Tag Archives: John Paulson

Paulson’s Shareholders Gold Council finally launches after initial delays

In September 2017, news emerged of a plan to launch a broad-based “Shareholders’ Gold Council” to address poor shareholder returns and under-performance in the gold mining sector. This plan was spearheaded by well-known hedge fund Paulson & Co and its founder John Paulson. Initially earmarked for a launch in June 2018 or early July, BullionStar covered this new Council in detail in a late June article titled “The Shareholders Gold Council (SGC) – “Just don’t mention the Gold Price”.

The aims of the new Council include shareholder representation on company boards, company accountability to shareholders, the removal of poor performing CEOs and board members, and the alignment of CEO compensation with share price performance. All of these aims, it should be noted, seek to reduce the cost base of miners and have little effect on top line revenue or the price that a gold mining company can sell its output for.

Presentation by Paulson & Co to Denver Gold Forum, September 2017, that kicked off the idea for the new Shareholders Gold Council

The new shareholder coalition will also make recommendations on board appointments, CEO pay, company takeovers, and make recommendations on AGM and EGM voting decisions, similar to the myriad reports that are churned out daily by proxy advisory firms Institutional Shareholder Services(ISS) and Glass, Lewis and Co.

16 Members, 4 of which are Anonymous

Throughout the summer, there was no news flow whatsoever about the new Council and the launch appeared delayed. The existence of such a delay was officially confirmed this week when Bloomberg ran a story confirming that the grouping has just been launched. The delay, according to the head of the new Council, Christian Godin, was “because of compliance issues and housekeeping challenges dealing with 16 institutions and back-office teams“. Godin joins to head up the Council from Canadian investment management company Montrusco Bolton Investments.

Christian Godin, appointed head of the new Shareholders Gold Council

According to Bloomberg’s story which is titled  ‘Paulson Joined by 15 Investors in Council to Oversee Gold Miners’, the new Shareholder’s alliance, in addition to founding hedge fund Paulson & Co, includes institutional and hedge fund firms Delbrook CapitalTocqueville Asset ManagementLivermore PartnersKopernik Global Investors, Apogee Global Advisors and Equinox Partners. Other named members of the alliance are Adrian Day Asset Management, Swiss based AMG Fondsverwaltung AG, Equity Management Associates, Luxembourg based La Mancha (Naguib Sawiris), and privately-held Sun Valley Gold LP.

According to Bloomberg, there are also four institutional members of the new Council who wish to remain anonymous, bringing the total number of institutions involved to sixteen. Previous coverage of the Shareholders Gold Council mentioned names such as Vanguard, State Street Global Advisors, Blackrock and Van Eck, so these could be some or all of the four that do not want their identities revealed. This preference for anonymity by four  institutional shareholders of gold mining companies is itself worrying, because it begs the question that if they haven’t even got the courage to publicly identify themselves, then how committed and motivated are they really to effect change within the gold mining companies that they invest in.

Don’t Mention the Gold Price

But as detailed in BullionStar’s article in June, there is one topic that this new Shareholders Gold Council could research and investigate, but has blatantly chosen not to. This is the issue of the gold price, an issue that goes to the heart of a gold mining company’s operations and the performance of its share price, including as we explained in June:

“how that gold price is discovered and established in today’s gold markets, whether that gold price is manipulated by bullion bank traders, and whether that gold price is subject to central bank interventions that attempt to control and stabilize it.”

The gold price as it relates to the health and performance of gold mining companies and their shares (common equity) is also a topic that is of interest to the Gold Anti-Trust Action Committee (GATA). GATA is a US-based educational and civil rights organization that was established 20 years ago to, in its own words “expose, oppose, and litigate against collusion to control the price and supply of gold and related financial instruments“.

Letter from GATA to John Paulson, dated 21 September 2018

GATA has even gone so far as to write a letter to John Paulson at the Paulson & Co headquarters in Manhattan, requesting that it be allowed to make a presentation to the Shareholders Gold Council “about the longstanding policy of Western governments and central banks to intervene in the gold market surreptitiously to suppress the monetary metal’s price“. GATA’s letter, dated 21 September 2018, can be read in pdf format here.

GATA’s letter to Paulson refers to:

“the largely surreptitious manipulation of the gold market by governments and central banks, usually undertaken through intermediary brokers and the bank for International Settlements.”

While making references to the fact that GATA has:

found that gold price suppression is actually longstanding Western government policy, acknowledged in government archives and the writings and public comments of many central bankers themselves but seldom reported by financial organizations“.

Conclusion

As someone who has found some of the government archives, writings and comments of central bankers that GATA refers to above, I would have to agree with the statements in GATA’s letter to Paulson. That is why it will be very interesting to see how John Paulson responds to the GATA letter, if indeed he responds at all.

GATA has also asked Paulson if it can join the Shareholders Gold Council, another possibly tall order for Paulson’s new grouping to fulfill, especially since the new coalition is already opaque with four large institutional members not having the courage to publicly put their names on record.

So, will this Wall Street centric New Shareholder’s Gold Council investigate the gold price as part of its remit? Or will it, like its similarly named World Gold Council, not bother to really care what goes on in the central bank gold world. It remains to be seen, but the best answer currently would be “Don’t hold your breath!”

The Shareholders Gold Council (SGC) – “Just don’t mention the Gold Price”

One of the more interesting developments in the gold mining sector at the moment is the impending launch of an investor alliance called the Shareholders Gold Council (SGC) whose objectives focus on reversing the poor shareholder returns and underperformance that has been dogging the sector’s leading gold mining stocks for some time now.

This new ‘Council’, which will be activist in nature, has been spearheaded by well-known hedge fund Paulson & Co, and was first pitched to fellow institutional investors and hedge funds during a Paulson & Co presentation at the Denver Gold Forum in September 2017.

For those unfamiliar with Paulson & Co, this is a hedge fund firm established by John Paulson in 1994. Paulson’s hedge fund firm rose to prominence in the late 2000s when it shorted subprime mortgages, and correctly bet on the collapse of the US housing market. Paulson & Co pursues event-driven strategies including merger arbitrage and corporate restructurings and runs a number of funds across equities and credit. Paulson also launched a specific gold fund in 2010 called the PFR Gold Fund which according to HedgeTracker had a “long-term strategy focus investing in mining companies and bullion-based derivatives“. This fund does not invest in physical gold, as was highlighted in the BullionStar article “Are the World’s Billionaire Investors Actually Buying Gold?“.

For those unfamiliar with the Denver Gold Forum, this is an annual three-day gathering of gold and silver mining companies, major institutional and hedge fund investors which invest in the sector, and Wall Street analysts covering the sector. In fact, the Forum’s organizers claim that the event represents nearly 90% of the world’s publicly traded gold and silver companies.

Denver Gold Group’s Gold Forum

 

According to an article by Reuters in early June, the nascent Shareholders Gold Council (SGC) has already garnered significant interest from major shareholders in the gold mining sector, and will, at the outset, represent more than 12 institutional and hedge fund investors, including investment institutions such as Delbrook Capital, Tocqueville Asset Management, Livermore Partners, and Kopernik Global Investors, and hedge funds Apogee Global Advisors and Equinox Partners, in addition to New York based Paulson & Co.

Reuters has also reported that major league institutional players such as Vanguard, State Street, Blackrock and Van Eck have also expressed interest in the SGC alliance.

High Cost Base, Destruction of Value

While hedge funds regularly attempt to turn around individual companies, the mobilization of a broad-based shareholder grouping focused on revitalizing an entire sector is still quite unusual, even for Wall Street. It is therefore instructive to examine what motivated Paulson & Co to roll out this idea and pitch the alliance to an entire institutional investment community. Although media coverage has been quite sketchy and exact details of the coalition remain unclear, the Denver presentation given by Paulson & Co’s natural resource specialist, Marcelo Kim provides some clarity, and is therefore worth reviewing.

According to Kim’s presentation ‘Gold Equities: Myths, Dreams and Reality‘, given to the Denver Gold Forum on 26 September 2017, the bottom line is that major gold mining stocks have been severely under-performing both the gold price and the broader equity indices for some time now.

Paulson & Co presentation to Denver Gold Forum, September 2017

This stock underperformance, thinks Paulson & Co, is due to poor investment decisions by said gold mining companies, destruction of enterprise value / low return on capital, and massive writedowns on ill-judged acquisitions, all in an environment of gigantic pay and compensation packages to gold mining company CEOs, clubby and cronie appointments to the companies boards of directors, and low stock ownership (but high options ownership) by these same company executives and board members. According to Paulson’s Kim, “CEOs and Boards get rich while shareholders lose money“.

To illustate, Kim in his presentation highlighted that from January 2010 to September 2017, a timeframe in which the US dollar gold price fell by 20%, the VanEck Vectors Gold Miners ETF (GDX) [which tracks the NYSE Arca Gold Miners Index] returned a negative 45%. Shareholder returns in the junior mining sector were even worse, with the VanEck Vectors Junior Gold Miners ETF (GDXJ)[which tracks the MVIS Global Junior Gold Miners Index] down by 58% over that time-frame.

Even more worryingly, total shareholder returns from 13 large publicly listed gold companies over the January 2010 to September 2017 period was an average negative 65%. However between 2010 and 2016, CEO pay in these same 13 leading gold mining companies was a combined US$ 550 million.

These 13 companies were Eldorado, Newcrest, Newmont, Gold Fields, Barrick, GoldCorp, Yamana, Kinross, AlgloGold, Agnico, Polymetal, Randgold, and Iamgold. All of these companies are members of the World Gold Council except for South African miners Gold Fields and Randgold and the Russian miner Polymetal. Notably, Randgold and Polymetal bucked the trend with relatively healthy shareholder return since 2010 of 35% and 20%, respectively, as well as the highest return on capital (RoC).

Additionally, over the 2010 – 2017 period, the gold mining industry had, according to Paulson and Co “written off $85 billion due to overpaying for acquisitions and massive cost overruns on mine builds“. Gold mining shareholders, said Kim, have no one to blame but themselves, as they had little engagement with company boards, chose not to engage in shareholder activism, but all the while continued to rubber stamp CEO pay, board appointments and mergers and acquisitions. Gold mining shareholders were in short, “like sheep being led to slaughter”.

Whose fault is it? Slide from Paulson & Co presentation

Paulson’s Call to Action

The solution, according to Paulson & Co, is shareholder representation on company boards, investor rights agreements with company boards, company accountability to shareholders, the sacking of poor performing CEOs and board members, and the alignment of CEO compensation with share price performance. As all of these tactics are typical activist hedge fund tactics, it’s not really surprising that Paulson, as an activist hedge fund firm, would make these suggestions.

However, it is in the modus operandus and implementation of the scheme that there is arguably a more radical departure, since this is where the Shareholders Gold Council (SGC) comes in, with Paulson calling for a Council comprising a broad base of major (institutional) gold mining equity holders to come together and make recommendations on board appointments, CEO pay, company takeovers, as well as to make recommendations on annual general meeting (AGM) and extraordinary general meeting (EGM) voting decisions.

But still, is this really a new departure? In one way it is not, because there are perfectly good proxy advisory firms, such as Institutional Shareholder Services(ISS) and Glass, Lewis and Co which between them provide the same type of corporate governance and proxy voting research that Paulson’s Shareholders Gold Council is envisioning, and that are specialists in doing so for every major listed company in the world including every major exchange listed gold mining company.

Call to Action – Shareholders Gold Council (SGC). Slide from Paulson & Co presentation

Paulson and Co’s presentation even mentioned ISS, saying that the new Council would be ‘similar to ISS‘.  According to Reuters’ June article, the Paulson led Council “will begin by releasing research reports on the gold mining sector… betting that shining spotlight on the space will result in greater accountability“. But is this just more of the same?

From a coverage standpoint, there are already countless sell-side (Wall Street) research reports covering all of the world’s leading gold mining companies that are published by a host of investment banks, in addition to umpteen buy-side research reports on the gold mining sector published by countless investment institutions and hedge funds, as well as the aforementioned governance and proxy voting research reports published by ISS and Glass Lewis.

If this new Shareholders Gold Council succeeds in gaining board level representation and in influencing investment and acquisition policy, and CEO compensation and board appointments, then this may in some way make a difference to future shareholder returns in the sector. But at this stage its impossible to say what type of influence, if any, such a Shareholders Gold Council would generate.

The Elephant in the Room

There is one topic, however, that an investor led Shareholders Gold Council could research, analyse and investigate, but for some mysterious reason has chosen not to. This is an issue that goes to the heart of a gold mining company’s operations and the performance of its share price. We are talking here about the actual gold price, how that gold price is discovered and established in today’s gold markets, whether that gold price is manipulated by bullion bank traders, and whether that gold price is subject to central bank interventions that attempt to control and stabilize it.

Simply put, the price that gold mining companies receive for their gold mining output is the most important driver of gold mining share price performance, and not the company’s cost base. We are assuming here that gold mining companies do not hedge their sales. Just look at how gold mining company stocks perform in an environment of a strongly rising or strongly falling gold price. The stock prices move up or down strongly since they are highly leveraged to corresponding gold price changes.

Take for example a simple model of a gold mining company. Its total revenue will depend on how much gold it extracts, processes and sells, and at what price it sells this gold. That’s the top line. The bottom line will be the profits remaining after subtracting total costs incurred by the mining company, which to some extent are fixed. These costs include operating costs (mining costs, processing costs, and corporate, general and administrative costs) and capital expenditure etc. Beyond this, impairments and writedowns on investments will also create an extra hit, as well as merger and acquisition costs.

As the gold price is most often quoted and understood in a price per ounce, the gold mining sector and the investment analysts which cover this sector like to calculate corresponding cost per ounce metrics, including operating costs per ounce of gold produced, total cash costs per ounce, and more recently an All-In Sustaining Cost (AISC) per ounce.

Total cash cost is a historic metric that was devised by the now defunct Gold Institute. It can be viewed as a standard metric for production cost in the gold mining sector. Cash costs would include all costs associated with producing the gold, such as direct production costs, smelting, refining, transport, and administration costs of a mine.

All-In Sustaining Cost (AISC) is a metric introduced by the World Gold Council in June 2013 which aims to try to reflect costs beyond cash costs. AISC includes cash costs but then adds other costs such as general administrative expenses (head office costs) and costs associated with maintaining and replenishing a mining company’s operations, i.e. for sustaining production. It thus includes capital expenditure and exploration costs.

So what Paulson & Co’s Shareholders Gold Council is planning, in addition to publishing research reports, is to try to have an impact on cost reduction, such as reducing CEO and board compensation, as well as to prevent gold miners making costly mistakes on acquiring overvalued mines which they will then have to take writedowns on in the future. This may all be very logical and make a difference in some way, but what the Shareholders Gold Council is not planning to do is to analyse and research anything about the gold price, which is, as was just stated above, the most important determinant of shareholder return and price performance in the gold sector.

Resources & Firepower, but Don’t mention the Gold Price

The Shareholders Gold Council, which on paper will have immense research resources and firepower and influence, will not it seems devote any time or resources to questioning anything to do with the gold price and will just take it a a given. This to me is a completely lost opportunity given that there is ample material for analysis in this area, some of which would surprise institutional and hedge fund investors in the gold space if they bothered to look. Much of this material has been documented on this website and elsewhere, such as by GATA.

The entire structure of the world’s largest and most influential contemporary gold markets has little to do with physical gold. The gold price is predominantly established and discovered in two markets, the London Gold Market and the COMEX gold futures market which between them trade very little physical gold but do trade vast quantities of synthetic gold and gold derivatives. See ‘What sets the Gold Price – Is it the Paper Market or Physical Market?‘.

The vast majority of ‘gold’ trading in the London Gold Market is of unallocated gold which is merely a claim against a bullion bank, and is a form of synthetic or paper gold in as much of a way as the gold futures derivatives that trade on COMEX are. See ‘Bullion Banking Mechanics‘ and an accompanying infographic for details. All gold demand that flows into unallocated paper gold by definition does not flow into physical gold demand, a gold miner’s bread and butter. So unallocated gold syphons off real physical gold demand into a paper substitute and suppresses real demand for physical gold.

There is no trade reporting in the London Gold Market, and the London Bullion Market Association (LBMA) whose remit it is to release it has continually stalled on publishing any trade reporting. This reinforces the opacity of the one of the main gold markets which is responsible for gold price discovery. Nor is there any transparency about where major gold-backed ETFs such as GLD, that store their gold in the London gold vaults, actually source this gold from, some of which is borrowed from central banks.

The SPDR Gold Trust (GLD) – On the NYSE

Nor it there any reporting of any activity in the London gold lending market or of outstanding central bank gold loans or gold deposits. Central bank gold loans are therefore another suppressing influence on the gold price.

This is also ample evidence that the Bank for International Settlements has continually taken a keen interest in the ‘free market’ price of gold and has at times discussed at the highest levels (i.e. the governors of major central bank) how to control the gold price. See ‘New Gold Pool at the BIS Basle, Switzerland’ Part 1 and Part 2.

The COMEX gold futures market is in effect a casino which has a huge influence on gold price discovery but where little physical gold ever changes hands. Some major bullion banks have also been fined recently for manipulating the gold price. These are the same bullion banks which ran the London Gold Fixings and which now run the LBMA Gold Price auctions, auctions whose prices the gold mining companies take to sell their gold output at.

Generally speaking, gold mining executives don’t want to touch any subject related to the  gold price, nor does its representative body the World Gold Council. Now it seems, the institutionally backed Shareholders Gold Council likewise does not want to broach the ‘gold price’ subject.

Which is a shame, for by not examining the issue, and by not using some of their research resources to analyse and investigate and to ‘write reports‘ on the ample evidence of structural inefficiencies and interventionalist forces that hold back the gold price, Paulson’s Shareholders Gold Council, in the same way as the gold mining shareholders which they criticize, will remain “like sheep being led to slaughter”.

Are the World’s Billionaire Investors Actually Buying Gold?

Infographic website Visual Capitalist recently published an eye-catching infographic on behalf of Sprott Physical Bullion Trusts which featured 4 well-known billionaire investors and their supposed investments in gold. The infographic is titled “Why the World’s Billionaire Investors Buy Precious Metals” and can be seen here.

The 4 investors profiled in the infographic are:

  • Jacob Rothschild (Lord), chairman of London-based investment trust RIT Capital Partners Plc
  • David Einhorn, president of Manhattan-based hedge fund firm Greenlight Capital
  • Ray Dalio, chairman and CIO of hedge fund firm Bridgewater Associates, Westport (Connecticut)
  • Stanley Druckenmiller, chairman and CEO of Manthattan-based Duquesne Family Office (and formerly of Duquesne Capital Management)

Overall, four very famous investors, and four names that should at least be vaguely familiar to almost anyone who has a passing interest in financial markets and investing.

For each of the 4 billionaires, the Sprott infographic provides a few quotes about their views on gold and then moves on to record their recent ‘Moves’ into ‘gold’, or in some cases their recent readjustments of existing ‘gold’ exposures.

However, the trouble with this infographic is that although it’s visually appealing, nowhere does it mention how these famous investors achieve their exposures to ‘gold’, i.e. what form their gold investments take.

This is something which is also regularly bypassed in financial media articles, especially those published by Bloomberg, articles which refer to hedge fund managers such as Druckenmiller, or John Paulson, or Ray Dalio buying ‘gold’, but which all too often are too lazy to do basic research into the actual trades that these hedge fund managers execute to acquire their positions in ‘gold’ and whether these positions are actually in real physical gold or in some form of synthetic or derivative or paper gold.

In fact, the first comment posted on the Visual Capitalist website under said Sprott infographic when it was published asks exactly this question:

I’d like to know if they are holding physical bullion, presumably in guarded safe vaults, or just paper.”

Given that the infographic is ‘Presented by’ Sprott Physical Bullion Trusts, one might assume that Rothschild, Einhorn, Dalio and Drukenmiller are all investing in physical bullion.

But are they? This is the question I set out to answer and which is documented below. Some of my findings may surprise you.

The Rothschilds: Jacob & RIT Capital Partners

First port of call, the Rothschilds of St James’s Place in London. Given that the Rothschilds are probably the richest family in the world and have been involved in the gold market for hundreds of years, you might assume that the family of the Five Arrows knows a thing or two about the difference between real gold bars and paper gold. And presumably they do. However, no one seems to have told this to the day-to-day managers of RIT Capital Partners Plc, the Rothschild controlled investment vehicle quoted in Sprott’s infographic.

Investment trusts are actually public limited companies (Plcs) which are structured as closed-ended investment vehicles. These vehicles issue a certain number of shares that can then be publicly traded. RIT Capital Partners plc, formally called the Rothschild Investment Trust (hence the name RIT), trades on the London Stock Exchange. Jacob Rothschild (The Lord Rothschild) is chairman of RIT Capital Partners Plc.

As a publicly traded vehicle, RIT Capital Partners Plc publishes annual and half-yearly reports, and is therefore more transparent than its hedge fund brethren. RIT’s latest report, an annual report for year-end 2016, was published on 28 February 2017.

Strangely, although the Sprott infographic was only published on 7 June 2017, it quotes not from the annual report for year-end 2016 but from RIT’s half-yearly report to 30 June 2016, which was published on 15 August 2016.

The Sprott infographic states:

“In a 2016 shareholder update [Jacob] Rothschild outlined bold changes to the RIT Capital Partners’ portfolio, including…increased exposure to gold and precious metals to 8%

Similarly, in the RIT Chairman’s Statement (page 2) of the 30 June 2016 report, Jacob Rothschild said “We increased gold and precious metals to 8% by the end of June.

Glancing at either the Chairman’s statement or the Sprott infographic, you might think ‘ok, so RIT holds (or held) 8% of its portfolio in gold and precious metals’. However, this is not the case, a fact which becomes clear when we look at the Investment Portfolio (holdings) of RIT that are detailed in the same report.

Jacob Rothschild, RIT Capital Partners
Jacob Rothschild, RIT Capital Partners

RIT is a global investment fund whose holdings span equities, hedge fund investments, private investments, real assets, credit, and bonds. It’s ‘gold’ and ‘precious metals’ holdings are listed under ‘Real Assets’. The entire RIT portfolio is worth £2.73 billion.

The Real Assets section of the RIT report to 30 June 2016 (on page 6 of the report, page 8 of the pdf) lists relevant gold-related line items as:

  • “BlackRock Gold & General Fund”, described as “Gold and precious metal equities”, valued at £22.9 million, and representing 0.9% of the NAV, with a fund weight of 0.83%
  •  “Gold Futures” with a description “Long, 6.0% notional“, valued at £7.6 million, represents 0.3% of the NAV
  • “Silver Futures with a description “Long, 1.2% notional” valued at £7.6 million, representing 0.0% (rounded) of the NAV

These are the only gold-related investments in the entire RIT portfolio. Therefore, could this 8% that Jacob Rothschild refers to as “we increased gold and precious metals to 8% by the end of June” be a combination of a 6% notional long on gold futures, a 1.2% notional on long silver futures, and a 0.8% fund weight in gold mining equities through the BlackRock Gold & General Fund holding?

In short, the answer is Yes.

Firstly, looking at the BlackRock Gold & General Fund, this is a UCITS equity fund which exclusively invests in the shares of gold and silver mining companies such as Newcrest, Newmont, and GoldCorp and which is benchmarked against the FTSE Gold Mining Index (an equity index). However, the BlackRock website reminds us that “The Fund does not hold physical gold or metal.” Like all equity investments, this fund exposes its holders to equity risk, currency risk, sectoral risks (in this case the mining sector), possible gold hedging risks, and the general corporate risks that come with stock specific investing in any publicly quoted company, some of which cannot be diversified through portfolio investing.

Next up are the precious metals futures line items. In investment portfolios, notional is literally the gross exposure of a position. In this case, the RIT portfolio being long 6.0% notional in gold futures just means that the portfolio’s notional exposure to gold (via the gold futures position) represented (on 30 June 2016) an amount which was 6.0% of the total (gross) exposure of the portfolio. This is also a leveraged position since it was acquired via the purchase of exchange traded futures and the maintenance of these futures via margin. The amount reflected in the NAV for this position just refers to the margin.

I also checked with RIT investors relations as to whether Jacob Rothschild, when he stated that RIT holds gold, was actually referring to these gold futures positions. RIT investor relations responded:

“Yes, we do refer to long gold futures exposure as “holding gold”. We take this view since we are confident that gold futures are acting as a suitable proxy for gold both from a regulatory perspective and in terms of where we are in the cycle.

However, it should be clear to all that holding gold futures is not the same thing as holding vaulted physical gold. Gold futures may provide exposure to the US Dollar price of gold, but that’s about it, and even if they can be theoretically exercised into physical gold on the COMEX or ICE platforms, no one uses them for this purpose. For example, only 0.04% of COMEX gold futures contracts result in physical delivery each year.

Gold futures also entail exchange risk, risk of not being able to exercise for delivery, margin risk, forced cash settlement risk, etc etc. Gold futures are also derivatives that can come into existence in massive quantities as long as there are counterparties to take the other side of the futures trades.

Allocated physical gold on the other hand is an asset which exists in limited quantities, has no counterparty risk, has intrinsic value and has been used as money and as a store of value for thousands of years.

The “regulatory perspective” that RIT refers to just seems to mean that the fund’s exposure ticks various compliance boxes and is an acceptable security from a compliance and regulatory perspective.

The “where we are in the cycle” phrase probably refers to the interest rate cycle in terms of interest rate movements, inflation, real interest rates etc, but surely this is irrelevant because if you really believe that gold futures prices are a perfect proxy for gold prices, then the existence of a “cycle” and the phases of such a cycle become irrelevant to the investment decision?

In summary, it should be clear that RIT Capital Partners Plc does not hold any gold or other precious metals, because it merely holds gold futures and units in a BlackRock fund which itself only holds gold and silver equities (common shares) and which does not hold physical gold.

Just for completeness, let’s turn to the latest annual report from RIT for year-end 2016 that Sprott did not refer to. Has anything changed compared to 30 June 2016? At year-end 2016, according to Jacob Rothschild:

We continue to hold gold and gold mining shares amounting to 6% of the portfolio.

Therefore, by the end of 2016, by RIT’s logic, it now had a 6% exposure to gold (and the exposure to silver futures had disappeared). However, as per the 6 month earlier period, this was really a) exposure to the US dollar price of gold via gold futures and b) an exposure to the common equity of publicly-traded gold mining companies through the BlackRock fund investment.

In the Real Assets section of the RIT annual report (page 13 of the report, page 15 of the pdf), it lists:

  • “BlackRock Gold & General Fund”, with a description “Gold and precious metal equities” valued at £20.3 million, representing 0.9% of the NAV, and with a fund weight of 0.7%
  • “Gold Futures” with a Description “Long, 5.7% notional” representing (0.2%) of the NAV

Again, the 6% Rothschild reference includes the 5.7% long notional on gold via the gold futures, the BlackRock fund with a weight of 0.7%, and possibly the (0.2%) NAV (margin), which altogether net to approximately 6% when rounded down. Since 8% sounds better than 6%, Sprott may have chosen to reference the 30 June 2016 RIT report and not the more recent 30 December 2016 RIT report as this would make Rothschild appear more bullish on gold.

David Einhorn and Greenlight Capital

Hedge funds by their nature are very secretive, and because they are private pools of capital, they have no obligation to report detailed holdings even to their clients, let alone to the general public. Some of the justifications for hedge fund secrecy include preventing other trading parties adversely trading against them and preventing competitors replicating their positions. Note, hedge funds still have to report equity holdings to the US SEC and they do this via their quarterly 13F form submissions, which can be viewed on the SEC EDGAR website about 6 weeks after quarter end.

Sometimes hedge fund stars will drop hints about some of their positions or engage with the financial media, but this is mainly to talk their positions and trading books up. Often however, the “partner letters” (similar to shareholder letters) that hedge fund partnerships send to their clients / investors will give some indication as to their positions and asset allocations, and for whatever reason, some of these letters seem to make it into the public domain pretty quickly. Note that most hedge funds are established as Limited Liability Companies (LLCs), a structure which supports the partnership model.

Following Jacob Rothschild, next up on the Sprott infographic is hedge fund manager David Einhorn and his Greenlight Capital hedge fund firm. Greenlight, as a hedge fund firm, runs a series of funds that invest in equity, debt etc but also include global macro and that are known as the “Greenlight Capital funds” a.k.a. “The Partnerships”. There are at least 6 funds in this group, maybe more.

David Einhorn
David Einhorn, Greenlight Capital

The Sprott infographic refers to a recent gold-related ‘Move’ that Einhorn that made as follows:

“In early 2017, Einhorn mentioned on an earnings call that he was:…Keeping gold as a top position”

More recently, Greenlight again refers to its gold positions in a partners letter dated 25 April 2017, in which it wrote that “gold gave us a small profit in macro”, and that:

 “Gold remains a long-term position with a thesis that global fiscal and monetary policies remain very risky”

So we can assume that Einhorn maintains a gold exposure of some sort. Since there was no information in the above partner letter as to what exactly Greenlight refers to as a gold position, and nothing that I could find on the web, I did what any junior Bloomberg reporter should but doesn’t do, and shot off an email to Greenlight asking how Greenlight Capital attains its long gold exposure? Surprisingly, or maybe not, within about 20 minutes Greenlight answered with a short and sweet one-liner:

 “We hold physical allocated gold in all our funds.” 

This response came from the top of the Greenlight tree, close to Einhorn. Hint David Einhorn only follows three accounts on Twitter, one of which is Donald Trump another of which is the Einhorn Trust. So now we know that at least one major hedge fund firm holds physical allocated gold.

On a side note, Greenlight also offers two funds called Greenlight Capital (Gold), LP and Greenlight Capital Offshore (Gold), Ltd. These two funds actually offers investors a gold class which denominates investments in that class in gold rather than USD. This is similar to a USD denominated fund offering shareholders a EUR or CHF class, the only difference being that this class is in gold. 

Ray Dalio and Bridgewater

Bridgewater Associates, based in Westport in Connecticut, runs some of the largest and most well-known individual hedge funds such as the global macro Pure Alpha as well as other well-known funds called ‘The All Weather’  and ‘Pure Alpha Major Markets’. Ray Dalio is founder, chairman and chief investment officer (CIO) of Bridgewater.

In the Sprott infographic, the gold ‘Move’ which they chose to highlight Dalio for was that:

“In 2016, Dalio said it is prudent to have a ‘well-diversified portfolio’ that is 5-10% gold”

However, unlike the other investors profiled, i.e. Rothschild, Einhorn, and Druckenmiller, who had investment decisions attributed to them that involved taking or extending long positions, there is nothing, at least in the infographic, that refers to Dalio taking on or amending a gold position.

When Dalio refers to gold, which he has done publicly on a number of occasions, he tends to do so in generalistic terms such as the following comments which were taken from Dalio’s appearance at the CEO Speaker Series conversations organised by the Council on Foreign Relations (CFR):

“And so gold is one of the currencies. So we have dollars, we have euros, we have yen and we have gold.”

“Now, it [gold] doesn’t have a capacity — the capacity of moving money into gold in a large number is extremely limited.”

“I think … there’s no sensible reason not to have some — if you’re going to own a currency, … it’s not sensible not to own gold”

“I don’t want to draw an inordinate amount of attention to gold”

“a certain limited amount, at least passably, should be in gold, just like you would hold a certain amount in cash”

“Now, it depends on the amount of gold, but if you don’t own, I don’t know, 10 percent in — if you don’t have that and then it depends on the world, then you — then there’s no sensible reason other than you don’t know history and you don’t know the economics of it.”

Ray Dalio, Bridgewater Associates
Ray Dalio, Bridgewater Associates

Dalio frequently, in various forums, demonstrates his understanding of the historical importance of gold in the monetary system. Based on the language that Dalio uses about capacity of the gold market and his appreciation of the history of gold, my hunch is that Bridgewater does hold physical gold in a similar manner to how Greenlight Capital holds gold.

Dalio has also gone on record with Tony Robbins hinting at a gold allocation that he would use for an “all weather fund”. This is not the Bridgewater All Weather Fund, but it could be something similar. Dalio’s recommended asset allocation that he gave Robbins was:

  • 30% Stocks
  • 40% Long-Term Bonds
  • 15% Intermediate-Term Bonds
  • 7.5% Gold
  • 7.5% Commodities

Although it is quite tricky to contact Bridgewater, I did manage to find Dalio’s email (somehow or other) and like an aspiring Bloomberg reporter (or not), I shot off an email to Dalio asking:

“Does Bridgewater hold physical gold in its funds (e.g. Pure Alpha, All Weather, and Pure Alpha Major Markets) or some other type of long gold exposure?” 

The same day, I received back an automated response:

______________________________________________________________________

Message from "Ray Dalio"
______________________________________________________________________

I recognize from your email address that this is the first message I have received from you since Bridgewater Associates began using Sender Address Verification (SAV).

Your message is very important to me.  Like you, we are very concerned with stopping the proliferation of spam.  We have implemented Sender Address Verification (SAV) to ensure that we do not receive unwanted email and to give you the assurance that your messages to me have no chance of being filtered into a bulk mail folder.

By pressing REPLY and SEND to this message your original message will be delivered to the top of my inbox.  You need only do this once and all future emails will be recognized and delivered directly to me.
...
Thank you!

Ray Dalio

However, after replying as per the instructions above using the verification address, there was no further response from Bridgewater. Maybe he is on vacation!

So the jury is still out on how Bridgewater acquires its exposure to gold, assuming that its funds actually have exposure to gold. But my guess is that at least some of Bridgewater’s funds do hold gold, and probably hold real physical allocated gold.

Stanley Druckenmiller and Duquesne

Finally, the Sprott infographic features Stanley Druckenmiller, founder and former chairman and president of Pittsburgh-based Duquesne Capital Management, and also former portfolio manager of Soros’ Quantum Fund. In 2010, ‘Stan’ Druckenmiller wound down Duquesne Capital since he claimed it was becoming harder to deliver consistently high returns, but he continued to manage his own wealth through Duquesne Family Office LLC, which is based out of Manhattan.

According to the infographic, in early 2017 Druckenmiller said:

“Gold was down a lot, so I bought it.”

Stan Druckenmiller

Stan Druckenmiller, Duquesne 

This quote was reported in a 8 February 2017 Bloomberg article which itself was based on a CNBC interview from 7 February:

“I wanted to own some currency and no country wants its currency to strengthen,” Druckenmiller said Tuesday in an interview. “Gold was down a lot, so I bought it.” 

As per usual, Bloomberg doesn’t bother to find out or mention what form of gold exposure Druckenmiller was referring to in that interview.

Strangely, Bloomberg says that Druckenmiller bought gold in late December and January having previously sold his ‘gold’ on election night in November when Trump was elected. I say strangely because Druckenmiller is known for getting his US dollar ‘gold exposure’ via the gold-backed ETF the SPDR Gold Trust (GLD) however, the Duquesne Family Office 13F filings with the SEC don’t show GLD activity in Q4 2016 or Q1 2016.

Looking at recent Duquesne Family Office 13F filings which show reportable equity holdings (including GLD since GLD is a listed security and is basically like a share), the last time Duquesne Family Office had a long exposure to the SPDR Gold Trust was in Q1 2016 when it held 2,016,000 call options on the SPDR Gold Trust (Cusip 78463V907) which at the time had a notional exposure of $237.16 million. Druckenmiller had purchased 2,880,000 call options on GLD during Q2 2015 but reduced this to 2,016,000 calls during Q1 2016. Duquesne has not held any SPDR Gold Trust shares or options since Q1 2016.

However, looking at the Duquesne 13F filings for Q3 2016, Q4 2016 and Q1 2017, there are some interesting changes in reported holdings of some gold mining equities over this period.

As of the end of September 2016, Duquesne reported holding 1.8326 million Barrick Gold shares and 530,800 Agnico Eagle Mines shares. Then, as of the end of December 2016, neither of these stocks appeared on the Duquesne 13F list.

However, as of the end of March 2017, both Barrick and Agnico reappeared on Duquesne’s filing, with Druckenmiller’s family investments holding 2.85 million Barrick Gold shares, and 882,900 Agnico Eagle Mines shares. Barrick Gold, headquartered in Canada, is the world’s largest gold mining company. Agnico Eagle, also headquartered in Canada, is another large gold mining company.

The timing of Druckenmiller saying that he sold his ‘gold’ on election night in November 2016 and the bought gold in late December 2016 and January 2017 fits very well with the Duquesne trades of selling Barrick Gold and Agnico Eagle so that they appeared in the Q3 13F, but not in the Q4 13F and then reappeared in the Q1 2017 13F. If this is the case, then Druckenmiller’s Duquesne does not hold gold but holds gold mining equities, and Druckenmiller’s recent references to buying gold are really references to holding common shares in publicly-traded gold mining companies.

Duquesne, however, could hold other ‘gold exposures’ such as gold futures or even real physical allocated gold. But due to the non-obligation of these investment pools to report holdings, this is unclear.

I also sent an email to Stan Druckenmiller at his Duquesne address, asking him:

“Does Duquesne Family Office hold physical gold as part of its exposure to gold within its investments, or is the exposure some other type of long gold exposure such as the gold-backed ETF GLD?”

However, as of the time of writing, Druckenmiller has not responded.

Druckenmiller’s gold exposure via GLD calls between Q2 2015 and Q1 2016 also deserves some commentary. Readers of this website will know that holding a gold-backed ETF such as GLD is not the same as owning real physical gold. Although the Trust behind GLD holds gold bars, GLD units just provide exposure to the US dollar price of gold and there is no conversion option into real gold. With GLD, the holder is a shareholder and not a gold holder. There are many other concerns with GLD, all of which are documented on a BullionStar infographic.

However, Duquesne’s ‘exposure’ is even one more step removed from gold since it was in the more of a derivative (call option) on an underlying (GLD) which itself does not provide ownership of any gold to the holder. So in some ways this could be called a second order derivative.

Paulson & Co

Although Sprott’s infographic doesn’t feature John Paulson of hedge fund firm Paulson & Co, maybe it should have. However, on second thoughts maybe not, because Paulson & Co is currently the 6th largest institutional holder of SPDR Gold Trust (GLD) shares, which as explained above, is not the same as owning real physical gold. According to its latest 13F filing, Paulson & Co holds 4,359,722 GLD shares worth a sizeable $500 million.

John Paulson (far left)
John Paulson (far right), along with Jim Simons of Renaissance (middle) and George Soros (left) 

Paulson also launched a specific gold fund in 2010 which is now called the PFR Gold Fund, named after Paulson, and the two managers who used to run the fund, namely, Victor Flores and John Reade, hence the PFR. Reade has now left Paulson & Co, and moved to the World Gold Council (WGC), which derives the majority of its revenue from…wait for it….the SPDR Gold Trust, since WGC’s 100% owned subsidiary World Gold Trust Services is the sponsor of the GLD.

According to HedgeTracker, the PFR Gold Fund has a “long-term strategy focus investing in mining companies and bullion-based derivatives“, so again you can see that this is nothing to do with owning and holdings real physical allocated gold.

Conclusion

After this whirlwind tour, we know the following:

RIT Capital Partners Plc claims to hold gold but really holds a) gold futures which provide notional long gold exposure and b) a BlackRock fund which invests in gold mining shares.

Greenlight Capital holds allocated gold in all of its hedge funds (and they are good about replying to emails).

Bridgewater Associates probably holds gold exposure across at least some of its funds. Given Ray Dalio’s grasp of the importance of real physical gold, I would be surprised if Dalio’s funds do not hold real physical gold. But Dalio is a hard man to track down, so the jury is still out on this one.

Stan Druckenmiller’s Duquesne Family Office had a large exposure to the SPDR Gold Trust via call options in 2015 and early 2016 but then closed this exposure. Duquesne also invests in gold mining equities Barrick Gold and Agnico Eagle Mines, and this could be what Druckenmiller is referring to when he said he sold and then bought back gold.

Paulson is a big fan of the SPDR Gold Trust, a vehicle which is in no way the same as owning physical gold, because it merely provides exposure to the US dollar price of gold.

If and when the paper gold market implodes and the price of real physical gold diverges from the paper price of gold, the world’s billionaire investors will need to line up their ducks and explain to their partners and shareholders if they actually hold tangible physical gold bars, and if not why not.