Paulson's bright spot may fade as gold plunges

John Paulson, the hedge-fund manager enduring the worst year in his career, may be facing a final blow from this month’s selloff in gold, an investment that mitigated losses at his $28 billion firm earlier in 2011.

The SPDR Gold Trust (GLD) exchange-traded fund, of which Paulson was the largest shareholder as of September 30, fell 10 per cent from the end of last month, and all eight of his gold stocks slumped with a 9.6 per cent decline for bullion. The declines would translate into a $672.1 million paper loss on those securities for Paulson & Co, assuming his holdings haven’t changed since the end of the third quarter, when the firm reported its equity stakes in a regulatory filing.

Until this month, gold had been the bright spot for Paulson & Co clients, who can choose to invest in gold-denominated shares of the hedge funds. Gains in bullion had alleviated losses of 46 per cent, in the dollar share class, for one of the firm’s biggest funds this year through November. Paulson also offers a dedicated Gold Fund, its best performer this year.

“With the dramatic moves of gold and the recent decline from its peak, I think some investors will be deciding whether they want to continue to invest in that share class,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors.

Scaling Back
Paulson, who turned 56 yesterday, has lost money this year on investments including Citigroup Inc, Bank of America Corp. and Sino-Forest Corp. (TRE), the Chinese forestry company accused by short-seller Carson Block of overstating timberland holdings. Paulson cut the so-called net exposure in his main funds to 30 per cent last month and reduced bullish bets across all his funds on stocks including gold companies.

Net exposure is calculated by subtracting the percentage of a fund’s short positions, or bets on falling securities, from its longs, or wagers on rising stocks and bonds.

Armel Leslie, a spokesman for Paulson, declined to comment on the firm’s potential gold-related losses.

Paulson & Co held shares of SPDR Gold Trust and eight gold companies in the third quarter, according to its 13F filing. The firm, which uses the ETF to denominate the gold share classes of his funds, pared its stake in the gold trust to 20.3 million shares from 31.5 million as of June 30.

The firm was the largest holder of American depositary receipts in AngloGold Ashanti Ltd (ANG), the third-biggest gold producer. Paulson also owned shares or ADRs of Gold Fields Ltd (GFI), NovaGold Resources Inc (NG), Randgold Resources Ltd. (RRS), Agnico-Eagle Mines Ltd (AEM), Iamgold Corp (IMG), Barrick Gold Corp (ABX) and International Tower Hill Mines Ltd (THM).

200-Day Average
Gold’s plunge to a five-month low sent it below its 200-day moving average for the first time in almost three years, signaling more declines to traders who follow technical analysis. Bullion fell below $1,600 an ounce yesterday to settle at the lowest level in five months as a stronger dollar curbed demand for the metal as an alternative asset. Gold futures for February delivery dropped 4.6 per cent to settle at $1,586.90 at 1:44 pm on the Comex in New York, the lowest closing level since July 13. The 200-day moving average was near $1,613.

The metal was up about 12 per cent in 2011 and still heading for an 11th straight annual gain, the longest winning streak in at least nine decades. It has outperformed commodities, global equities and Treasuries.

11% Gain
The Paulson Gold Fund, which can buy derivatives and other gold-related investments, rose 11 per cent in this year’s first 11 months.

Paulson’s biggest funds, Advantage Plus and Advantage, seek to profit from corporate events such as takeovers and bankruptcies and have $11 billion in combined assets. The Advantage Plus Fund fell 46 per cent in 2011 in its dollar shares and 29 per cent in its gold shares. The Advantage Fund lost 32 per cent in its dollar class and 13 per cent in its gold class.

The Paulson Partners Enhanced Fund, which invests in the shares of merging companies, decreased 18 percent in its dollar class and 0.9 percent in its gold class.

The Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic upturn, declined 28 per cent in its dollar shares and 12 per cent in its gold class. Paulson has been betting on a US economic recovery by the end of 2012.

Paulson’s Credit Opportunities Fund dropped 18 per cent in its dollar shares and gained 0.3 per cent in its gold shares.