Why Is This $150 Billion Hedge Fund Buying Gold Stocks?

Source: Agnico-Eagle Mines.

Bridgewater Associates -- founded by Ray Dalio, who famously predicted the global financial crisis in 2007 -- is a $150 billion hedge fund with a wide spectrum of institutional clients, including central banks, pension funds, foreign governments, foundations, and endowments.

In 2012 and 2013 Bridgewater, earned clients more than any other hedge fund in history. In 2011, while most hedge funds lost money, Bridgewater returned 23%.

Look who's buying gold mining stocks
Investing in gold has been considered by many on Wall Street to be a game for unsophisticated investors with no fundamental sense of value. So why are hedge funds like Bridgewater increasing their stake in the gold mining sector right now?

In fact, Bridgewater increased its holdings in Barrick Gold Corp (NYSE: ABX  ) by 80%, as reported in Bridgewater's 13F filing for the last quarter of 2013.

Soros Fund is another 13F filer that bought a new position in Barrick Gold.

Barrick Gold isn't the only gold mining stock that Bridgewater is acquiring. Bridgewater is among 198 13F filers that were holding Eldorado Gold Corp (NYSE: EGO  ) stock as of Dec.31, 2013. In fact, Bridgewater increased its position in Eldorado by 82% in the fourth quarter.

How are gold mining stocks doing?
A quick look at Barrick Gold's recent financials shows that last year's drop in gold prices has clobbered earnings. Eldorado Gold, Kinross (NYSE: KGC  ) and Goldcorp (NYSE: GG  ) have reported similar losses for similar reasons. After enjoying prices between $1,500 and $1,800 per ounce for most of 2011 and 2012, gold slumped in value, touching $1,200 several times and still failing to climb past $1,400 since then.

Barrick Gold reported a 2013 fourth quarter net loss of $2.61 per share, which includes after tax impairment charges of $2.82 billion. Their net loss for the year 2013 was $10.37 billion ($10.14 per share).

Eldorado Gold Corp reported fourth quarter 2013 revenue was $232 million, well below the $350 million in the same period the previous year. Bottom line swung to a loss of $688 million ($0.96 per diluted share), from Q4 2012's profit of $115 million ($0.16).

In March, 2014, Federal Reserve Chair Janet Yellen unexpectedly suggested that investors could expect easy money to last about six more months, implying that short-term interest rates could rise after that time. That may be good news for the dollar, but gold prices and gold mining stocks responded with an immediate drop. Barrick Gold declined 4% on the news, and other gold mining companies followed close behind.

Is there any good news for gold mining stocks Barrick and Eldorado?
Given that Barrick Gold is stuck in the mud and Eldorado Gold is slipping on it, what is the attraction? Despite the 28% drop in gold prices last year, Barrick Gold has been aggressively reducing its exposure to underperforming mines. The cost to ramp down a mining operation is high, which is contributing to recent losses.

Barrick Gold has also targeted about $2 billion in costs and capital expenditure cuts in the last quarter of 2013, and cut its dividend by 75% to conserve cash. According to Barrick's 2013 fourth-quarter report, the company is reducing its gold reserves by 28%, divesting Barrick Energy, and temporarily suspending operations at its Pascua-Lama mine (which has issues of its own).

Eldorado Gold has been slowing down its capital spending on certain projects and exploration.

Both Barrick and Eldorado are also working to improve cash flow from operating efficiencies.

Investors shouldn't write off gold investments too quickly based on the Fed's comments about the end of easy money this fall. Yellen has mentioned other time frames in the past, suggesting any monetary change could be postponed again.

Indeed, the fundamentals for gold mining stocks are improving. As fellow Fool Varun Chanan notes, the market's reaction to the Fed's comments may have been just a knee-jerk. The Fed was already expected to start tapering, so Yellen's comments were not a huge change, if any. Plus, the gold market is expected to be driven by improving demand from China and India.

When Bridgewater speaks, should we listen?
A leaner, meaner Barrick Gold and Eldorado Gold could be the recipe for a turnaround on both counts. The purchase of 386,700 Barrick Gold shares and 370,500 EGO shares by a high-performing fund should be a signal to investors to ignore the gold bashers and decide for themselves whether gold mining stocks should be in their portfolio -- and when. Unless you can afford the minimum investment of $100,000 to buy into a Bridgewater fund, Barrick and Eldorado stocks might be a good way to diversify your own "hedge fund" account.

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Sally Herigstad

Sally is a new Fool contributor for 2014, but a long-time personal finance writer, columnist, and certified public accountant. Sally wrote "Help! I Can't Pay My Bills" for St. Martin's Griffin.

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Related Tickers

9/3/2015 4:01 PM
ABX $6.48 Down +0.00 +0.00%
Barrick Gold Corp. CAPS Rating: ***
EGO $2.77 Down +0.00 +0.00%
Eldorado Gold Corp… CAPS Rating: ****
GG $13.33 Down +0.00 +0.00%
Goldcorp, Inc. (US… CAPS Rating: ***
KGC $1.66 Down +0.00 +0.00%
Kinross Gold Corp… CAPS Rating: ***