Bloomberg News

Pacific Group to Convert 1/3 of Hedge-Fund Assets to Gold

January 20, 2013

The Pacific Group Ltd., founded by a former PaineWebber Inc. trader, is converting one-third of its hedge-fund assets into physical gold, betting that prices will go up as governments print more money to pay off debt.

The Hong Kong-based asset manager plans to take delivery of $35 million worth of gold bars that can be traded on the London Bullion Market Association and other international markets, William Kaye, its founder and chief investment officer, said in a telephone interview on Jan. 18. It has secured vault space at Hong Kong International Airport to store the gold, he said.

Investors disillusioned with government money printing to service “insurmountable” public debt may seek alternatives to fiat currencies, Kaye said. Asset managers, including Soros Fund Management LLC, Paulson & Co. and Sprott Inc., are betting on the precious metal even after a 12-year rally has cemented the longest bull market in at least nine decades.

“Gold, the way we look at it, is anywhere from being undervalued to being seriously undervalued,” Kaye said. “We’re in the early stages, in our judgment, of what would likely be the world’s largest short squeeze in any instrument.”

Fiat currencies have no tangible backing, such as gold or silver, except governments’ good faith and can become worthless due to hyperinflation or loss of public faith.

Pacific Group’s $95 million Greater Asian Hedge Fund, which started trading in 2001, returned 2.8 percent last year, taking the cumulative net return since its February 2000 inception to 195 percent. It suffered two down years in 2008 and 2011, according to its December 2012 newsletter.

Soros, Paulson

Gold for immediate delivery finished last year up 7 percent at $1,675.35 an ounce, off the high of $1,900.23 reached on Sept. 5, 2011. Prices retreated for three consecutive months to December, as the easing European debt crisis and faster growth from the U.S. and China spurred speculation that central banks will scale back stimulus. Spot gold finished last week up 1.3 percent at $1,684.30 an ounce, a second consecutive weekly advance.

Soros Fund Management, founded by the billionaire George Soros, raised its stake in the SPDR Gold Trust (GLD:US), the biggest gold-backed exchange-traded product by 49 percent in the third quarter to about $215 million, U.S. Securities and Exchange Commission filings show. Paulson & Co., led by John Paulson whose wager against the subprime mortgage market made him a billionaire in 2007, has a bet of about $3.6 billion through the trust, according to the filings.

Investors would seek the safest assets while governments spend to stimulate their economies, raising the risk of accelerating inflation, Eric Sprott, the founder and chairman of the Canadian fund manager said in July. Sprott manages funds that invest mainly in gold, silver and precious-metals equities.

‘Financial Catastrophe’

Central banks have so far been able to manipulate interest rates to allow governments to service their debt at low costs, averting market seizures, Kaye said. Still, the next big rally in precious-metal prices may be 18 months to two years away, triggered by a “financial catastrophe,” he added.

Ownership of gold through financial instruments based on it, such as Comex futures contracts, now represents more than 100 times the physical gold that exists above ground worldwide, Kaye said, citing the Pacific Group’s own analysis.

“All you actually need for a major upward revaluation of gold is for a small fraction of people to physically reclaim from major central banks or other depositories that are holding your gold and using it for their purposes,” he added.

The Pacific Group has just converted the first tranche of such investments, buying gold bars from local refineries, Kaye said without giving the exact value of the delivery.

Kaye was a manager of the arbitrage department of PaineWebber in New York and also worked in the mergers and acquisitions department of Goldman Sachs Group Inc., according to a biography posted on his company’s website. In 1991, he set up the Pacific Group, which also has made private-equity investments.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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