Paulson faith in gold unshaken despite ETF sale

The hedge fund run by John Paulson, one of the world's highest-profile gold bulls, has sold more than half its shares in the largest exchange traded fund backed by the metal, according to a regulatory filing.

However, Paulson & Co offset much of its sale of about 1.1m ounces of bullion held in SPDR Gold Shares in the second quarter by buying gold swaps on the over-the-counter market, according to a person familiar with the matter.

Mr Paulson's activities in the gold market have been religiously followed since the hedge fund manager, who made billions correctly predicting the US housing crash, accumulated a large quantity of the metal in 2009, when he started allowing investors to denominate their holdings in gold rather than dollars.

The 21 per cent tumble in gold prices so far this year has hurt Mr Paulson, who has denominated much of his own wealth in gold, as well as attracting a large amount of publicity even as many of his other investments were performing well.

However, his faith in gold remains unshaken. "The rationale for owning gold has not gone away. The consequences of printing money over time will be inflation," he told CNBC last month. "Over time, indicators of inflation will start to rise, and demand for gold will increase again."

Paulson & Co's decision to shift a chunk of its gold holdings out of the ETF and into the OTC market reflects the relative costs of the two, the person familiar with the matter said.

The ETF, known by its ticker 'GLD', charges management fees of 0.4 per cent a year, making it a relatively expensive way of investing in gold. Moreover, the gold forward curve has flattened in recent months, with spot gold moving to a small premium to forward contracts, a shift that reduces the cost of holding a position in the derivatives markets.

The fund invests in gold in order to hedge out its gold-denominated share class, with the position in the GLD only ever representing a portion of that investment, people familiar with the fund said.

Paulson was not alone in selling gold ETF shares in the second quarter. ETFs dumped 402 tonnes of gold between April and June, pushing global demand for physical gold to its lowest level in four years, according to a quarterly report published on Thursday by the World Gold Council, an industry lobby group.

The selling helped push spot gold prices to a near three-year low of $1,180 a troy ounce at the end of June. They have since recovered to trade at $1,329 on Thursday.

Paulson & Co's move to shift some more of its gold position into the OTC market will make its holdings less transparent. Fund managers must report positions in GLD in quarterly filings to the SEC, but not positions in commodity markets, such as the OTC gold market. The firm decided earlier this summer to stop reporting the gold fund's performance alongside that of its other, larger, funds after it grew frustrated with the "disproportionate" attention being paid to it.

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