In 2008, his fund returned 37%  – in a year where the typical hedge fund lost 19%.

Since last September, Paulson earned nearly $420 million shorting the stocks of some U.K.-based bank stocks – specifically Lloyds Banking Group PLC (ADR: LYG), and the former HBOS PLC (which Lloyds absorbed in January).

Paulson clearly does his homework, and now he’s turned his attention to gold.

In a recent move that garnered much industry attention, Paulson acquired an 11.3% stake in AngloGold Ashanti Ltd. (ADR: AU). At $32 per share, that acquisition set him back a cool $1.28 billion. British mining giant Anglo American PLC (ADR: AAUK) was the beneficiary of Paulson’s acquisitiveness, for it sold Paulson the AngloGold shares from its own stake in that company.

So let’s think about this for a moment. A single transaction shifted a significant portion of ownership, and more than $1 billion in cash, strictly between two parties:  No banks and no stock markets took part in the deal.

Besides his 11.3% stake in AngloGold (the world’s fifth-largest gold miner by market cap), Paulson also owns 4.1% of Kinross Gold Corp. (KGC), making him that gold company’s fourth-largest shareholder.

It seems this prescient investor is in good company, too.  David Einhorn, founder of Greenlight Capital Inc., with $5 billion in assets, also began buying gold earlier this year – for the very first time.

Noted value investor Jean-Marie Eveillard holds $1 billion in a vault near Times Square as “calamity insurance.” What’s more, as much as 8% of his First Eagle Global Fund is comprised of bullion and gold miners’ shares.

In the case of Paulson, the billionaire hedge-fund investor, his exceptional skill lies in his ability to foresee extreme financial episodes. From there, he decides how to position his funds to benefit from a likely outcome.

And that’s why we should all pay close attention to his most recent actions.

The very day after Paulson’s acquisition of AngloGold, the U.S. Federal Reserve announced that it would buy back a total $1.25 trillion of long-term Treasury bonds and Fannie Mae (FNM) and Freddie Mac (FRE) mortgage junk. That is essentially a monetization of the debt.  And that’s a red-carpet invitation for inflationary times (which is also the best time to play gold).

Pure coincidence? Maybe. But it’s a lot more likely that one of the savviest investors of our recent era is really onto something.

Source: If You Follow the (Smart) Money, Gold is Clearly the Smart Play

Times of crisis such as these provide some choice examples; HBOS plc, one of the UK’s largest banks, for one.

The banking and financial services giant, with some 72,000 souls under its wing, saw its shares crippled one morning in a bear raid stoked by rumours of funding problems. Those behind the whispering were deemed to have a cynical vested interest at heart. No, really? It certainly riled the regulator against the short sellers. Whatever the motive the impact of rumour on professional market minds turned feverish in mad markets was briefly impressive. A 20% fall at one point in a morning.

Fear got the better of Bear Stearns too thinks CEO, Alan Shwartz. He laid the blame for the sudden demise of 85 years of investment banking on “short sellers and “market manipulators” as it “suffered an evaporation of confidence fuelled by falsehoods,” according to a Guardian report. Though some, ourselves included, might point to the fact they were up to their necks in the subprime swamp might have had something to do with it. Whatever the reason, the Bear died on a single fateful day when the lifeblood was leeched out of it. On March 13, $10bn was sucked from the company by panicked investors. At the end of the raid over $12bn in cash resources had dwindled to $2bn. It proved a mortal blow.

“As an observer of the markets, it looked like more than just fear. It looked like people wanted to induce a panic,” Schwartz told a senate finance committee in Washington.

So there’s fear…and there’s its exaggerated form: panic. I guess it’s one grade of emotion to see a tsunami coming from a distance. A more intense one when it crashes on the beach and you’re still in the sun lounger. The fight then is not one of rational avoidance but visceral survival. At such times the pin stripe suit and the Ivy League finance MBA provide little protection as normally civil behaviour reverts to something more primal.

Continues below …

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Even the proverbial Man on the Clapham Bendy Bus has noticed. Mortgage and remortgage deals are either getting more expensive and restrictive or, worse, disappearing altogether. The Bank of England warns that almost half of the UK’s lenders are preparing to “ration” mortgage deals over the next three months, reports the Telegraph. Middle England is cutting back on spending as recession fears take hold, reports a survey by insurance group Axa; as credit reference agency, Experian, warns more than 5m people could run into serious financial difficulty.

But as the UK consumer braces for hard times, the clouds seem to be lifting a little for some in the more forward looking financial markets. Edward Menashy, economist at Charles Stanley, feels “definitely less gloomy” as credit markets have “recovered somewhat”. Well, LIBOR has now dipped a bit under 6%, according to Bloomberg, but there looks to be some way to go…

*** Back to basics. Commodities. That commodity prices have continued to rise as the US has headed into recession “makes no sense to me” said Unicredit economist Marco Annunziata yesterday. He sees prices stabilising from here. Meantime the long commodity price boom for everything from industrial metals to agricultural staples is giving rise some quirky economic side effects.

“Some homes are worth less than their copper pipes”, reads a Reuters headline. It reports an emerging trend of thieves ripping up the plasterwork in derelict homes to steal the valuable metal.

Closer to home, a new kind of robber alchemist (turning lead into gold?) appears to be at work on English churches. With the price of lead having risen sevenfold in the last six years, the churches’ lead roofs have become popular targets for thieves. One church in Leicestershire found itself with 100sq ft hole in the roof, reports the International Herald Tribune.

Meanwhile for resource-rich countries, the bounty of ‘Chindia’s’ industrialisation is helping transform economic fortunes. One time banana republic Peru has just had its foreign currency debt rating upgraded by Fitch to investment grade on a par with India and Croatia, as commodity exports including oil, copper, gold, zinc and coffee boost revenues and strengthen its ability to repay debt. Peru’s improving fortunes are old news to any adventurous investor who has been keeping tabs its stock market in recent years. The Lima General stock index has risen about ninefold in the three years to mid 2007.

Finally, ex-media mogul and so called “Mouth of the South” Ted Turner, who set up CNN, knows how to make the news.

If we don’t get a handle on global warming says the billionaire “we’ll be eight degrees hotter in 30-40 years and basically none of the crops will grow. Most of the people will have died and the rest will be cannibals.”

And there we were worrying about a trifling credit crunch.

Regards,

Rob Mackrill
The Daily Reckoning

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