Hedge funds buying much more paper than metal

Bearish Big Investors Catch Gold Bug

By Gregory Zuckerman
The Wall Street Journal
Monday, March 9, 2009

http://online.wsj.com/article/SB123655584569665995.html?

Large investors, including some who anticipated troubles for the housing and financial sectors, have been buying gold, concerned that moves by governments to shovel money at problem areas could cripple leading currencies.

Firms such as Eton Park Capital Management LP, Greenlight Capital Inc., Hayman Advisors, LP and Paulson & Co. have been ramping up gold exposure in recent months, according to investors in the funds. Blue Ridge Capital Holdings LLC and Highfields Capital Management LP also have been recent buyers, according to public filings about their year-end holdings. Those two firms couldn't be reached for comment Sunday.

Some of these funds have become among the largest holders of gold exchange-traded funds, such as the SPDR Gold Shares ETF, while also buying gold futures contracts, swaps, and even physical bars of the yellow metal.

For years, gold fans often were fast-moving traders and so-called gold bugs, a crowd of bears ever-convinced that the underpinnings of global economies and markets were set to crumble and inflation about to soar. Gold has disappointed some investors because it hasn't been a home-run investment despite recent financial ills.

The recent purchases of gold by the hedge-fund investors, some of whom have top records, suggests they are coming to share deep worries about the health of global economies and how ongoing problems are being addressed.

Kyle Bass, who runs Hayman, a firm that earned millions of dollars betting against risky subprime home mortgages, is now buying gold. "Confidence in governmental and cenral bank leadership ... is plummetting worldwide," Mr. Bass wrote his investors recently. "As a result, we believe people will look to "old-fashioned" stores of value. Indeed, investors have already begun moving into precious metals. We expect this will continue."

Since 1971, the dollar has been backed not by gold but by faith in the U.S. government. Though they worry about the dollar, some of the investors buying gold are even more concerned about European currencies.

John Paulson's eponymous firm, which reaped $15 billion in 2007 betting against subprime mortgages and added more profits last year, is beefing up its gold holdings. Last week, it told clients it will offer its investors a new share class denominated in gold.

Gold is the largest investment in the portfolio of Greenlight, led by David Einhorn, who has bought exchange-traded funds holding gold as well as gold futures contracts, according to a person familiar to the matter.

Some of those buying gold predict nations will default on their debt, as they spend money to help stabilize their economies. The spending could lead to a burst of inflation, at least eventually, some say, which could help gold rise in price. But even deflation, or falling prices, could bolster gold, which usually does a good job storing value, the bulls say. Others simply see gold as a better alternative to crumbling stocks, corporate bonds, and Treasurys with super-slim yields.

Still, gold isn't an investment that produces any kind of cash flow, like a share of a company or a fixed-income investment, and consumer demand for gold-related products is down amid the global economic downturn. Those factors have long reduced its attractiveness to many investors.

Though gold has been a robust performer of late, hitting $1,000 an ounce recently before closing at $942 an ounce on Friday, it has been stuck in a range of $700 to $1,000 an ounce for much of the past few years. That raises questions about the potential for upside, especially if stocks regain their footing. If gold can preserve value at a time when most other investments drop, that in itself could reward bulls, of course.

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