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Saturday, July 27, 2013

Passport Capital’s Rationale for Owning Physical Gold vs. Proxies



January 31, 2010 by · Leave a Comment 

Market Folly submits:

At the end of 2009, John Burbank’s hedge fund Passport Capital took possession of its physical gold investment. It is kept in custody in Zurich with UBS and represents a 1% allocation in Passport Global. What’s interesting here is that Passport also notes that it intends to increase its exposure via physical gold and that it is unlikely to buy various proxies for gold (GLD) (IAU) (SGOL).

Passport has published a white paper on its rationale for owning physical gold. The paper examines the supply/demand dynamic, the impact of central bank action on gold, and the implications of owning “paper” gold versus physical. This is not the first time we’ve seen specific research published by the firm, as we covered its previous case for agriculture as well.

This is very intriguing for two reasons: First, many of the hedge funds we track have been long gold. Second, and most important, we are now seeing more and more funds shift from “paper” gold exposure to physical gold. David Einhorn’s Greenlight Capital was one of the first major funds to store physical gold, citing lower storage costs (versus expense ratios) as its rationale. Now we see Passport Capital doing the same, but for slightly different reasons.

Then on the other hand, you have John Paulson’s hedge fund Paulson & Co. holding billions worth of GLD. Paulson owns the paper proxy for gold, but it is merely a hedge to its fund share class denominated in gold. Paulson & Co. also launched a new gold fund as a wager against the U.S. dollar. Additionally, we saw that hedge fund manager Eric Sprott is launching aphysical gold trust and published a special report on gold, “The Ultimate Triple-A Asset.”

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