John Paulson on the Future of Gold and Housing
John Paulson, the hedge fund manager made famous by capitalizing enormously on housing’s collapse, was interviewed yesterday by Carl Quintanilla at CNBC‘s “Delivering Alpha” conference. It was supposedly Paulson’s first TV interview.
Paulson has reportedly suffered large drawdowns from bets on gold and mining shares in the recent past. Defending his record Paulson stated, “The gold fund is only 2% of our assets, and with returns between 5% and 32%, this year we think we are back into achieving returns now commensurate with our long-term record.”
Paulson further clarified his rationale for investments in gold:
We became very concerned when the Fed started QE1 about loss in value of the dollar. The Fed has printed close to 300% more money than existed prior to the failure of Lehman Brothers. I and others were looking to gold to preserve wealth in the event of inflation. Although the Fed has printed a lot of money, to date, there is very little inflation. People who bought gold in anticipation of inflation have lost patience. That has caused the price to fall. But the rationale for owning gold has not gone away. The consequences of printing money over time will be inflation. I know many people aren’t concerned because the latest inflation headlines are under 2%. But the rationale is valid. In the trend, we are in a pause period. But over time, indicators of inflation will start to rise, and demand for gold will increase again.
Quintanilla asked if Paulson had moderated his commitment to the gold trade to which he replied:
We did two things. We made a gold share class. We give our investors the option of Dollar shares, Euro shares, Yen shares, or gold shares. We don’t force it upon investors. Since we started it, it has been very successful. Our average cost of the hedge was $950. The amount of the gold class has come down. But gold is volatile, so I think it’s very difficult to predict price movements in short terms. But looking for a hedge in future, and having a longer term view, I think it is important.
Quintanilla asked Paulson about housing, to which he responded the industry typically experiences a cycle of the proverbial 7 years of feast and 7 years of famine.
Paulson sees housing as the best investment a person can make and it will likely increase at a rate of 5-7% per year for the next 5-7 years.
Paulson added that a decline in housing supply to a level it was at during the peak of the housing market, about 5 months’ supply, meant that new construction will be needed, which he believes will be accretive to economic expansion. He also pointed out that people who bought a home last year with 20% down are now 50% richer, “which will also increase demand for housing.” When Quintanilla asked if Paulson was as certain about this as he had been about his famed short position on housing, he responded “yes.”