AUGUST 19, 2010
By JOHN SPENCE
BOSTON—Hedge funds managed by George Soros, John Paulson and other high-profile investors are using a $50 billion exchange-traded fund to buy gold, recent filings show, even as the ETF's growing clout may be chipping at gold's role as an asset that moves to its own beat.
John Paulson
Eton Park Capital Management LP earlier this week showed it had joined a list of hedge funds that own SPDR Gold Shares, an ETF backed by about 1,300 metric tons of the precious metal. Eton revealed a roughly $800 million stake in the ETF. Paulson & Co., Mr. Paulson's firm, kept its stake in the gold ETF steady at 31.5 million shares, meaning its position was close to $4 billion at the end of the second quarter. Soros Fund Management had about $600 million in the gold fund, filings show.
This stamp of approval from some of the world's most respected money managers may attract other investors. Yet there are signs gold is acting less as a portfolio diversifier, one of gold's key attractions. For one, gold at times has been moving in tandem with stocks.
"Many analysts seem to be bullish on gold because of concerns over possible weakness in equities, but we would point out that there are two flaws there," said Waverly Advisors in a strategy note Tuesday. "Future equity-market direction is anything but certain," while the correlation between gold and stocks is "unstable at best," it said. "Recent market data shows periods of very strong positive correlation between the two."
Indeed, investment demand for gold has been rising in recent years as investors seek disaster protection. Gold is also seen as an inflation hedge as central banks take on more debt in the economic downturn and spark fears of currency debasement.
"Gold and silver, traditionally delinked relative to equities, saw their correlations to stocks rise" in July from the previous month, says Nicholas Colas, ConvergEx Group chief market strategist.
Signs that more investors are flocking to gold and gold-backed ETFs raise the question of what could happen if stocks or gold—or both—crash. In a meltdown, investors could be forced to unwind winning bets like gold to meet margin calls on other falling assets, the theory goes.
Certainly, ETFs have changed the dynamics of buying and selling gold, Mr. Colas said in an interview. "Gold has not been very correlated with financial asset prices, historically," he said.
In the past, gold would be bought from a dealer, perhaps in coins, and stored in a safety-deposit box or home safe. Now, Mr. Colas pointed out, investors can easily buy or sell gold in their brokerage accounts with ETFs. This "dramatic shift" may lower gold's appeal as a hedge to financial assets, although the strategist noted that the gold/stock correlation tends to vary a lot over time.
Although some claim other large ETFs tracking stocks and commodities futures may be impacting their underlying markets, SPDR Gold Shares is often singled out. This is because the ETF controls such a large portion of the gold market; its stash ranks it among the world's largest central banks. China's sovereign wealth fund has disclosed a stake in the ETF.
SPDR Gold Shares, which is sponsored by a unit of the World Gold Council, traded higher Wednesday afternoon and is up 12% year to date, while the S&P 500-stock index is slightly negative this year.
"We've definitely seen an increase in long-term strategic users," such as institutional investors, said Tom Anderson, head of ETF strategy and research at State Street Global Advisors, the marketing agent for SPDR Gold.
There are several other exchange-traded funds and notes that track gold prices and other precious metals. Some allow investors to make leveraged bets, profit from lower gold prices or take positions in miner stocks.
Sprott Physical Gold Trust holds bullion and has a unique feature that allows large investors to take physical possession of gold.
Write to John Spence at jspence@marketwatch.com
From The Wall Street Journal published on AUGUST 19, 2010