By Doug Ehrman
One of the practices favored by many investors is to watch the trading decisions of major investors. This is done in an effort to get a glimpse of which stocks these individuals are buying and selling based on the belief that if one emulates them, profits are achievable. One such investor is the billionaire chief of Paulson and Co., John Paulson, who can to the attention of the public for the fortune he made shorting subprime securities just before the bottom fell out of the real estate market. Anxious not to appear to be a one hit wonder, Paulson was able to net $4.9 billion in 2010, solidifying himself as a giant of Wall Street. While sailing has not remained smooth for Mr. Paulson, whose Paulson Advantage Plus Fund lost over half its net worth in 2011 and cost Mr. Paulson about $3 billion personally, his trades are still worth monitoring and his judgment worth considering.
One of the moves made by Mr. Paulson during the first quarter was to increase his holding in AngloGold Ashanti Ltd. (AU) by 6%, bringing his total holding up to $1.36 billion. According to the analyst who wrote the above article, Guan Wang, there were 18 other hedge funds that increased their positions in AngloGold as well.
Aside from being a useful source of a few statistics, this is where Mr. Wang's positions fall apart. Leaving aside the fact that contrary to the increasing convention, one does not 'long a stock,' but rather buys it or goes long it, Mr. Wang makes the purely absurd claim that "gold miner stocks are much more risky that gold commodities." His claim is that the price swings that are present in the commodities market are exaggerated in the stocks of gold miners.
On a pure basis, this might be true if one looks at the percent moves of the settlement price of gold relative to the settlement price of certain gold stocks - another way to reach this conclusion is to look at the exchange-traded-funds (ETFs), using the SPDR Gold Shares (GLD) as a proxy for the gold commodities and the Market Vectors Gold Miners ETF (GDX) as a proxy for the miners.
The reality of the situation is that trading gold as a commodity is not a simple matter of buying an ounce of gold at the settlement price. Trading commodities involves buying and selling futures contracts that contain a certain degree of leverage that is in escapable except at very large numbers. So when one is making trading decisions, one must look at the return available to an investor who is operating with a reasonable account size and does not have unlimited funds. On this basis, trading stocks, or perhaps ETFs, is always a lower risk proposition. If one really wants to get a sense of the volatility to the price of gold implied in the price of a given stock, it must be computed for the stock at the time the stock is under consideration. Lesson concluded.
The point to be considered is that Mr. Paulson and 18 other hedge fund managers have significant positions in AngloGold. That fact alone makes the stock worthy of consideration. Interestingly, another analyst writing for the same site argues that AngloGold is poised to rise by as much as 20% in 2013 based on the simple fact that the company has been effective at expanding its operations and avoiding work stoppages. One example of the expansion efforts is the company's decision to invest $1.9 billion to expand the Creek and Victor mine in Colorado. This expansion is expected to help boost the mine's production to roughly 400k ounces per year. This level is believed to be sustainable until at least 2025, at which time the production capacity may drop to 350k ounces for an additional ten years.
Other Gold Options
There are two geopolitical factors that are having a major impact on the demand for gold: inflation in India and weakening confidence in China. Each of these factors is bad news for gold producers in general, but each will hurt specific companies more than others if these conditions worsen. Fortunately AngloGold is not on either list.
In April, India's inflation rate ticked up to 7.2% from 6.9%. While this means that consumers in the globe's top gold consuming nation will have less purchasing power, the result may be mixed. In times of inflation, investors tend to flee to safe havens like gold because they offer a superior store of wealth. Companies including Goldcorp Inc. (GG) and Barrick Gold (ABX) are expected to be particularly impacted by the situation if it persists.
On the Chinese front, a recent report by Bloomberg offers compelling evidence that Chinese investors are losing some of their faith in gold as the go-to investment of choice. First, demand for gold jewelry has decreased thus far this year, marking a major reversal in the explosive growth that was present in recent years - the World Gold Council estimates that the demand for gold in China grew by 96% between 2008 and 2011. Furthermore, falling prices have shaken investor confidence. These same consumers are choosing to remain in cash rather than taking on greater commodity exposure. Reduced activity in China is expected to have a particular impact on Goldcorp, Newmont Mining (NEM) and Barrick.
Given the relative positions of each of these companies, AngloGold looks particularly appealing at current levels. The combination of the company's growth efforts and superior position relative to both India and China should prove positive moving forward. While global macro events like the ones described above may have an impact on the overall market, making a solid move into AngloGold looks solid here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.