Owning gold certainly hasn't lost its appeal with investors. The metal's safe haven status continues to be affirmed as many of the problems facing the global economy - low growth, big public debts and high unemployment - still has not subsided since the Great Recession. Overall, the precious metal continues to find support in both retail and institutional investor portfolios. That support recently got another boost from another class of investors - elite billionaire hedge fund managers.
With so many once again flocking to gold as a safe haven as a fiscal cliff play, the big question for investors is whether or not they should follow suit.
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Soros, Paulson and More
Gold's ultimate store of value and safe haven status hasn't been lost on the investing elite. The group's latest 13F filings and commentary show that the billionaire hedge fund manager set has been diving head first into the precious metal as a way to prepare for a poor outcome of the fiscal cliff debate in the United States as well as lower global growth in 2013.
John Paulson made a splash in 2007-2008, when he correctly bet against subprime mortgages. That bet guided his Advantage Plus Hedge Fund to realize returns of 591% and helped propel him into the media spotlight. Since that time, Paulson has been accumulating gold and gold mining stocks at a fevered pace. The fund manager raised his stake in the SPDR Gold Shares ETF (ARCA:GLD) by 26% in the second quarter of 2012 to sit at 21.8 million shares. At roughly 66 metric tons of gold, that makes him the single largest holder of the fund. The ETF, along with a stake in miner AngloGold Ashanti (NYSE:AU) make up 38.7% of his hedge funds portfolio.
Not to be outdone, George Soros and his funds boosted their investment in the SPDR Gold Trust by 49% to 1.32 million shares, while Louis Moore Bacon acquired 1.8 million shares in Sprott Physical Gold Trust (ARCA:PHYS) last quarter. This echoes moves by other fund managers like Julian Robertson into the metal, mining equities and exchange traded products that track it. Even PIMCO's Bond King, Bill Gross, has urged investors to begin buying precious metals.
Follow or Head In a Different Direction
Given that so many prominent fund managers and investment superstars have once again flocked to gold, the question remains if regular retail investors should follow their lead or not. The answer may not be a simple yes or no.
First, many of these managers have piled into the metal as more of an insurance policy. In an interview with Newsweek, George Soros thinks that the current global economic situation is worse than during the Great Depression as "riots on the streets of American cities are inevitable." While most analysts and pundits don't think an all-out chaos will occur in the streets, the safe haven status of the precious metal certainly gives investors a piece of mind against the possibility. A more real scenario is going over the fiscal cliff, and gold again provides an insurance policy against Congress.
With billions of dollars invested with these managers and their personal net-worth's up for grabs, if all heck breaks loose finding protection could overshadow potential stock or bond market gains - at least in the short run.
Yet, even without the cliff or fiscal Armageddon, the explosion of stimulus measures across the world, currency debasement and slowing developing market growth should help push gold higher. The billionaire fund managers could just be making a macro bet on the long-term increase in the price. If you believe the odds of either of these situations could come true, then buying bullion via a fund like the ETFS Physical Swiss Gold Shares (ARCA:SGOL) or shares of miners such as Barrick Gold (NYSE:ABX) makes perfect sense.
However, if you agree with one the biggest billionaires on the block - Warren Buffett - that gold is strictly nonsense, then the recent downturn in stocks due to the fiscal cliff debacle should be viewed as a buying opportunity. There are plenty of great businesses that are paying great dividends - something gold doesn't do - that are currently trading for dirt cheap multiples. Simply buying a dividend-focused fund like the Vanguard Dividend Appreciation ETF (ARCA:VIG) could be the best road, especially if the U.S. continues its slow moving recovery.
The Bottom Line
With billionaires like Soros, Paulson and Rogers moving into gold again, the question for us regular Joes is should we follow. All the issues facing the global economy certainly makes a great case for buying the precious metal or funds like the Central Gold-Trust (AMEX:GTU). Investors just need to make their minds on how strongly they believe the macroeconomic picture will or won't deteriorate over the next few years before jumping in.
At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.