Especially the hedge fund community is sitting on a sizeable pile of gold and gold-related investments. Their positions look good on paper and show a handsome profit. So did other assets in the very recent history before they collapsed.
Here is the dillemma for the funds. One of the main reasons for gold's current levels is the huge demand from investors. If they start offloading some of their positions to realize gains, this might take the shine off gold. Plus, it is difficult to publicly make the case for buying gold (in order to keep it up) while selling it at the same time.
So what should they do? Hold on to it and hope for the best? Or sell tiny bits and pieces over a longer period of time?
John Paulson, head of the hedge fund Paulson & Co., came up with a brilliant idea. He is going to launch a dedicated gold fund. According to the Wall Street Journal, the fund will invest in gold-related shares, mining companies and bullion-related derivatives.
Since his gold-related investments already make up more than 10 per cent of his $30bn under management, one should seriously question the reasoning behind Paulsonís planned new gold fund.
The answer is very simple. Paulson will be able to sell some or large parts (depending on the size and investor demand) of his gold-holdings to the new fund and thus realize profits for Paulson & Co. Of course, he is also trying to capitalize on the current hype around gold.
Should gold prices decrease in the near future, steep losses in the gold fund could not be blamed on Paulsonís ability as a money manager. It is the gold thatís not performing, stupid.
Investors wanting exposure to gold should ask themselves if they really need Mr. Paulsonís new fund (and pay him 2 & 20) to bet on the yellow metal.
All the others, who are already sitting on long gold and gold-related positions, should be getting very nervous and should rethink their exit strategy Ė if they ever had one.