Paulson Gold Stock Fund Losses

Bloomberg News reports that Paulson took losses due to his investment in gold mining stocks. They also show the chart of the S&P TSX Gold Gold Index. This one chart above all else will demonstrate just how badly underperforming gold stocks are.

None of the gold stocks pays dividends beyond the yields you would find in treasuries or the corporate sector. They should be paying out very robust dividends, if they want to have their share price appraised on a forward earnings basis, and thus index with the gold price.

One of the things never mentioned anywhere is that delta hedging strategies rely on the abolishment of the no-down-tick rule last year. That means they can lay on massively leveraged hedging strategies which involved selling the gold miners and buying long-dated U.S. treasury options in the futures market.

The underlying asset in the delta hedging position is called the equity swap. This is essentially a debt to repurchase gold stocks that were sold as part of the hedging strategy, based on the change in price. A delta hedging strategy on GBN.V stock would have had to have been in place since the Bre-X disaster.

GBN.V shares have thus not changed in price in 17 years. Therefore, considering the power, range and longevity of delta hedging strategies against the entire sector of gold stocks and especially GBN.V shares, there is no case or opportunity for share price appreciation at all.

GBN.V's strategy should be to pay a dividend. They can pay out a 10% of revenue dividend if they so chose. Practically all of their grandiose plans in the attempt to save face and peddle their wares to the market and re-hash old news have failed. Then again, certain information has not been forthcoming such as the SGH surverys over the Benjamin Lake area. The result has been a heavily diluted gold stock with no buyers and a share price strongly inversely correlated with the long date U.S. treasury-bond market, rather than indexed to the gold price.

On the face of it, it looks like a swindle. What does it matter if the swindle is in the commercial banking sector delta hedging strategies, or with the GBN.V management?

Paulson aught to be looking for robust increases to dividends in their gold mining stocks, or dump the ones clearly failing to deliver production, or share price appreciation.

http://www.bloomberg.com/video/92118787/

supersize: http://www.flickr.com/photos/11747277@N07/7153028321/sizes/l/in/photostream/

stockcharts.com

-F6