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The Mother of all Financial Battles

If you were a trader in Chicago on Friday January 11 2013, you could feel the panic sweep the room, Gold has dipped below the magic number, it has passed below the 200 day moving average. Sell they cried in the pits and Gold dropped 3% in a single week. But if you have access to market depth screens you could have seen this coming all week. The two largest hedge funds in the world are going toe to toe in a winner take all battle and it is more than clear who will win.

Lets meet the players
In one corner you have “The Big Short” John Paulson* who made the biggest winning trade in history when the housing bubble bust. All that money that almost blew up the American banking system, killing Bear Sterns and Lehman Brothers, crippling BofA and AIG,  it was lost to Mr. Paulson who had a super bet against mortgages in 2007. It was him that got all those billions in profit. You can read about it in the best selling book “the Big Short”. After Paulson got mega rich he knew the American banking system was too fragile to trust so he bought Gold. He owns over 5% of the Gold ETF called GLD. Its no secret that Paulson has not been doing well since the Big short, Forbes magazine dubbed his fund “To Big To Manage” a play on too big to fail.


In the other corner is George Soros
Hungarian American super star hedge fund manager. His most famous trade was back in September 16, 1992, Black Wednesday, Soros' fund sold short more than $10 billion in British pounds, profiting from the UK government's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency. Finally, the UK withdrew from the European Exchange Rate Mechanism, devaluing the pound, earning Soros an estimated $1.1 billion. He was dubbed "the man who broke the Bank of England". In 1997, the UK Treasury estimated the cost of Black Wednesday at £3.4 billion. 

Soros, called gold "the ultimate asset bubble" back in 2010. Sorros is not a buffet buy and hold guy, or a HFT computer wiz, he is a patient man who waits years to strike and when a certain financial conditions are just right, then he is “all in”. Now he wants Paulson & Co.’s money in his next trade of a lifetime.

Lets get ready to rumble.
If you were watching last week it was all over the tape. These two funds are taking massive opposite positions in the gold markets. Paulson is a bleeding whale and sharks are circling, Soros is dumping gold, of course Goldman Sachs is piling in right behind Soros and the boys in the pits only want one side of this trade - sell. Even the little players are joining in, volume is ramping up and Paulson is cornered. His clients are leaving in droves but are only getting paid in Gold, but that client gold also is being dumped on to the market.

I Told You So.
There is worse news, commodity bubbles have popped in the past, even Gold had a bubble in January 1980, but this is very very different. Gold underpins many nations treasuries, and with that Gold holds all of the global monetary confidence. These national treasuries have been eclipsed in size, many times over. We have never had so much Gold controlled by Wall Street, an ETF -- the GLD fund. In short the GLD fund has all the world's Gold and never have we had so much Gold. GLD has built a mountain of Gold in the HSBC vaults in London. 

As Gold drops (over 20% down so far)  investors will want out. When it sells there is no one to buy it all. I warned how very dangerous this was last summer, in my blog “After the Gold Rush” I know it is a lot of reading, but the implications are staggering. I suggest you slug though it again to see why Spring 2013 will go down in trading history. http://cme4pif.blogspot.ca/2012/06/after-gold-rush.html

 



* not to be confused with Secretary of the Treasury Hank Paulson

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CLICK HERE: To see the 100 and 200 series charts



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