Two examples of the frustrations that some gold investors have gone through in the past year offers a valuable lesson to long term gold investors.
During 2011, despite being heavily invested in gold, John Paulson's Gold Fund wound up losing 11% of its value. This despite the fact that gold bullion gained $142.50 during 2011, closing the year at $1,531.00, up 10.2% (see How Did An Investment Pro Lose Money Investing in Gold?).
Investors in the $4.4 billion Vanguard Precious Metals Fund (VGPMX) which holds almost all of its assets in a diversified portfolio of precious metal mining stocks dropped by a stunning 27.4% last year, declining from $26.71 on January 3rd to $19.39 on December 30, 2011.
In both of the above cases, the declines in value were primarily due to the large under performance of gold stocks to gold bullion during 2011. Nonetheless, nothing stings more than picking the right asset class only to somehow wind up losing. An investor bullish on gold and investing completely in gold stocks would have had a disastrous year. An investor with a large position in gold, diversified across gold mining stocks, gold bullion and gold ETFs would have performed substantially better.
Although gold stocks can often outperform gold bullion, many investors may lack the expertise to pick the best gold stock or gold mutual fund. The best strategy for most small gold investors is to buy physical gold bullion at regular intervals with a commitment to a long term holding period. Over the years, I have seen far too many uninformed investors who want a position in gold wind up trading speculative junior gold stocks, often times resulting in large losses. Gold mining stock prices can be volatile and even when an investor selects quality gold stocks, the temptation to liquidate a position during price weakness often results in losses.
The gold investor who has purchased gold bullion consistently over the past decade has been amply rewarded and there is no reason to expect this trend to change.
Meanwhile, John Paulson remains committed to gold and recently told Bloomberg News that he personally owns over half of the $1.2 billion Gold Fund he manages.
John Paulson, the hedge fund manager seeking to rebound from record losses in 2011, told investors his Gold Fund will outperform his other strategies over five years, according to a person with knowledge of the matter.
The billionaire, at a meeting yesterday at the Metropolitan Club in New York, said the metal is the best hedge against currency debasement as countries inject money into their economies, said the person, who attended the event and asked not to be named because the information is private. Paulson also cited gold as a hedge against the euro currency, as a breakup may occur, and an eventual increase in inflation.
The manager told clients his own money comprises 55 percent of the Gold Fund’s $1.2 billion in assets, the person said. The fund, which can buy derivatives and other gold-related securities, declined 11 percent last year after the metal slumped 14 percent in the final four months.
Europe’s sovereign-debt crisis may continue to affect bullion in the near term, Paulson, whose firm manages $23 billion, said this month in a year-end letter to investors. The metal serves as the best long-term alternative to paper currencies, he said.
“We remain excited about the outlook for the Paulson Gold Funds over the next few years,” he said in the letter. “We would argue that the potential upside in gold outweighs the potential downside.”
In addition to his Gold Fund, Paulson also holds a large position in the SPDR Gold Trust (GLD) ETF, valued at $2.9 billion. As of February 24, 2011, the SPDR Gold Trust holds 41.3 million ounces of gold valued at $73.4 billion.