Passport Capital's Rationale For Owning Physical Gold Versus Proxies ~ market folly

Friday, January 29, 2010

Passport Capital's Rationale For Owning Physical Gold Versus Proxies

At the end of 2009, John Burbank's hedge fund Passport Capital took possession of their physical gold investment. It is kept in custody in Zurich with UBS and represents a 1% allocation in Passport Global. What's interesting here is that Passport also notes that they intend to increase their exposure via physical gold and that they are unlikely to buy various proxies for gold (i.e. exchange traded fund GLD).

Passport has published a white paper on their rationale for owning physical gold. In it, they examine the supply/demand dynamic, the impact of central bank action on gold, as well as the implications of owning "paper" gold versus physical. This is not the first time we've seen specific research published by the firm, as we covered their previous case for agriculture as well.

This is very intriguing for two reasons: Firstly, because many of the hedge funds we track have been long gold. Secondly (and more importantly) is because we are now seeing more and more funds shift from 'paper' gold exposure to physical gold. David Einhorn's Greenlight Capital was one of the first major funds to store physical gold as they cited lower storage costs (versus expense ratios) as their rationale. And now we see Passport Capital doing the same, but for slightly different reasons.

Then on the other hand, you have John Paulson's hedge fund Paulson & Co holding billions worth of GLD. Paulson owns the 'paper' proxy for gold but it is merely a hedge to their fund share class denominated in gold. Paulson & Co then also launched a new gold fund as a wager against the US dollar. Additionally, we saw that hedge fund manager Eric Sprott is launching a physical gold trust and also published a special report on gold entitled, "The Ultimate Triple-A Asset."

Josh Berkowitz (ex-Soros Fund) and his global macro fund Woodbine Capital published a piece in December entitled, Gold: The Anti-Goldilocks where they take a different look at gold. They have owned gold as well as deep out of the money puts on gold. However, they view this position not as a hedge against inflation or deflation, but rather as a part of their theme of stronger emerging market demand.

As you can see, plenty of prominent hedge funds have gotten involved with the precious metal in various capacities and it's interesting to sit down and compare their rationale. The main takeaway here is that different funds own gold for different reasons and via different vehicles.

Hedge fund Passport Capital has decided to drill down the debate to which type of gold to own: 'paper' or physical. They've elected to go the physical metal route and embedded below is their rationale:



Make sure to check out Passport Capital's John Burbank & many other prominent fund managers (including Eric Sprott) as they present investment ideas at the Value Investing Congress on May 4th & 5th in Pasadena, CA. We secured a discount for our readers, so be sure to use discount code: P10MF5.


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