Gold Stocks’ Weakness a “Final Blow” for John Paulson?

GOLD STOCKS NEWS – Gold stocks dipped Thursday morning as the Market Vectors Gold Miners ETF (GDX) fell $0.38, or 0.6%, to $52.00 per share.  The modest weakness in gold stocks and the GDX came despite stability in the price of gold, which hovered near $1,575 per ounce.  Gold stocks in Canada retreated more than their U.S. counterparts, as the S&P/TSX Global Gold Index dropped 1.1% alongside the GDX.

The gold stocks sector has come under significant pressure thus far in December amid widespread weakness in precious metals.  On a month-to-date basis, the GDX is now lower by 13.9% and on pace for its worst month since a 14.4% plunge in June 2009.  Furthermore, since reaching an all-time high of $66.98 on September 9, 2011, the gold stocks ETF has tumbled 22.4%.

Gold stocks have also continued to underperform the yellow metal in recent weeks as the broader equity markets have been rocked by sovereign debt concerns in Europe.  The price of gold has fallen 9.8% in December, but remains higher by 10.9% on a year-to-date basis.  The GDX, on the other hand, is lower by 15.7% in 2011 and on pace for its first annual decline since 2008.

One marquee investor who has been hit particularly hard by the underperformance of gold stocks has been John Paulson.  As the head of Paulson & Co., his firm has already suffered significant losses in 2011 in Bank of America, Citigroup, and Sino-Forest, according to a Bloomberg published report this morning.  Now, with gold stocks deep in the red this year, “he may be facing a final blow from this month’s selloff in gold,” the report noted.

According to SEC filings as of September 30, 2011, Paulson & Co. holds substantial positions in many large-cap gold stocks and components of the GDX.  The firm is the largest shareholder of American depositary receipts (ADRs) in AngloGold Ashanti (AU), the world’s third largest gold producer.  In addition, Paulson owns shares or ADRs in Agnico-Eagle Mines (AEM), Barrick Gold (ABX), Gold Fields (GFI), IAMGOLD (IAG), International Tower Hill Mines (THM), NovaGold Resources (NG), and Randgold Resources (GOLD).

Among the group of aforementioned gold stocks, only Randgold Resources is positive on a year-to-date basis, by 20.9%.  International Tower Hill Mines is the worst performer, with a 62.2% decline.  AngloGold Ashanti (AU), Paulson’s largest gold stock position, is down 13.0% in 2011.

However, while there is a considerable amount of negative news surrounding gold stocks of late, history suggests that now may actually be a good time for investors to consider positions in the sector.  Yesterday, GoldAlert highlighted a piece by Mark Hulbert, founder of the closely-followed Hulbert Gold Newsletter Sentiment Index (HGNSI).  The HGNSI reached 0.3% yesterday, a particularly low level that is often associated with troughs in the price of gold.

According to Hulbert, the significant negative sentiment that has developed toward the yellow metal is an especially bullish factor from a contrarian perspective.  As a result, he wrote that this “very strong wall of worry…could be the springboard for bullion rallying into new all-time high territory.”

Although Hulbert did not discuss gold stocks specifically, his contention that “gold is due for a strong rally” undoubtedly has positive implications for many GDX components that have performed so poorly in 2011.