RICH PICKINGS: The golden divide

With news emerging that one-time gold detractor George Soros has been betting big on the precious metal, the debate over whether it is the 'ultimate asset bubble' or the ultimate hedge against inflation is raging anew.

For a moment there it looked like we were going to have a good old-fashioned clash of the billionaires.

In the blue corner, weighing in at $US6.8 billion, we have hedge fund manager John Paulson, the man now world famous for his bets against the sub-prime infested banking sector back in 2007.

In the red corner, weighing in at $US13 billion, the wily veteran of the hedge fund world, George Soros, who made his name decades before as the banker who bet against the British pound.

The battleground? Gold.

Late last year, Paulson set about building up a special new fund focused on the precious yellow metal, injecting $US250 million of his own cash into the fund that is focussed on gold mining companies, gold futures and the commodity itself.

Then, in late January, Soros delivered what some saw as a little swipe at Paulson and other gold bugs when he declared that gold was "the ultimate asset bubble”.

Surely we were set for a battle of billionaire wills?

Um, not quite.

This week it has emerged that Soros has actually been betting – and betting big – on gold. According to Securities Exchange filings released this week, Soros Fund Management owned 6.2 million shares of SPDR Gold Trust – an exchange-traded fund that owns gold bullion – at the end of 2009, worth $US663 million. In the last three months of year, Soros more than doubled his stake in the gold trust.

The hedge fund billionaire is yet to comment on the discrepancy between his bold bubble call and his gold investments, but there are plenty of theories going round. Had Soros already sold out of SPDR in late January? Or is he just trying to grab a slice of the bubble profits before it bursts?

Whatever the case, news of Soros’ investment helped push the gold spot price a little higher to around $US1119 an ounce, not too far away from the $US1226 record high set in December.

SEC filings also showed Paulson hasn’t lost his appetite for gold and has maintained his stakes AngloGold Ashanti and SPDR Gold Trust.

So with two of the most revered hedge fund managers in the world piling into gold, you’d think investors would be queuing up to follow them in.

But not so. In fact, Paulson’s gold fund appears to have been a bit of a fizzer so far. According to a report in The Wall Street Journal, months of meetings with investors have managed to attract just $US90 million into the fund – not much considering Paulson has tipped in $US250 million himself.

There could be a number of reasons for that. The fund rules apparently require a minimum investment of $US10 million (which might hint at just how few gold bugs have backed the fund) and investors were required to leave their money in for one year.

Other would-be investors may have been put off by the fund’s apparent poor performance. A few weeks ago it was reported that the fund had fallen 14 per cent in the first two months, as the gold price slipped from its December highs.

But perhaps what the slow start to Paulson’s gold fund really highlights are the vast differences of opinion amongst wealthy investors on the subject of gold.

Certainly the last 12 months has seen a surge of interest in gold from the wealthy. In early 2009, the media was flooded with stories that wealthy investors were "hoarding” gold as a hedge against asset inflation; in the first two months of 2009, sales of gold bullion coins by the US Mint surged 176 per cent.

By October last year, gold buying by the wealthy had reached such a state that up-market London department store chain Harrods even started selling gold bullion in its stores.

A survey taken that same month by UK website Family Office Channel (a news service for family offices in Europe) reported that two thirds of high net worth individuals were more likely to invest in gold and other commodities than equities or property.

But since the start of the New Year, sentiment seems to be changing. British wealth management firm Barclays and Swiss company Basinvest, which manages funds for the ultra rich, have warned that the price looks overvalued at the $US1000 mark.

Ronald Wildmann, who manages three Basinvest funds from Zurich, summed up the mood of many gold bears – including Warren Buffett – when he told Reuters: "There is absolutely no use for gold today. When you think about the world without gold, nothing would happen, but a world without copper or alloy or zinc is not running anymore. That is a huge difference."

Judging from the reception to Paulson’s fund, it seems that many rich investors agree with Wildmann’s point.

Of course, we shouldn’t write off Paulson’s fund just yet. For every investor negative on gold, you can always find one who is a believer.

By way of example, back in January, Forbes asked 10 billionaires for their gold prediction: buy, sell or hold. Four of those polled were buys, and four were holds.

But the best comment came from one of the sellers, Broadcast.com owner Mark Cuban: "Gold is a religion; it's not an asset class. It is always a bubble."

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