Funds seek Midas touch with miners

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Funds seek Midas touch with miners

Top hedge fund stock pickers have extended their bets on gold, adding gold mining stocks to their investments in the precious metal.

By (Reuters)

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Published: Fri 28 May 2010, 2:04 PM

Last updated: Mon 6 Apr 2015, 2:06 AM

Last year, investors such as John Paulson and Richard Chilton piled into shares of the exchange traded fund Gold Trust, which is directly backed by the metal.

This year, many managers have added shares of gold producers like Barrick Gold and NovaGold Resources, as well as the Market Vectors Gold Miners ETF, which owns stakes in several dozen publicly traded companies.

Among 30 of the largest equity-oriented hedge funds tracked by Thomson Reuters, including those run by Paulson and Chilton, 12 reported owning substantial plays on gold in regulatory filings that covered portfolios as of March 31.

Gold is seen as a safe haven in a world stressed by the hangover from the financial crisis, particularly potential weakness in the euro because of the budget distress faced by many European governments. Gold has often worked as a long-term hedge against inflation when governments are forced to print money to keep their economies afloat.

The addition of mining stocks to portfolios of the “Smart Money” 30 reflects continued faith in the price of gold, according to analysts and other investors. The metal hit an all-time high two weeks ago at $1,248.95 an ounce and is currently trading at around $1,215.

“In the next two years it’s going to $2,000 or I have to shave my hair off,” said Charles Oliver of Toronto’s Sprott Asset Management, referring to a pledge he has made publicly. He co-manages a $600 million precious metals fund.

Oliver echoes the thinking of many investors that the best way to profit from a surging price now is through shares of a gold producer.

“Gold bullion is defense,” he says. “On the offensive side, if you want capital gains, (you want) gold stocks. We’re in a bull market in gold and, generally speaking, most of the time gold stocks will outperform bullion.”

While gold stocks have actually lagged the metal’s performance during much of the past decade—which many attribute to rampant mining cost inflation in 2005-2008 -- the relationship appears to have reversed this year.

During gold’s run-up since the end of March, gold mining stocks have risen more than 16 percent, versus a 9 percent rise for the metal.

A belief that this will continue has prompted many fund managers to increase their exposure to gold stocks.

Paulson, who presciently bet housing prices would fall three years ago, announced plans late last year to make a big bet on gold by launching a new fund devoted to the metal.

He has turned to gold as a currency alternative to the U.S. dollar, as he worries inflation could jump due to the political difficulty of removing the U.S. government’s mountain of stimulus cash from the economy.

At the end of the first quarter, Paulson held 31.5 million shares of the popular SPDR Gold Trust, as well as a 12 percent stake in Anglogold Ashanti ANGJ.UL and a 4 percent stake in Kinross Gold (K.TO).

Chilton’s fund bought shares of Kinross and Barrick, among others, in the first quarter. Eric Mindich’s Eton Park Capital bolstered positions in gold, including Barrick and Newmont Mining And John Griffin’s Blue Ridge Capital reported a 5.1 million-share holding of the miners ETF.

Paulson raised a few eyebrows in March when he agreed to take a 9 percent stake in junior miner NovaGold.

NovaGold, also favored by billionaire George Soros this year—he now holds more than 8 percent—owns 50 percent stakes in the Galore Creek and Donlin Creek deposits in British Columbia and Alaska. Both have huge reserves but are beset by multibillion-dollar start-up costs.

“The criteria that appear to be used by some of these funds is they’re looking for assets in politically safe jurisdictions—Canada and the U.S. being targeted,” said Paolo Lostritto, an analyst at Wellington West.

An investment in a junior like NovaGold also suggests faith that the metal is headed upward, said Ian Nakamoto, director or research at MacDougall, MacDougall, and MacTier.

“If you have a bias toward high gold prices, you would want companies that have a lot of potential reserves,” he said.

“You don’t necessarily want gold companies that are producing now and selling into the market and getting $1,200 (an ounce). Maybe you want a company that’s going to produce in three years and get $1,700.”

As a hedge against inflation, gold benefited from billions in stimulus dollars spent last year—particularly in the United States—to kick-start economic growth. It has pushed even higher in recent weeks as the European debt crisis has begun undermining the euro.

Central banks, meanwhile, have reversed their past practice of selling gold and are now expected to add hundreds of tonnes of bullion to their holdings, a shift seen as a bullish signal.

Adam Graf, an analyst at New York’s Dahlman Rose & Co, sees those pressure driving gold to at least $1,800.

“I think over the longer term gold should have upward pressure for quite a while,” Graf said. Western countries “have printed a lot of money and keep doing it,” he added.

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