Gold as an Insurance Policy (and When to Sell It) ~ market folly

Thursday, March 25, 2010

Gold as an Insurance Policy (and When to Sell It)

Societe Generale is out with some well thought out research on everyone's favorite precious metal: gold. The global strategy research piece is called "Popular Delusions: When to sell gold." In it, the argument is made that gold is not really an investment, but rather a speculative tool.

The most intriguing thing about this precious metal is perhaps the vast array of reasons that investors are purchasing it. Some use it to hedge, some are making a speculative wager, while others use it to bet against fiat currency or protection from inflation. In SocGen's research, they examine gold primarily as an insurance policy. And they interestingly point out that, "Indeed, during the '6000 year gold bubble' no one has defaulted on gold. It is the one insurance policy which will pay out when you really need it to."

The author is using gold as an insurance policy against developed market governments failing. They note that the crises we've seen in Dubai and now Greece are just the first few drops in the bucket. In the end, they conclude that it will be time to sell gold when "political winds change direction and become blustering gales forcing us onto the course of fiscal sustainability." So, there you have their argument for gold as an insurance policy.

In another corner, you have hedge fund rockstar John Paulson who is using his new gold fund to bet against fiat currency, and in particular, the US dollar. We also just recently examined the dynamic between gold, the dollar & gold equities.

Global macro hedge fund Woodbine Capital, on the other hand, sees gold as the anti-goldilocks. They've owned gold as well as out of the money puts on the metal. They're not using it as a hedge for inflation or deflation. Instead, they're wagering on it as part of their theme of increased emerging market demand.

Additionally, we've also see John Burbank's Passport Capital's rationale for owning physical gold. They own it because of its supply/demand dynamic as well as central bank action, among other reasons. David Einhorn's hedge fund Greenlight Capital was one of the first to store physical gold. We've also seen others use it as a diversification tool in their portfolio. Lastly, we saw Dan Loeb's Third Point at one time use gold as a fat tail risk and doomsday trade. Obviously, the reasons to own gold vary. The research below now presents gold as an insurance policy.

Embedded below is Societe Generale's look at the precious metal and when to sell it. It's a great objective take on the metal and worth the read:

You can directly download a .pdf here.

As you can see, there are a myriad of reasons to own the metal. It's hard to say though whether or not everyone would be selling for the same reason in the end. SocGen argues that the time to sell gold will be when fiscal sustainability is achieved, but this is because they view the metal as an insurance policy. When or why others might sell the metal is yet to be determined and something we haven't seen discussed at length. That's the crazy thing about gold, everyone seems to own it for different reasons. In markets, when to buy is one thing. But many great investors will tell you that it's when you sell that matters most.

For more on gold, we've posted copious amounts of hedge fund research and highly recommend reading the following:

- John Paulson's gold fund: an in-depth look
- Global macro hedge fund Woodbine's research, Gold: The Anti-Goldilocks
- Passport Capital's rationale for owning physical gold
- A look at the dynamics between gold, the dollar & gold equities

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