Greenlight Capital Founder Takes Grandfather’s Advice on Gold

“The Federal Reserve’s policy of taking unorthodox steps to boost the supply of credit is essentially “printing money,” Greenlight said.”

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Jan. 28 (Bloomberg) — Greenlight Capital Inc. founder David Einhorn is finally taking his grandfather’s advice. The $5.1 billion hedge fund is buying gold for the first time amid the threat of inflation from increased government spending.

Since Einhorn was 10 years old, his grandfather has warned him that investing in bullion and gold-mining stocks was the only “sensible” thing to do given the threat of inflation and the risks of so-called fiat currencies, New York-based Greenlight said in a Jan. 20 letter to clients. The firm had never before considered buying bullion or mining-company shares.

“To everyone’s dismay, we believe some of Grandpa Ben’s predictions are playing out,” Greenlight said in the letter, a copy of which was obtained by Bloomberg News. “The size of the Fed’s balance sheet is exploding, and the currency is being debased.”

Greenlight is turning to the centuries-old currency to mitigate the effects of the economic collapse and government efforts to end it. Bullion gained for the eighth straight year in 2008 as governments in Europe and the U.S. rescued banks from collapse.

Greenlight said in the letter that in addition to buying gold, it has added call options on gold and the Market Vectors Gold Miners exchange-traded fund to its other investments. Call options are the right to buy a security or commodity at a set price, within a set period of time. The owner of the call profits when the security rises above the set price.

Gold & Silver Index

The 16-company Philadelphia Stock Exchange Gold & Silver Index gained 90 percent in the three months through yesterday while the Standard & Poor’s 500 Index fell 0.4 percent. Gold rose 21 percent in that period. Gold futures for April delivery fell $11.30, or 1.3 percent, to $888.20 an ounce today on the New York Mercantile Exchange’s Comex division.

Steven Lehman, who manages Federated Investors Inc.’s $1.3 billion Federated Market Opportunity Fund, beat the S&P 500 by 30 percentage points last year. The fund, which outperformed 99 percent of its competitors in that period, also has bet on the precious metal and counts Toronto-based Yamana Gold Inc. and Goldcorp Inc. among its top holdings.

‘Too Many Mistakes’

Greenlight, which Einhorn, 40, started in 1996, has returned an annual average of 20.8 percent from its Greenlight Capital LP fund. The firm said it made “too many mistakes” last year, when it lost 23 percent from its main fund, its first annual loss. Mary Beth Grover, a Greenlight spokeswoman, declined to comment.

The Federal Reserve’s policy of taking unorthodox steps to boost the supply of credit is essentially “printing money,” Greenlight said. The government’s “aggressive” fiscal policy also signals all efforts will be made to stem the effects of the current economic problems, the fund said.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

To contact the reporters on this story: Stewart Bailey in New York at sbailey7@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net.

Last Updated: January 28, 2009 16:21 EST
By Stewart Bailey and Saijel Kishan

Source: Bloomberg

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