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Greenlight Capital (GLRE) reported a major increase in its exposure to gold as the hedge fund’s founder worries about the direction of the markets. In a Q3 letter to investors, David Einhorn expressed concern about geopolitical uncertainty, the rising price of oil, and inflation.

Greenlight famously shorted Lehman Brothers before its 2008 failure.

According to third-quarter 13-F filings with the Securities and Exchange Commission, Greenlight plunged $34.9 million into SPDR Gold Trust, the world’s largest gold-backed ETF. That increased the fund’s stake in the ETF by 89.2%, a record exposure to gold for Greenlight.

The hedge fund also reportedly holds a significant amount of physical gold, which is not subject to 13-F reporting.

ETFs such as SPDR are backed by physical gold held by the issuer and are traded on the market like stocks. They allow investors to play gold without having to buy full ounces of gold at the spot price. Since their purchase is just a number in a computer, they can trade their investment into another stock or cash pretty much whenever they want, even multiple times on the same day. Many speculative investors appreciate this liquidity.

There are good reasons to invest in ETFs, but they aren’t a substitute for owning physical metal. In an overall investment strategy, SchiffGold recommends buying gold bullion first.

Greenlight’s increased exposure to gold appears to be a shift into a safe haven strategy. The hedge fund also cut exposure to its two biggest holdings, homebuilder Green Brick Partners and Pennsylvania coal miner Consol Energy.

In his Q3 letter, Einhorn said investors are too complacent about geopolitical uncertainty.

The complacent investor view that geopolitics should be ignored might be true, except for the times when it isn’t. We suspect we are in one of those times. If we are right, current extreme levels of geopolitical tension will lead to lower stock prices over a timeframe that lasts more than a couple of hours.”

He also expressed concern about rising oil prices and resulting price inflation.

Higher oil prices would squeeze the consumer and likely cause a recession. The resulting inflation would also put the Federal Reserve in the uncomfortable position of having to fight rising prices at a time of rising unemployment. This leaves the market outlook very concerning.”

Greenlight Capital reported returns of 27.7% through the first nine months of 2023.

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