Believe it or not, the housing crash wasn't all heartache and tears. When the mortgage bubble burst a few select investors made a boatload.
One of them was hedge fund titan John A. Paulson.
In what has been called "the greatest trade ever," Paulson earned $15 billion for himself and his clients as the rest of the markets fell hard.
But thanks to artificially low interest rates, incessant money printing, and ongoing stimulus plans, the same opportunity is beginning to build.
I'm talking about gold, where the "the next greatest trade ever" is only a matter of time.
You see, there's no mania like gold mania.
And despite the fact that we've been in a powerful gold bull market for more than a decade already, I believe the best is yet to come for gold prices.
As it happens, so does John A. Paulson, who is already lining up for round two.
Here's why. . .
Billionaires Love Gold
As the dust settled on his housing mega gains, Paulson's research led him to conclude the demand for gold would be strong in the years ahead.
Thanks to profligate central banks and ongoing fear about the sustainability of our fiat financial system, Paulson decided real money was the place to be setting up his next great trade.
So he put a huge portion of his wealth into one asset class: gold.
In January 2010, Paulson launched a dedicated gold fund, which invests in gold stocks and gold derivatives, committing $250 million of his own capital.
Now to be fair, the results have been less than stellar so far. Thanks mainly to mining stocks, Paulson's Gold Fund was down 23% in the first half of this year.
But here's the thing. His original bets against housing fell at first, too. And we all know how that one turned out. Over time, Paulson's thesis proved to be spot on.
So what has Paulson been buying lately?
Thanks to a recent "Form 13F" filing we know Paulson is still on board since he's been aggressively adding to his gold exposure of late.
According to the most recent filings for Q2, Paulson boosted his holdings of SPDR Gold Trust ETF by 26% to 21.8 million shares, and bought more shares of NovaGold Resources Inc. (NG:TSX; NG:NYSE.A). With these moves, Paulson's $21 billion hedge fund is currently at 44% exposure to gold and related equities, up a third from 33% in Q1.
What's more, in February Paulson advised his clients that he saw gold as his favored long-term holding, since it offers simultaneous protection against debasing currencies (money printing), increasing inflation, and rising euro risks. And in April, he told investors that gold miners were trading at historically cheap levels.
Yet Paulson's not alone in his love of the shiny metal.
George Soros' Form 13F filings reveal the prolific hedge fund manager is something of a gold bug as well.
In Q2 Soros not only added some 884,000 shares of GLD, worth $130 million, but he also unloaded almost $50 million (1 million shares) in financials and banks, including names like Citigroup, JPMorgan, and Goldman Sachs.
Given his connections to the highest levels of global politics, finance, and banking, Soros has to be one of the most well-informed money managers around.
For investors, that kind of action is hard to ignore.
Gold and Gold Stocks are Headed Higher
But that's not the only reason to think that gold is the next greatest trade ever.
Fact is, there are several more reasons, both fundamental and technical, why gold is primed for big gains from here. They include:
- Seasonal Patterns. Since January 2002, gold has averaged 20.8% gains from the months of August through the end of February.
- Gold Demand Sustained. According to the World Gold Council (WGC), gold demand volume was down 7% in Q2 (year over year), but stable in value terms at $51.2 billion, since the gold price was up about 7%.
- Central Banks Buying. Gold reserves increased by 157.5 tonnes in Q2, the largest quarterly net purchases since the official sector shifted into net buying mode in Q2 2009, according to WGC. Developing nations were again the biggest buyers.
- Gold is Technically Cheap.Frank Holmes of U.S. Global Investors says that, using the 12-month rolling return for gold with data from the last 10 years, gold reached an extreme low earlier this month, triggering a Buy signal.
- Narrowing Price Range and Volatility.Since mid-May, gold's been trading in a narrow price range, and daily volatility has all but dried up. This behavior is typical before large moves.
- Bullish Price Action.The gold price has been acting well, establishing higher highs and higher lows for the past three months.
- Gold Stocks Historically Cheap. By several fundamental measures, including price-to-book and price-to-earnings, gold producers are about as cheap as they've been since this entire secular bull launched back in 2001.
What investors need to keep in mind is that gold's price hasn't progressed in a straight line. Instead, it tends to follow a "two steps forward, one step back" pattern.
But even after retreating from last year's high at $1,900, gold has gained an astonishing 78% between March 2009 (when gold was $920) and current gold prices around $1,660.
Paulson knows this set-up as well, which is why he's gearing up again.
As Bloomberg recently reported, "The last time his (Paulson's) stock portfolio had a bigger concentration in gold-related equities than last quarter was March 2009, when U.S. equities hit bottom."
Meanwhile, governments and central banks the world over keep perpetuating the expansion of debt at an accelerating rate. Their solution to the problem invariably is well...debt, debt and more debt.
In this kind of environment, the only logical conclusion is higher gold prices and gold stocks.
That's why I think Paulson is about to cash in on yet another gigantic pay day. There's a reason billionaires love gold.