Hedge Fund Legends Stock Up on Gold

“Big Short” legend Michael Burry has made a large commitment to gold at same time as more than 80% of largest fund managers own gold in their portfolios

Bullion.Directory precious metals analysis 24 May, 2024
By Isaac Nuriani
CEO at Augusta Precious Metals

The yellow metal has been exhibiting an impressive display of strength since the end of February. From that time through Friday, the price of gold appreciated 15%, to more than $2,300 per ounce.[1]

Analysts have identified a number of drivers they say are responsible for the support that gold has been receiving during its current move higher, and most of them are rooted in economic and geopolitical uncertainty. The prospect of lower interest rates also has helped buoy gold, but those have become a somewhat unreliable source of gold energy thanks to the uncertainty among Federal Reserve policymakers that we’ll actually see lower rates in the near future.[2]

So, it’s unpredictability in both the global economy and global geopolitical environment that seems to be providing much of the momentum to gold.[3] On the economic front, inflation persists, as does concern that recession and perhaps even stagflation have the potential to rear their ugly heads.[4] A related issue is America’s fiscal outlook, which has been poor for some time and appears to be continuing to deteriorate. According to Michael Hartnett, chief investment strategist at Bank of America, the country’s surging national debt is a primary driver of gold right now.[5]

As for geopolitical uncertainty, strategists across the board have been quick to identify it as a key source of gold’s current energy.[6] The ongoing war in Ukraine, acute tension in the Middle East, and the persistent risk of trouble between the U.S. and China over Taiwan represent just some of the contents of the “basket” of risks that are credited with adding to gold’s momentum right now.[7]

“To hedge against these uncertainties,” Minerals Council South Africa economist André Lourens recently explained, “investors and central banks opt to buy assets that are reliable, predictable and universally valued. Hence, an increased demand for asset classes like gold.”[8]

And when Lourens says, “investors,” he means, among others, institutional asset managers – including hedge fund gold managers.

Hedge funds are distinct from more traditional asset management by their use of more aggressive and/or alternative strategies and assets to both minimize risk and maximize returns. And given the manner in which gold has performed lately, as well as the specific nature of the drivers pushing it higher, it’s understandable why precious metals would be popular with a fund type devoted simultaneously to the minimization of risk and the maximization of return. This is where the role of hedge fund gold managers becomes prominent.

That asset managers, including hedge fund gold managers, are going “long” is notable in its own right. But it gets even better. According to a recent report, two storied hedge fund gold managers – who earned a fortune predicting and profiting from the 2008 financial crisis – recently made sizable bets on gold. Will their predictions pan out? We’ll be keeping an eye on that.

Today, we’re going to look closer at the apparently growing money management community in gold right now, to include trying to determine the motivations of hedge fund gold managers for acquiring metal. Are there any helpful lessons individual investors can glean as they seek to navigate their own portfolios through economic and market waters that remain plenty unpredictable?

Let’s see if we can find out.

Analyst: “Cocktail of Safe-Haven and Hedge Fund Purchases” Pushing Gold Higher

Institutional money – including hedge fund gold managers’ money – appears to have indicated that the time is right for gold.

We were given a heads up last year that such might be the case, when a Bloomberg survey of professional money managers found that all of them planned to maintain or increase their exposure to gold over the subsequent 12 months.[9]

There’s some evidence that they, indeed, are men and women of their word. Fresh analysis by Citibank found that 83% of the largest fund managers own precious metals in their portfolios, and that gold, specifically, was the only commodity to which they’d allocated money recently.[10]

Some analysts have shifted their focus from central banks to asset managers – and hedge fund gold managers, specifically – as the institutional drivers of the metals rally that’s been in play for going on three months now.

“The rally has been fueled by a powerful cocktail of safe-haven and hedge fund purchases, prompted by record-high equities and sticky inflation,” James Steel, chief precious metals analyst at HSBC Securities, wrote recently.[11]

David Neuhauser, founder of hedge fund Livermore Partners and one of the hedge fund’s gold managers, indicated recently that his weighting in gold has climbed to more than 20%.

“With inflation well above trend and being extremely sticky, it doesn’t take a rocket scientist to figure out that gold could serve in a great capacity,” Neuhauser told CNBC. “We are in for a structural change in terms of inflation, and gold will be the metal to continue to find investors worried about monetary disorder, worried about monetary debasement.”[12]

Speaking to his belief in gold as a core portfolio asset, Neuhauser also shared his view that gold will be at $3,000 within the next few years.[13]

Another renowned hedge fund gold manager, David Einhorn of Greenlight Capital, also told CNBC that he has taken “a very large position” in gold and did so largely because of what he sees as the nation’s precarious fiscal situation.

“There’s a problem with the overall monetary and fiscal policies of the country, and if both policies are systemically too loose, I think the deficits are ultimately a real problem,” Einhorn said. “And I think that this is a way to hedge the risk of something not-so-good happening.”[14]

Financial Crisis “Prophets” Now Make Big Wagers on Gold

Among the more notable hedge fund gold managers making big bets on gold are Michael Burry and John Paulson, whose biggest claims to fame likely will remain the outsized winning bets they placed against the subprime mortgage industry that triggered the financial crisis.

Burry made hundreds of millions a decade and a half ago shorting the housing market with derivative instruments; Paulson made billions doing the same thing.[15] Paulson and Burry – whose story was immortalized in the book and movie titled The Big Short – were lauded roundly for both their prescience in “seeing” the brewing trouble and for their courage in wagering so big on their projection.[16]

And now, it seems, they’re betting on gold.

According to a recent regulatory filing, Burry made gold his fifth-largest position last quarter – an allocation worth roughly $8 million within a portfolio valued at a little more than $100 million.[17]

Paulson’s gold commitment is larger – to say the least. According to regulatory filings good through the end of March, he made a $400 million commitment to the gold sector inside of a portfolio valued at $1.45 billion; that’s an allocation of nearly 30%.[18]

In their respective cases, neither man has publicly explained their reasons for making such substantial gold purchases. However, in an interview early last year, Paulson made his long-term case for gold, saying, in part:

“We’re at the beginning of trends that are going to increase the demand for gold, and inflation and geopolitical tensions will determine the rate at which gold increases. This year gold will appreciate versus the dollar, and also over a three-, five- and ten-year basis.”[19]

And as for Burry, although he’s not addressed his large gold position, it may be worth noting that he has issued several warnings over the last 18 months or so about several of the kinds of risks that have at times in the past encouraged investment in stores of value such as gold, including: financial market volatility; persistently higher inflation; and rampant consumer debt, to name just three.[20]

What stands out about the reasons – and presumed reasons – these and other hedge fund icons are moving to gold is how relevant those justifications can be to garden-variety, “mom-and-pop” investors. And while it’s never prudent for anyone to transact an asset solely because another class of investor is transacting the same asset, it’s understandable if the actions of hedge fund giants in embracing gold at least prompt some smaller, individual investors to learn about and look more closely at the metal.

So…is there anything of value that individual investors might glean from what some of the world’s most renowned hedge fund managers are doing vis-à-vis precious metals?

Let’s touch on that briefly as we close out this week.

Physical Gold Available to Individual Retirement Savers within an IRA

There is no way to know, of course, if the robust performance logged by gold recently will continue. Perhaps the more salient point – which, it appears, hedge fund managers have grasped firmly – is that precious metals have had the capacity at various periods in the past to not only maintain their resilience but even thrive when their properties as fundamentally uncorrelated assets and perceived stores of value are “activated” by uncertainty and volatility.[21]

It’s unlikely that many individual investors see their own holdings quite the same way as hedge fund managers see theirs. Nevertheless, it’s worth noting that smaller investors who suspect hedge funds may be on to something with their outsized metals allocations have much the same access to gold and silver as those fund managers focused on optimizing their substantial and typically complex portfolios, so it’s possible if they want to take a cue from the “big boys.”

In fact, not only can “regular” investors build their own inventory of physical metals, but they can do so through a gold IRA, which offers the same potential tax-advantaged account benefits as other IRAs (consult your tax advisor for more information on IRA tax implications).

In the end, retail investors must decide for themselves what – if any – worthwhile messages are being transmitted by the trend toward metals exhibited by many of the world’s hedge funds and asset management firms.

But however they actually proceed with the stewardship of their own financial resources, smaller investors can learn a lot by at least observing how those with more dollars at stake are attempting to not only navigate through – but prevail in – what world’s-largest-asset-manager BlackRock has called “the most fraught global environment since World War II.”[22]

[1] CNBC.com, “Gold COMEX (Jun′24)” (accessed 5/24/24).
[2] Jeff Cox, CNBC.com, “Federal Reserve minutes indicate worries over lack of progress on inflation” (May 22, 2024, accessed 5/24/24).
[3] World Gold Council, “Geopolitical and economic uncertainty bolster gold demand and prices in 2023” (January 31, 2024, accessed 5/24/24).
[4] Lee Ying Shan, CNBC.com, “Gold at $3,000 and oil at $100 by 2025? Citi analysts don’t rule it out” (February 20, 2024, accessed 5/24/24).
[5] Michelle Fox, CNBC.com, “The U.S. national debt is rising by $1 trillion about every 100 days” (March 4, 2024, accessed 5/24/24).
[6] Ashitha Shivaprasad, Reuters.com, “Gold retreats as dimming rate cut expectations overshadow safe haven demand” (April 17, 2024, accessed 5/24/24).
[7] Sabrina Jardim, Mining Weekly, “Economic and geopolitical uncertainty supporting strong gold demand and prices” (March 15, 2024, accessed 5/24/24).
[8] Ibid.
[9] Investment News, “Gold continues to shine as a hedge against uncertainty” (August 23, 2023, accessed 5/24/24).
[10] Yun Li, CNBC.com, “The biggest money managers are flocking to gold as inflation fears intensify” (April 18, 2024, accessed 5/24/24).
[11] Ibid.
[12] Ibid.
[13] Ibid.
[14] Ibid.
[15] Michelle Lodge, Investopedia, “Who Is Michael Burry?” (February 16, 2024, accessed 5/24/24); Ernest Werlin, Herald-Tribune, “Man who bet against bubble in housing is revealed in book” (January 11, 2010, accessed 5/24/24).
[16] Theron Mohamed, Yahoo Finance, “Michael Burry and John Paulson hit the jackpot when they called the housing crash. Now they’re betting on gold.” (May 19, 2024, accessed 5/24/24).
[17] Ibid.
[18] SEC.gov, “Form 13F” (accessed 5/24/24); WhaleWisdom, “Paulson & Co., Inc.” (accessed 5/24/24).
[19] Alain Elkann Interviews, “John Paulson” (February 12, 2023, accessed 5/24/24).
[20] Nicole Goodkind, CNN.com, “Michael Burry, of ‘Big Short’ fame, just bet $1.6 billion on a stock market crash” (August 16, 2023, accessed 5/24/24); Theron Mohamed, Yahoo Finance, “‘Big Short’ investor Michael Burry warned inflation would spike again. Prices just jumped.” (April 11, 2024, accessed 5/24/24); Thomas Barrabi, New York Post, “‘Big Short’ investor Michael Burry warns of consumer debt crisis: ‘Winter coming’” (August 12, 2022, accessed 5/24/24).
[21] Portfolio Visualizer, “Asset Class Correlations” (accessed 5/24/24).
[22] Will Daniel, Yahoo Finance, “BlackRock says throw out your old investment playbook, we’re headed for a ‘new regime of greater macro and market volatility’” (December 9, 2022, accessed 5/24/24).

This article was originally published here

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