Bad Gold Investing Decisions

Gold investing pro's came unstuck in 2013. Here's why...

 

TWO of the most noteworthy gold investors were humbled by this year's collapse in gold, writes Sumit Roy at Hard Assets Investor.

 

This year's gold collapse has had many casualties. From mining companies, to hedge funds, to small and large investors alike, anyone who's held a position in the yellow metal has felt the impact of the price collapse.

 

As Dave Nadig of IndexUniverse wrote in a piece today that we picked up, even a couple billionaires were blindsided by gold's sudden demise. John Paulson's PFR Gold Fund was down a whopping 63% as of the third quarter, while Eric Sprott's flagship hedge fund was down more than 50%.

 

Both investors' reputations have certainly taken a beating along with gold. Both were firm believers that the Federal Reserve's unprecedented monetary stimulus would result in rapid inflation, propelling gold to new heights.

 

In 2010, Paulson said that 80% of his assets were in gold and that he anticipated double-digit inflation over the next few years. Last month, Paulson conceded that events hadn't played out how he foresaw and thus he would not be adding to his gold positions because "it's not clear when inflation will accelerate."

 

In contrast to Paulson, fellow billionaire Eric Sprott remains an adamant proponent of gold. Claiming that demand for the metal is well in excess of supply, Sprott maintains that central banks are suppressing prices. 

 

"For people not to think [there] is manipulation of the gold and silver prices is almost ridiculous," Sprott said in a September interview. 

 

Sprott's view mirrors that of many so-called gold bugs, a vocal segment of the gold market that believes that governments have played a large role in distorting prices of the yellow metal.

However, facing hefty losses and waning investor confidence, Sprott's namesake firm has announced plans to phase him out of investment decisions by the end of the year, according to the Wall Street Journal.

Paulson admits his timing was off, while Sprott blames manipulation for his fund's woes. Regardless, the fact is that they both made bad calls. The returns speak for themselves. A drawdown of 50%-plus in a single year is not something most investors can weather.

 

This could all have been avoided, of course, if Paulson and Sprott did not hold highly concentrated positions in precious metals. Gold is a hedge against inflation; any hedge should only comprise only a portion of one's portfolio. The greater the concentration, the more speculative the position becomes. 

 

Many investors believed that QE would translate into high levels of inflation. Most weren't foolhardy enough to put their entire portfolio into gold, hoping to hit the jackpot. Paulson and Sprott made a bad investment decision; that's the bottom line.