John Paulson: Gold Will Rise In Proportion To Bernanke’s Dollar Printing
Hedge fund rock star and a high-ranking member of the Forbes 400 list, John Paulson gave an interview to a French financial newspaper in which he called Dodd-Frank a failure that has hampered any sort of recovery in the real estate sector, while noting that QE, essentially the same thing as running the printing press, makes him even more bullish on gold, where prices “will rise in proportion to the creation of paper dollar.”
Interviewed by France’s Les Echos and republished in English by ZeroHedge, John Paulson spoke of the current global state of affairs and ratified his bullish call on gold. Paulson manages what he calls the world’s third largest hedge fund, Paulson & Co., with $36 billion under management. The Harvard alumna made his fortune beating against the housing market before the market crashed, and is bearish on housing again.
“To me, the major risk for the U.S. recovery is stagnating housing market,” Paulson told Les Echoes, “banks have handcuffs [and] the private sector is frozen due to regulatory uncertainty on foreclosures.” A day after three federal regulators reached a settlement with mortgage lenders over the famous “robo-signing” incidents, and after Goldman Sachs was targeted by an investigation into mortgage practices by Senators Carl Levin and Tom Coburn, Paulson blamed regulation for the continued weakness in real estate markets.
“Since [Dodd-Frank], banks have virtually halted lending for home financing because of the lack of clarification on the rules. This will be difficult to have a rebound in property prices this year. But with any luck, if banks start to reconnect with mortgages, we could have a real estate recovery in 2012 and 2013.” Before the financial regulation bill was passed, Paulson had predicted an 8% to 10% rebound in home prices through 2011. (Read ‘No real Hope In Sight’ As Case-Shiller Shows Housing Recession Still Here).
Calling it a “failure,” Paulson noted that Dodd-Frank was more an emotional reaction than a well thought out plan to regulate financial markets. Contradictory and conflicting clauses would cause market distortions while attempting to tell banks what to do would only extend uncertainty. “The financial crisis was linked to the fact that banks had excessive leverage and too many risky assets. The solution is not to try to dictate to banks what they can do or not do, but to require them to strengthen their capital to absorb potential losses and hold less risky assets.”
On Chairman Ben Bernanke’s program of quantitative easing, Paulson explained that it was useful but did possess inflationary characteristics. “It is undeniable that this monetary expansion is equivalent to running the printing press,” explained the hedge fund billionaire, noting he does not expect a third round of QE. (Read FOMC Shows Inflation Concerns As Bernanke Faces ‘Soft Resistance’).
These inflationary pressures are exactly what Paulson is capitalizing on. Asked about who will finance U.S. government debt after PIMCO and the Chinese cut their holdings, and if this meant the greenback was losing its “reserve currency status,” Paulson immediately took the conversation to gold. “In these times of uncertainty for paper based currency, I feel more secure in holding gold; [it] offers good protection against the paper currencies devaluation and even the possibility of generating a return on fixed investment.” (Read PIMCO’s Bill Gross Shorts Treasuries As Experts Eye Inflation).
Gold has not plateaued and it will continue to rise “in proportion to the creation of paper dollar.” Given the current inflationary environment, elsewhere Paulson noted that he expects double digit inflation in the next three to five years, demand for protection will lead capital towards the shiny metal, which still has room to grow. “Historically,” Paulson says, “gold has always been a safe haven against inflation and a safe haven in times of political instability.” (Read Gold To Average $1,500 In 2011).
Finally, the financier had words for President Obama and the current debt situation in the U.S. Paulson told Les Echoes that while current federal debt was still at a relatively reasonable 65% of GDP, it would approach Greek and Portuguese levels of near 100% of GDP if state and local debt were added. “Sooner or later [debt levels] will reach a threshold that will be a problem [as] the U.S. does not have the ability of unlimited borrowings.” On Obama, Paulson applauded his backtracking on the “traditional Democratic approach” of increasing taxes, instead moving towards aggressive tax incentives “to boost job creation and stimulate growth.” The administration’s weakness, he said, continued to be financial reform. “With a little hope, there will be changes to eliminate the negative aspects of this reform.
Touching on every subject, Forbes’ 39 richest person in the world gave his view on the current investment environment. Housing will hold back the U.S. economy, regulatory reform is holding back housing, Bernanke’s dollar printing will inflate the dollar, so bet on gold as long as inflationary pressures persist.
If Gold Doubles John Paulson Climbs Up Billionaire List
John Pauslon, the FORBES billionaire who earned his money off the backs of banks faulty investments in the housing market, is planning ahead for his next big score. This time he’s betting on the U.S. economy facing some serious issues with inflation. His hedge against this expected inflationary macro trend is to go long Gold- very long- as in investor’s shouldn’t expect a huge payoff for at least 3 years.
According to investors I spoke with, Paulson, or JP as his friends call him, thinks Bernanke will continue encouraging the Federal Reserve to print more money (known as quantitative easing) to try and pull the US out of the recession. JP tells investors in his $600 million Paulson Gold fund that he sees Gold not as a commodity but as a currency — one that will double in value.
A West-coast based institutional investor told me, “Look the fund’s been outperforming the price of spot gold. If gold doubles, or more, the fund could be worth 4 to 8 times what it is right now. JP thinks gold could go much, much higher in three to five years.”
The Paulson Gold fund booked a near 15 percent return through August and I’m told it’s going to be even higher by the end of the month. It’s not just the price of gold or gold ETF’s he invests in; investors say he’s also long mining companies like AngloGold Ashanit, NovaGold, and Gabriel Resources out of Toronto. The one mining company he’s recently dropped as a favored long position is Canada based Centamin Egypt Limited.
When Paulson believes in a trend, he appears to find any which way to invest in it. Yep, investors tell me he’s got a nice built in derivative kicker if Gold really does double. “This gold play is similar to his subprime bet in that he’s identified something and created a derivative to match his view. If he’s right watch out,” says a Gold Fund investor. Of course, what goes up can go down. Gold is at an all-time high and if Paulson’s belief is wrong, the derivative kicker could be more of a derivative dragger.
Of course, unlike those protections he bought on credit default swaps that he worked with Goldman Sachs and Deutsche Bank to engineer, there is no infinite win or loss in the trade because he can’t control the price of Gold. (Unless he’s got a lot of gold bars stocked away in that new $25 million Aspen house, with a secret way to load up Fort Knox when Helicopter Ben isn’t looking.)
Instead I’d count on this Wall Streeter’s competitive nature (why is he still trading with a FORBES estimated net worth of $12.4 billion?) and long term investing skills to help him climb up the Forbes Richest Americans list. Who knows? In a few years JP’s current spot of #20 could topple that other seasoned hedgie George Soros and his $14.2 billion.