Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

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

6 Critical Money Making Rules