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Hedge Fund Managers are Selling Gold Shares but Holding on to their Bullion
With gold falling back toward $1200 last Friday, it’s hard to find good news about the yellow metal these days, but one very good indicator for gold investors comes out every quarter, and that is the SEC’s 13F hedge fund filing due at the mid-point of each quarter. In the middle of February, May, August and November, we find out what hedge fund managers are doing with their money each quarter. Based on the old saw, “watch what I do, not what I say,” we only know the truth about hedge funds once each quarter.
The most-watched hedge fund managers are long-term buy-and-hold gold bug John Paulson, who owns more GLD shares – the largest gold exchange-traded fund (ETF) – than any other investor, and the on-again, off-again gold timing attempts of the legendary hedge fund manager George Soros.
Last week, on February 16, we learned what these fund managers (and others) were doing with their gold holdings. Here’s a rundown of some of the more important gold investors and their current thinking.
John Paulson is the largest shareholder of the SPDR Gold Trust (GLD). In last week’s SEC filings, we learned that he sold 40% of his stake in South African gold shares, Gold Fields Ltd and Sibanye Gold Ltd, but we also learned that Paulson held on to all 10.23 million shares of GLD (worth over $1.16 billion) in the fourth quarter of 2014. That means Paulson’s gold holdings remained unchanged for the sixth straight quarter, since mid-2013, despite the gradual price decline in gold during those 18 months.
In a mid-2013 appearance on CNBC, Paulson outlined his case for holding gold in this “flat” market:
“I think the rationale for owning gold is valid. I would say in the trend we’re in a pause period. But over time as you see the economy grow, credit expand, and inflation – or the indicators of inflation – start to rise, I think demand for gold will start to increase again… It’s very difficult to predict price movements in the short term, but if you’re looking for a hedge against potential inflation in the future and have a longer-term view, I continue to believe it’s an important part of anyone’s portfolio.”
George Soros of Soros Fund Management LLC gave up on mining shares last quarter. He sold his stake in gold miner Barrick Gold and cut his holding in the Market Vectors Gold Miners ETF by 27%.
We won’t know their holdings in 2015′s first quarter until mid-May, but we do know that inflows into the GLD ETF are positive so far in 2015. Holdings of gold bullion in the GLD fund are up by 59.24 metric tons* in the first six weeks of 2015 – about nine times the 6.63 ton gain from the same period in 2014.
In addition, last Thursday, Sebastian Lyon, manager of the £2.5 billion ($3.9 billion) Troy Trojan fund, said that he is holding on to his gold hoard worth over Â£200 million ($309 million), despite low inflation. He sees gold as part of a balanced portfolio, holding 8% in gold bullion and another 3% in gold ETFs.
Partly due to this balanced asset allocation, the Troy Trojan fund has returned 108% over the past decade, vs. 81% for the average fund in the IA UK Flexible Investment sector. One of Lyon’s main reasons for investing in gold is that central banks continue to buy gold, while engaging in interest rates cuts, money printing or other techniques that amount to a currency devaluation war – a bizarre “race to the bottom.”
In 2014, Central Banks Bought the Second Most Gold Ever
We also learned last week that the world’s central banks bought 477.2 metric tons (15,342,000 Troy ounces) of gold, or 17% more than they bought in 2013, amounting to the second-highest annual increase in central bank gold holdings in last 50 years. In their annual report on gold demand, released on February 16, the World Gold Council (WGC) said that the world’s central banks spent about $19.4 billion on new gold purchase in 2014. In the last five years, central banks have bought 1964 metric tons of gold, an average of 393 tons per year. For 2015, the WGC expects central banks to buy another 400 tons of gold.
Russia’s central bank was the biggest 2014 gold buyer, accumulating 173 metric tons* – almost one-third of all central bank purchases. (After Russia, the next biggest central bank buying in 2014 came from Kazakhstan and Iraq, each of which bought about 48 metric tons.) In 2014, the Russian ruble was one of the weakest currencies in the world, so the Russian central bank exchanged their paper rubles (and other paper money) for gold. Gold now represents about 12% of Russia’s foreign reserves, making Russia one of the top five gold-holding nations, behind only the U.S. Germany, Italy, France (and the IMF).
Gold may be struggling to stay above $1200 in terms of the strong U.S. dollar, but it is rising faster in terms of nearly all other world currencies, and that will motivate most central banks to keep buying gold.
*A metric ton (or tonne) is one million grams, or 32,150 Troy ounces, or 2,205 pounds