Buy Paulson, Short Buffett

By Rick Ackerman       Mar 18 2009 12:30PM www.rickackerman.com

Since stocks started rallying a week ago, gold and silver futures have held up magnificently against a tide of silliness that has swelled on faintly improving perceptions of the economy. We should view the price of gold, above all, as a reality check on the global Carnivale, such as it is, but there will always be times when bullion's cold, stern eye will be temporarily distracted by the irresistible hubris of a bear rally. Such as now. An unavoidable side effect of the current mini-mania for stocks has been the wild thrashing of precious metal quotes -- or more recently, the tedious flatlining of quotes until some gratuitous spasm erupts for an hour or so just to scramble the players. But such histrionics make little sense to serious investors when they probe below $900; and so, with no rationale for going lower, but no reason yet to blow the $1000 barrier to smithereens, gold will continue to seethe, waiting for the tide of silliness to recede. (Click here to sign up for a free demonstration of Hidden Pivots during market hours.)

And no one sounds sillier these days than our Fed Chairman, Helicopter Ben, who despite his nickname has tried everything except dropping $100 bills from the sky. With his talk about an end to the "recession" later in the year and a gradual recovery in 2010, he has begun to sound almost like Kudlow, CNBC's all-purpose shill for anything that might cause The Hopeful to turn on, tune in and permanently suspend disbelief. What will it take to send Bernanke back into his bomb shelter? We can see a few inevitabilities that might do the trick: a complete meltdown of the global insurance business; the collapse of New York City real estate; or yet another swan dive by the Dow Industrials. In the meantime, it will remain largely unappreciated by Bernanke, and by nearly everyone else, that it is not the recent emergence of hopefulness that has caused stocks to rise, but rather the reverse -- i.e., a purely technical rally has caused false hopes to arise.

Bogged Down in Swiss Re

With respect to bullion's continuing role in keeping such hopes tethered to reality, we note that one of the savviest investors of this era, John Paulson, has just invested $1.28 billion in AngloGold Ashanti, acquiring an 11.3% stake. Paulson is perhaps the only investor to be featured on the front page of the Wall Street Journal in the last couple of years for making a huge pile of money (by shorting subprime mortgage paper) . This was no easy trick, since, as we have pointed out here before, deflation holds few opportunities for speculators; it is not the dot-com boom in reverse. By our lights, shorting Buffett and going long Paulson is a pretty good bet. The Sage has coveted Swiss Re for so long that he apparently can't resist throwing good money after bad in a futile effort to keep the company afloat. Is it possible that the insurance giant, encumbered as it is by vast debt in sundry ways that even Buffett may not be able to imagine, will ultimately prove to be worth less than an ingot of gold?

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Rick Ackerman