Monday, March 9, 2009

Hedge Fund Giants Betting on Gold

(this video is kinda sorta about gold!)

The Financial Times has a piece out today discussing a newer generation of gold bugs, including hedge-fund honcho David Einhorn of Greenlight Capital:

Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the economic crisis. A bet on gold is a bet against paper currencies.

"The size of the Fed's balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed," Mr Einhorn wrote to investors.

"Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself."

Mr Einhorn's comments - and the revelation that he is buying gold - are in line with the views held by other institutional investors in Europe, according to bankers in London.

The head of commodity sales at one bullion bank told the Financial Times that he had never been so busy dealing in gold for large investors.

I am typically wary of imitating what hedge funds do, but betting on gold, and also silver, makes a lot of sense to me. The U.S. government is throwing an awful lot of money at its economic problems, and that is the perfect recipe for inflation over the long-term.

At the same time, investors are likely to be extremely risk-averse for the next few years (or until the next bubble comes along!) and that is bullish for gold.

As far as actual investments go, I would favor the SPDR Gold Shares (GLD) ETF over any of the actual gold companies, which are subject to production/operational snafus which can trip them up, even when the commodity price is rising. Call options on GLD might even make some sense, because implied volatility readings are actually lower than that of the S&P 500 (as measured by the SPY ETF). Personally, I tend to shy away from making directional bets with options, but the GLD might be an exception for me.

The dollar will probably be a victim of the Fed’s moneyprinting strategy, though that would be positive for the major averages. Many large companies like Caterpillar (CAT), IBM (IBM), and Oracle (ORCL) are very dependent upon exports for growth, and a weakening dollar significantly boosts earnings numbers.