Tags: John-Paulson | Bonds | Stocks | Gold | inflation

John Paulson: Sell Bonds, Buy Stocks and Gold Before Double Digit Inflation Hits

Wednesday, 29 Sep 2010 07:53 AM

Strong earnings yields will help stocks, while rising inflation kills bonds and boosts gold, says hedge fund legend John Paulson.

He also says record low mortgage rates make houses a must-purchase now — more so than at any other time in the last 50 years.

“If you don’t own a home, buy one,” Paulson said in a speech delivered in New York City, Forbes reports. “If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

Paulson forecast economic growth of 2 percent in 2011 and 2012 and thinks all of the Federal Reserve’s quantitative easing will push inflation into double-digits by 2012. Inflation totaled 1.1 percent in the year through August.

As for gold prices, Paulson noted that they have historically correlated very closely to money supply, Gold Alert reports. Given his expectation – and that of others — that the Fed will expand its quantitative easing program, Paulson says gold could hit $2,400 an ounce.

That would represent an 85 percent rise from the recent record of $1,300. But given that gold surpassed its rising-money-supply correlation level by 100 percent in 1980, the precious metal could jump as high as $4,000 in the current run, Paulson says.

If gold reaches $5,000, Paulson’s huge holdings will put him in competition to be the world’s richest man, Business Insider reports.

Just to show how bullish, he is on gold — and bearish on paper currencies — Paulson holds 80 percent of his assets in the precious metal.

Like many others, Paulson sees bonds as a bubble ready to burst. Comparing them to stocks, he notes that equities have earnings yields of 7 percent to 8 percent compared to the paltry 2.6 percent yield available on 10-year Treasury notes.

Paulson is shorting longer-dated Treasuries through selling five- and seven-year calls on the 30-year Treasury bond.

Paulson’s favorite stocks include blue chips Johnson & Johnson, Coca Cola, Pfizer, Citigroup, Bank of America, SunTrust Banks and Regions Financial.

One of Paulson’s favorite investment strategies is to buy the distressed bonds of bankrupt companies, converting the debt to equity in bankruptcy reorganization and then making out like a bandit when the new shares rise upward.

Paulson says he utilized this strategy with K-Mart, whose stock came out of bankruptcy at $10 a share and then rose by a factor of 19.

He’s not the only gold bull. Fellow hedge fund icon George Soros has established a huge gold position, and star CNBC commentator Jim Cramer says the precious metal’s rally still has a ways to go.

Is gold in a bubble, Cramer asks? “Arguably yes,” he said on the air. “But if we can’t find gold, you have to get prices up to where secondary holdings of veins of gold can be found. So right now, $1,300 is not a top.”

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Strong earnings yields will help stocks, while rising inflation kills bonds and boosts gold, says hedge fund legend John Paulson. He also says record low mortgage rates make houses a must-purchase now more so than at any other time in the last 50 years. If you don t...
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2010-53-29
Wednesday, 29 Sep 2010 07:53 AM
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