of its physical gold investment. It is kept in custody in Zurich with UBS and represents a 1% allocation in Passport Global. What's interesting here is that Passport also notes that it intends to increase its exposure via physical gold and that it is unlikely to buy various proxies for gold (GLD) (IAU) (SGOL).
Passport has published a white paper on its rationale for owning physical gold. The paper examines the supply/demand dynamic, the impact of central bank action on gold, and the implications of owning "paper" gold versus physical. This is not the first time we've seen specific research published by the firm, as we covered its previous case for agriculture as well.
This is very intriguing for two reasons: First, many of the hedge funds we track have been long gold. Second, and most important, we are now seeing more and more funds shift from "paper" gold exposure to physical gold. David Einhorn's Greenlight Capital was one of the first major funds to store physical gold, citing lower storage costs (versus expense ratios) as its rationale. Now we see Passport Capital doing the same, but for slightly different reasons.
Then on the other hand, you have John Paulson's hedge fund Paulson & Co. holding billions worth of GLD. Paulson owns the paper proxy for gold, but it is merely a hedge to its fund share class denominated in gold. Paulson & Co. also launched a new gold fund as a wager against the U.S. dollar. Additionally, we saw that hedge fund manager Eric Sprott is launching a physical gold trust and published a special report on gold, "The Ultimate Triple-A Asset."
Josh Berkowitz (ex-Soros Fund) and his global macro fund Woodbine Capital published a piece in December entitled "Gold: The Anti-Goldilocks," which takes a different look at gold. Woodbine has owned gold as well as deep out-of-the-money puts on gold. However, it views this position not as a hedge against inflation or deflation, but rather as a part of its theme of stronger emerging market demand.
As you can see, plenty of prominent hedge funds have become involved with the precious metal in various capacities, and it is interesting to sit down and compare their rationales. The main takeaway here is that different funds own gold for different reasons and via different vehicles.
Hedge fund Passport Capital has decided to drill down the debate to which type of gold to own: paper or physical. Passport has elected to go the physical metal route and embedded below is the rationale:
