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Hedge fund makes headlong rush into gold

Date: Friday, March 20, 2009
Author: Andy Hoffman, Globe and Mail

Investor John Paulson, whose hedge fund made billions betting against subprime mortgages, is making a massively bullish call on gold.

Paulson & Co. paid $1.28-billion (U.S.) yesterday for an 11-per-cent stake in AngloGold Ashanti Ltd., one of the world's largest miners of the precious metal.

The deal is just the latest example of a major international investor buying into bullion as a safe haven amid the global financial crisis.

As the economic meltdown has worsened in recent weeks and months, firms such as Eton Park Capital Management LP, Greenlight Capital Inc. and Hayman Advisors LP have been boosting their exposure to the yellow metal. The investment funds are turning to gold as central banks around the world continue to print money in hopes of stimulating economic growth.

While it has yet to happen, many believe that the monetary stimulus efforts will cause a spike in inflation. Gold is traditionally seen as a hedge against price increases and declining currency values.

“As the world deals with the global economic crisis, the value of gold, as the only true ‘hard currency,' is coming to the fore as evidenced by the investment choices of some of the world's most seasoned investors,” AngloGold Ashanti Ltd. chief executive officer Mark Cutifani said yesterday.

New York-based Paulson, which manages about $30-billion, earned $15-billion in 2007 by betting against subprime mortgages.

The firm's flagship fund returned 37 per cent in 2008, compared with an average loss of 19 per cent for other hedge funds.

As part of yesterday's deal, Paulson bought 39.9 million shares in South Africa-based AngloGold from mining giant Anglo American PLC. The diversified British miner owned 42 per cent of AngloGold in 2006. Following yesterday's stock sale to Paulson, Anglo American no longer owned a stake in the gold miner.

“We believe AngloGold Ashanti is one of the best managed and undervalued of the major global gold-mining companies,” Paulson said in a statement.

Recently, Paulson has been betting against banking stocks such as Lloyds Banking Group PLC and HBOS PLC. At the same time, Paulson has been going long on gold and gold stocks.

Paulson owns about 28 million shares of Toronto's Kinross Gold Corp. or about 4 per cent of the company, according to regulatory filings. Earlier this month, Paulson told clients it will offer investors a new share class pegged to the price of gold.

“We're extremely pleased that someone with John Paulson's track record and reputation has chosen AngloGold Ashanti as one of his investments through which to increase his exposure to the gold market,” Mr. Cutifani said.

Paulson isn't the only hedge fund getting into gold in the belief that the metal will prove a store of value as some countries default on their debts, putting negative pressure on currencies. According to The Wall Street Journal, gold is the largest investment in the portfolio of Greenlight Capital Inc. The New York-based fund, which is led by David Einhorn, has been buying exchange-traded funds holding gold as well as gold futures contracts.

Hayman Advisors, another fund that boosted returns by betting against subprime mortgages, is also buying gold.

“People will look to ‘old-fashioned' stores of value – those which represented money long before green pieces of paper backed a promise existed,” Kyle Bass, who runs Hayman, recently told investors.

Gold futures briefly climbed above $1,000 an ounce last month but failed to retest the record highs achieved in March, 2007. Gold has recently been trading between $900 and $930 an ounce.

With files from Dow Jones and Bloomberg News