September 16th, 2012
by Peter Krauth, Global Resources Specialist, Money Morning
Believe it or not, the housing crash wasn't all heartache and tears. When the mortgage bubble burst a few select investors made a boatload. One of them was hedge fund titan John A. Paulson. In what has been called "the greatest trade ever," Paulson earned $15 billion for himself and his clients as the rest of the markets fell hard.
But thanks to artificially low interest rates, incessant money printing, and ongoing stimulus plans, the same opportunity is beginning to build. I'm talking about gold, where the "the next greatest trade ever" is only a matter of time.
You see, there's no mania like gold mania. And despite the fact that we've been in a powerful gold bull market for more than a decade already, I believe the best is yet to come for gold prices. As it happens, so does John A. Paulson, who is already lining up for round two. Here's why...
Billionaires Love Gold
As the dust settled on his housing mega gains, Paulson's research led him to conclude the demand for gold would be strong in the years ahead. Thanks to profligate central banks and ongoing fear about the sustainability of our fiat financial system, Paulson decided real money was the place to be setting up his next great trade. So he put a huge portion of his wealth into one asset class: gold.
In January 2010, Paulson launched a dedicated gold fund, which invests in gold stocks and gold derivatives, committing $250 million of his own capital. Now to be fair, the results have been less than stellar so far. Thanks mainly to mining stocks, Paulson's Gold Fund was down 23% in the first half of this year. But here's the thing. His original bets against housing fell at first, too. And we all know how that one turned out. Over time, Paulson's thesis proved to be spot on. So what has Paulson been buying lately?...
Gold and Gold Stocks are Headed HigherBut that's not the only reason to think that gold is the next greatest trade ever. Fact is, there are several more reasons, both fundamental and technical, why gold is primed for big gains from here. They include:
- Seasonal Patterns. Since January 2002, gold has averaged 20.8% gains from the months of August through the end of February.
- Gold Demand Sustained. According to the World Gold Council (WGC), gold demand volume was down 7% in Q2 (year over year), but stable in value terms at $51.2 billion, since the gold price was up about 7%.
- Central Banks Buying. Gold reserves increased by 157.5 tonnes in Q2, the largest quarterly net purchases since the official sector shifted into net buying mode in Q2 2009, according to WGC. Developing nations were again the biggest buyers.
- Gold is Technically Cheap.Frank Holmes of U.S. Global Investors says that, using the 12-month rolling return for gold with data from the last 10 years, gold reached an extreme low earlier this month, triggering a Buy signal.
- Narrowing Price Range and Volatility.Since mid-May, gold's been trading in a narrow price range, and daily volatility has all but dried up. This behavior is typical before large moves.
- Bullish Price Action.The gold price has been acting well, establishing higher highs and higher lows for the past three months.
- Gold Stocks Historically Cheap. By several fundamental measures, including price-to-book and price-to-earnings, gold producers are about as cheap as they've been since this entire secular bull launched back in 2001.
"The last time his (Paulson's) stock portfolio had a bigger concentration in gold-related equities than last quarter was March 2009, when U.S. equities hit bottom."
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