Gold Glitters Once Again

Gold is glittering more than ever.

All the fundamentals are in place for a big run in gold.

The “hot money” has found a new friend: gold and gold stocks.

As we looked at a few days ago, the big money pension and mutual funds are betting big on gold too.

The thing is though, despite all of the attention gold is getting, 95% of investors will miss the biggest prize of all. Here’s why.

Gold is “Cool” Again

A few days ago the world learned that leading hedge fund manager John Paulson has started to place some very big bets on gold too.

Paulson has become one of the most closely followed hedge fund managers – and justifiably so. He personally pocketed more than $3 billion and made his clients a whole lot more by betting against subprime loans while the housing bubble burst.

So when Paulson makes a move, the entire financial world watches. This time, although he’s betting big on “boring” gold and gold stocks, was no different. The blogosphere and financial media lit up when Paulson’s firm disclosed how much gold and gold stocks it had bought.

Paulson’s firm said it had $2.8 billion in SPDR Gold Trust (NYSE:GLD) and $638 million in Market Vectors Gold Miners ETF (NYSE:GDX). It also had taken 2.6%, 4.4%, and 11.3% stakes in gold mining companies Goldfields (NYSE:GFI), Kinross Gold (NYSE:KGC), and Anglogold Ashanti (NYSE:AU) respectively.

With such a big bet, Paulson is almost single-handedly making gold “cool” on Wall Street. And gold stocks have been steadily climbing over the past month.

Good Things Come to Those Who Wait

No one can deny Paulson’s success. He spots an opportunity, gets a big leveraged position, waits for it all to unfold, and makes a fortune for himself and his clients in the process.

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 (China said it was going to up its gold holdings to 3% of foreign exchange reserves from 1.6% – no timeline given).

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 lending market.

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.

Hot or Not?

How many investors do you know that are willing to wait two years or more for gold stocks to really pay off?

Two years is a very long time for Wall Street. And, when it comes to gold, there will be many “tests of will” (read: sharp corrections) which will sort out a lot of the weak hands.

First, the inflation/deflation battle is far from over. The deflationary forces of a credit contraction are incredibly strong. The Fed is printing a lot of money very quickly, but we haven’t seen much of an impact yet. Consumer prices still have barely nudged. Most of the run-up in gold and other real assets has come from expectations of future inflation.

Second, we’ve watched how the “hot money” hedge funds and traders don’t stick to a thesis for very long. Although the theses are completely justified, we have watched the average lifespan of a thesis decline to about two months.

For example, in the last six months sectors have fallen in and out of favor very quickly. Infrastructure stocks were very hot as the stimulus bill was being formed. The excitement hasn’t lasted. The for-profit education sector had a big run too. It didn’t last long though as expectations quickly exceeded reality. The entire sector quickly started to decline even though companies were releasing stellar quarterly results. Now we’re seeing the “fix-it-yourself” thesis which ran auto parts store stocks to lofty highs come to a slow and painful end as well.

The theses just don’t last very long. And when stocks in the sector quit making new highs every week the “hot money” sells out and moves on. The dominant gold thesis will likely run its normal course in the short-term as well.

Finally, it’s going to take a long while (I’m expecting a few years) for the gold story to play out completely. The economy is still in a tough spot. Investors are still more than willing to lend to the U.S. government. Every element of an inflationary firestorm is in place, but there haven’t been any sparks yet. Gold looks great, but it’s just attracting a bit too much attention at the moment for me.

The Price of Impatience

That’s why I’m not running in to “Buy gold NOW before it’s too late!!!”

Right now, gold is the hot sector. Expectations are soaring and it is only a matter of time until the “hot money” finds something new. Gold is glittering now and it will do so in the future, but it’s best to buy it when it’s not being watched so closely.

Yes, I’ve bought gold and gold stocks in the past. I will be buying gold stocks again in the future. It’s all part of my personal investment plan which I’m sticking too.

Inflation is coming. Real assets and shares of producers of real assets will do exceptionally well in the years ahead. For now though, it’s best to look for value in the real asset sectors.

The recent run-up in gold stocks has made many other real assets look downright cheap. There is much better value in other real asset sectors.

For instance, silver stocks haven’t kept up at all with gold’s recent rise. Oil has done well, but it could do much, much better than gold in the short-term if the economy does show some signs of life over the summer. Probably best of all though, is the opportunity shaping up in agriculture.

In the end, gold is good. If you don’t have any exposure, get some. If you do, just let the rally play out and stick to your plan. Chances are, this time isn’t “the big one” for gold, the rally will fizzle out, and there will be another long dry spell where gold is no longer very “cool.”

In the end, Paulson didn’t get to where he is by running with the herd. He got it by identifying an opportunity, consistently buying into it, and then waiting for the big payday. That’s something we can all take away.

By Andrew Mickey

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