Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

John Paulson's Secret Gold Stocks Investment Strategy

Commodities / Stock Markets 2010 Nov 17, 2010 - 05:11 AM GMT

By: Q1_Publishing

Commodities Best Financial Markets Analysis ArticleJohn Paulson almost single-handedly made gold “cool” again on Wall Street.
The man who made billions betting against subprime debt put the spotlight on gold when his firm revealed in May 2009 that he was betting on gold in a big way.


Since then gold has climbed 45% and major gold stocks (as tracked by the Market Vectors Gold Miners ETF – NYSE:GDX) have climbed more than 70%.

Paulson’s largest gains in gold, however, have come from using a unique strategy which reduces risk, increases gains, and you can use to truly maximize the gold bull market.

Investing in “Impaired” Gold Stocks

When Paulson made his move into gold, he bought mostly gold and gold stocks. His funds took large positions in the SPDR Gold Shares ETF (NYSE:GLD), the Market Vectors Gold Miners ETF, and individual gold miners including Gold Fields (NYSE:GFI), Kinross Gold (NYSE:KGC), and AngloGold Ashanti (NYSE:AU).

But he also took a large stake (18% of the company) in a gold company that made was poised to outpace all of those all with much less risk. That company was Gabriel Resources (TSX:GBU).

Gabriel Resources shares have far outpaced everything he bought. Gabriel shares have climbed from around $2 per share to more than $7 since then. That 233% move more than three times the return of the major gold stocks.

More importantly, Paulson’s Gabriel investment shows a strategy you can use to truly capitalize on the gold bull market.

You see, Gabriel is what we call an “impaired” gold company.

It has a massive gold deposit. Its Rosia Montana deposit in Romania contains an estimated 14.6 million ounces of gold. The deposit has been mined on and off for more than 1900 years (the Romans were the first to mine it around 100 A.D.).

But it had a few problems too.

The Wall Street Journal reported in June 2009:

Gabriel’s main asset: a majority stake in a large Romanian gold mine. The problem: That mine produces no gold.

Environmentalists have long been hot under the collar, worried about potential cyanide poisoning. Their protests have helped block Gabriel’s decade-long efforts to open a modern mine at the site, known as Rosia Montana. Yet as gold fever continues to rage, the hedge funds appear to be banking on yellow trumping green.

Gabriel was impaired and the whole world new it. Efforts to open the mine have been going on for over a decade. And there was little chance when gold was between $700 and $900 per ounce to entice the local government to change course anytime soon.

That’s why the company was so cheap.

It had a market cap of $700 million at the time of Paulson’s investment. That’s works out to about $48 per-ounce-in-the-ground of gold. Most miners are valued at between $100 and $300 per-ounce-in-the ground depending on factors like mining costs, reserve base, production growth and many other factors.

Most of the world wrote Gabriel off completely. The basic thinking went: Sure it has a lot of gold, but it may never be mined.

StockChase.com, a web site which tracks “expert” comments on stocks, showed how hated the stock was. Only one of the 19 most recent comments on Gabriel said “buy.”

“Crazy” Moves Pay Off Big

Paulson, however, saw something different than the herd.

Although it seemed incredibly risky, the risk was actually very low. The bearishness was so strong it would have been tough for Gabriel shares to fall much further. There was always the sheer size of the deposit and the value of the gold in the ground to help put a floor in Gabriel shares.

The upside, when something is so out of favor, was maximized. Remember, when a stock is lowest and no one is willing to buy it, the upside potential is greatest.

Paulson saw it and bought big. He bought 18% of the Gabriel’s outstanding shares.

At the time it was “crazy.”

From a tactical perspective, however, it was a brilliant move.

Finding the Extremes

Gabriel turned out to be a classic “extreme” in the markets that one of the great speculators of this generation capitalized on.

As the gold bull market continues, we expect to find many more of these opportunities. After all, in the mining world everything that can go wrong will go wrong. The smaller gold companies with market values between a few hundred million and a few billion dollars and have their futures tied to just one or two mines, they will run into occasional speed bumps.

That’s all why we’re still focused on gold as one of the top asset classes to hold onto this decade and the best ways to play it.

All the fundamentals are in place for a record run in gold prices. And since the “hot money” hedge funds have come and gone since Paulson made took his first big stake in gold and gold stocks, we knew there were big things to come.

In May 2009 when the whole world noted Paulson’s gold bets we noted:

We all see the opportunity in gold though. Everything is there. We have the pending devaluation of the dollar. We have a very small gold market relative to the investment capital sitting on the sidelines. We have China quietly announcing it is going to buy a lot more gold…

It’s all there. And now Paulson is betting big too.

This run seems inevitable at this point. There is, however, one very big consideration a lot of folks following Paulson’s lead are forgetting. And that’s time.

You see, Paulson is good – really good. But a lot of investors are good at finding opportunities. The difference with Paulson is he’s patient and disciplined enough to maximize an opportunity. Just take a look at his bet against the subprime debt.

According to Pensions & Investments magazine, “Convinced that subprime mortgages would falter, [Paulson] did extensive research, hired staff with necessary expertise and in April 2005 began making a big bet, using credit default swaps to short the asset class.”

Think about that for a second. Paulson began betting against subprime mortgages in 2005. That was well before the housing market peaked and nearly two years before subprime markets started to falter in 2007.

He was right, but he was early. He stuck to his bet even though the housing market continued to do well. Eventually, it paid off.

Now we’re expecting the big payoff to come in gold.

We’re waiting for it. We know it will take some time to play out. And if history is any example, it will take just long enough for most investors to get bored and frustrated (or both) to move onto greener pastures just as the real boom begins.

While we’re waiting, “impaired” gold stocks will allow us to tie up less capital, reduce risk, and increase our eventual profits exponentially.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2010 Copyright Q1 Publishing - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in