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John Paulson’s Detailed Case for his Favorite #Gold Stocks | ValueWalk #d

John Paulson’s Detailed Case for his Favorite Gold Stocks

Gold equity prices are currently trading at very depressed levels, with the sector now on a valuation not seen since the fall of Lehman. The gold mining companies, however, continue to grow their earnings with the higher gold price, and we believe that it is only a matter of time before the sector re-values.

John Paulson image

May 22, 2012


We have obtained John Paulson’s latest letter to investors. Paulson’s letters are great because he goes into great detail. For example,  a letter to investors dated February 2012, was 102 pages, the latest letter for Q1 is 44 pages, and mostly text, not legal jargon. Almost no other hedge fund managers write letters as long as Paulson’s.

Below is Paulson’s macro overview followed by his gold fund holdings:

Macro Overview
While the U.S. economy appears to be doing better than expected and equity markets appear moderately priced, significant risks exist. At the global level, the Euro crisis remains the biggest risk to global activity and global markets. While the ECB has stabilized European credit markets in the short term through the injection of massive liquidity, the ECB maneuvers do not address the fundamental flaw of the Eurozone, a monetary union without a fiscal and political union. An unraveling of the Euro would affect not only European markets but also all markets in which we operate. We are also monitoring other risks, such as rising tensions in the Middle East, the rise in oil prices, and a potential slowdown in China.
In the short term, risks remain with Greece, Portugal, France and Spain.

A Greek exit from the Eurozone remains a concern. Portugal also remains an
unresolved issue, which despite its government’s recent positive statements, is likely to need a second bailout program to avoid a default.

New risks would present themselves if a new French government took a
radically different approach to European policy. The benefits of the LTRO are starting to wear off as Spanish CDS spreads are at all-time highs. Spanish banking stocks are also falling due to concerns about both Spanish sovereign and private sector credit risk. In the intermediate term, Spain will likely require bailout assistance as its deficit remains high, its economy continues to shrink, its unemployment rate continues to rise, and its debt to GDP continues to climb. Spanish Five Year CDS Spreads Above Peak Levels of November 2011 and Spanish Banks Stocks Plummeting Due to Increasing Sovereign Exposure.

Gold Price
The first quarter of 2012 was characterized by continuing volatility in gold and gold equities. Gold started the year at US$1,564/oz, and had risen to US$1,738/oz. by the end of January, driven by news that gold imports into China in the final quarter of 2011 were extremely robust. The rally continued into February, and by February 28th the metal reached US$1,784/oz, a gain
of 14.1%. The following day, however, gold lost almost $90/oz. on the back of comments from Fed Chairman Bernanke suggesting that no further quantitative easing would be required. After starting out strongly, gold shed 2.3% in February and a further 1.7% in March but still posted a positive return of 6.7% for the quarter.

Gold Equities
Although gold prices rose, gold equities fell during the quarter. After rising along with the gold price through February 28, they fell at a more rapid pace for the rest of the quarter, with the gold mining index finishing down 3.7% for the quarter. In fact, the divergence of gold miner equity performance from the gold price has continued to widen since the fund was formed. Since the inception of Paulson Gold, the gold price is up 49%, the Gold Miners Index Market Vectors Etf Trust (NYSE:GDX) is flat and the Junior Gold Miners Index, Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) is down 12%.

Gold equities have been lagging the price of gold since January 2010. After rising 13.5% in January, the gold fund dropped 4.8% in February and 13.5% in March, closing the quarter down 6.5%.

Despite recent negative performance, we believe that the outlook for gold and gold equities remains positive. The improved performance of the U.S. economy is consistent with our view that the Fed’s massive stimulus program is beginning to take effect, and that the effects of quantitative easing will eventually result in higher levels of inflation. We believe this will
ultimately be very positive for gold, even though we are currently in a low-inflation environment. Gold equities are now at historically low valuation levels. An analysis of the trailing 12-month EV/EBITDA ratio for the NYSE ARCA GOLD BUGS INDEX (NYSE:HUI) shows that the gold equities
are trading at their lowest valuation level in ten years, on par with the low point in valuation that prevailed following the failure of Lehman Brothers.

Given the financial performance of the gold mining companies in the current gold price environment, we believe the equities are substantially undervalued and poised for a revaluation. During 2011 the gold producers delivered EPS growth of approximately 50%, compared to an average year-over-year increase in the gold price of 28.2%. In the first quarter of 2012 the gold price averaged 21.9% more than it did in 1Q2011, and we anticipate further growth in earnings and cash flows when the industry begins reporting its quarterly results. In our view, this is a compelling entry point.

Paulson Gold Fund Equities
The gold equities in the Paulson Gold Funds delivered mixed results in 1Q2012. Randgold Resources Ltd. (NYSE:GOLD) (LON:RRS), which was one of the best performing gold equities during 2011, sold off towards the end of March following news that a group of junior officers had staged an unexpected coup in the West African nation of Mali. This country accounts for approximately 45% of Randgold’s gold reserves and 65% of this year’s production. Recently, the leaders of the coup and the Economic Community of West African States (ECOWAS) have brokered a resolution providing for a quick return to democracy. Randgold’s operations were not materially affected by these events, and the company has reaffirmed its
2012 production guidance.
Centerra Gold Inc. (TSE:CG) also suffered a setback when it announced that its production for 2011 would be impacted by the unexpected movement of waste sitting on the south end of its current production pit. Due to this movement, the company will have to devote its fleet to advancing the removal of waste, and will therefore not be able to access high grade ore that was scheduled for production in the fourth quarter of 2012. The shares sold off sharply before recovering the majority of its losses, once the market recognized that this was a timing issue and production is expected to recover in 2013.
On the positive front, NovaGold Resources Inc. (NYSE:NG) (TSE:NG) shareholders approved the corporate restructuring that was announced in November of 2011. The company will be spinning out a new company called NovaCopper, which has as its sole asset the Ambler project in Alaska, an exciting copper exploration project. NovaGold will sell the Galore Creek copper project, focusing solely on its flagship Donlin Creek gold project in joint venture with Barrick Gold. The company has recently appointed a seasoned and highly regarded executive to lead the company. As a pure play gold company, we believe NovaGold will be attractive to investors and corporate buyers.
Detour Gold Corporation (TSE:DGC) continues to move forward with the development of the Detour Lake gold project. At the end of March, the project was 60% complete and is advancing at about 5% per month. Mining activities have commenced, allowing the company to build a stockpile of ore ahead of the completion of the processing plant. The main critical path item, the connection of the high tension power line, is now scheduled for early August, which should allow commissioning of the plant in the fourth quarter of 2012. When fully complete, Detour Lake will be Canada’s largest gold mine, and we believe that the shares have significant upside potential.

The shares of Osisko Mining Corp. (TSE:OSK) recovered during 1Q2012 as the market recognized that the modifications to the processing plant at the Canadian Malartic mine were being implemented. The first of two secondary crushers began commissioning in mid-March, and the second remains on schedule for delivery in June of this year. This should allow the company to meet its production guidance for 2012 of 600,000oz


Gold equity prices are currently trading at very depressed levels, with the sector now on a valuation not seen since the fall of Lehman. The gold mining companies, however, continue to grow their earnings with the higher gold price, and we believe that it is only a matter of time before the sector re-values. The Paulson Gold Funds are poised to benefit in such an environment.

John Paulson’s Detailed Case for his Favorite Gold Stocks | ValueWalk

FT Alphaville » This is why #Grexit fears might be overdone

This is why Grexit fears might be overdone

We pointed out on Friday that a poll suggested Greeks were far from wanting out of the eurozone and would actually return to New Democracy in adequate numbers for a pro-bailout coalition to be formed. From Reuters:

The poll, the first conducted since talks to form a government collapsed and a new election was called for June 17, showed the conservative New Democracy party in first place, several points ahead of the radical leftist SYRIZA which has pledged to tear up the bailout.

EU leaders say that without the bailout, Greece would be headed for certain bankruptcy and ejection from the common currency, which would sow financial destruction across the continent. The prospect SYRIZA would win the election has sent the euro and markets across the continent plummeting this week.

The poll predicted New Democracy would win 26.1 percent of the vote compared to 23.7 percent for SYRIZA.

Crucially, it showed that along with the Socialist PASOK party, New Democracy would have enough seats to form a pro-bailout government, which it failed to win in an election on May 6, forcing a new vote and prompting a political crisis that has put the future of the euro in doubt.

Read the Rest Of the Post Online here:
FT Alphaville » This is why Grexit fears might be overdone

Norway’s Day Traders Take on the Algos FT CNBC.com

Norway’s Day Traders Take on the Algos

Financial Times | May 17, 2012 | 03:37 AM EDT

Sophisticated algorithmic trading systems have become the bane of an equity day trader’s life, reacting faster to news than any human can and spotting price irregularities across thousands of stocks at once.

Nearly 40 percent of all share orders in Europe are sent by algorithmic trading computers, up from just 20 percent five years ago, according to the Tab Group, a capital markets constancy. In the U.S. the figure is 37 percent.

Yet despite the prevalence of these supposedly smart machines, some traders are making a tidy profit getting the better of these systems, which can make costly mistakes if they are not set up correctly or if their trading patterns can be understood.

Send Emil Larsen, a Norwegian day trader, worked out in 2007 how the computer algorithm of Timber Hill, a unit of US-based Interactive Brokers, would respond to trades in certain illiquid stocks. The stocks would change price in a uniform way regardless of how much was bid.

He found that he could bump up the price with very small trades and then sell with much larger trades for a profit. He was not the only trader who worked out this flaw, which he called “painfully obvious.” But he still made $50,000 in a few months.

Charges of market manipulation were brought against him and another trader, Peddler Vibe, in a high-profile court case where the public came to look on the duo as heroic Robin Hood figures, beating financial houses at their own game.

The courts found them not guilty of market manipulation this month, concluding that they were making the market more efficient by exposing a flaw in the system.

Meanwhile Mr. Larsen – and others – continue to beat algorithms. A few months ago he says that UBS failed to set a bottom limit on one of its trading algorithms and he picked up some stock at a discount. He estimates he made $14,000 in a few minutes.

It is not just Mr. Larsen getting the better of financial institutions. Eivind Stolen, a Swedish day trader, says he made several thousand dollars in seven minutes last year after a Morgan Stanley client algorithm went “totally haywire” in Atlas Copco and SSAB stock.

He says the computer started buying at the offer price and selling at the bid, instead of the other way round, and hundreds of people across the world piled in to take advantage, making a small spread on every trade they bought and sold straight back. Morgan Stanley [ MS 13.41  -0.73 (-5.16%) ] was fined for this error on Wednesday.

“Every few weeks an algorithm is going wrong, and there is always someone making money from it,” says Kjell Jørgensen, associate professor at BI Norwegian Business School.

John Bates, chief technical officer at Progress Software, a US-based company that provides algorithmic trading software, says that every time there is a big failure of an algorithm because of a “fat finger” or programming error, behind the scenes there are always “some traders making a lot of money”.

He points to some notable recent failures where day traders and others in the market likely made a profit, including when Deutsche Bank’s [ DB 35.93  -1.15 (-3.10%) ] trading algorithms in Japan took out an $182 billion stock position by mistake in 2010.

Another was in 2011 when a possible “fat finger” nearly wiped out ten Focus Morningstar exchange traded funds that had just been launched on Nasdaq OMX [ NDAQ 23.15  -0.53 (-2.24%) ] and NYSE Euronext [ NYX 24.61  -0.51 (-2.03%) ].

Annika von Haartman, head of surveillance at the Nasdaq OMX Nordic stock exchanges, says that over the past two years they have seen more cases like this than ever before due to the rate at which new algorithms are emerging. “We deal with algo related issues on an everyday basis,” she says.

Policy makers in Brussels want to tighten up regulation of high-frequency trading after fears about the integrity of these trading systems were raised in the wake of the “flash crash” in 2010, when the Dow Jones Industrial Average swung hundreds of points in 20 minutes.

In the meantime, traders contacted by the Financial Times say that their technique for beating algorithms is the same as beating any other trader: endless screen watching. This gives them a sense of how certain stocks behave, allowing them to spot quickly when something goes wrong. Often they do not know it is an algorithm they have beaten until after the event.

In the day-to-day, they stress that algorithmic traders are an overwhelming negative for them, making trading more difficult. But this makes it all the more satisfying when they outwit one of the big financial institutions. “We feel like Robin Hood, or David beating Goliath,” says Mr. Larsen.

Read the article online here: News Headlines

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