Famous for his exploits featured in the book and film The Big Short, hedge fund manager Michael Burry made news once again, this time for going long on a peculiar asset. Burry’s Scion Asset Management acquired a huge stake in Sprott Physical Gold Trust (NYSEARCA:PHYS), a unique closed-end fund that focuses almost exclusively on physical gold. The legendary investor isn’t the only major player in the precious metals game, making the Michael Burry gold wager enticing.
What distinguishes the Sprott Physical Gold Trust from other funds is its structure. According to CNBC, the PHYS ETF is defined as a “closed-end mutual fund trust.” However, it carries a hybrid profile. As a closed-end fund, PHYS units trade in an exchange, just like a standard security. At the same time, PHYS also features characteristics of an open-end fund, particularly the ability to “issue an unlimited number of redeemable, transferrable trust units.”
What really sparked interest in the concept was the strong vote of confidence via the Michael Burry gold bet. On Wednesday, many investors turned their eyes to Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) due to the 13F filing deadline with the U.S. Securities and Exchange Commission (SEC). However, the real fireworks arguably came from Scion, which bought more than 440,000 units of the PHYS ETF.
It’s now the biggest bet for the hedge fund. And that raises the obvious question: Why?
Michael Burry Gold Bet Sounds the Alarm
While Burry may have become a household name for betting against the housing market prior to the 2008 financial crisis, in recent years, the hedge fund manager has attracted attention for what he has acquired. However, the precious metals seem unusual thanks to their reputation as outdated relics.
Nevertheless, as CNN pointed out in April when gold prices reached a record high, multiple catalysts exist for the metal. First, investors are speculating that the Federal Reserve will eventually cut the benchmark interest rate. If so, the reduced burden of borrowing could inflate the value of desired commodities. These investors range from Costco (NASDAQ:COST) members to central banks, with a particular spotlight on China.
However, another reason gold has drawn attention is the “fear trade.” With geopolitical flashpoints raging, much uncertainty exists in the broader economic system. More than 60 countries will be holding elections this year, including, of course, the U.S. presidential election. Tensions in this arena have also contributed to the rise in gold.
Finally, it’s worth mentioning that the Michel Burry gold investment isn’t the only major play in the precious resource. Last month, billionaire investor Ray Dalio stated that he has exposure to gold as a hedge against currency devaluation. Also, Greenlight Capital founder David Einhorn disclosed via SEC filings that the underlying hedge fund acquired $74 million worth of the SPDR Gold Trust (NYSEARCA:GLD).
Why It Matters
Interestingly, the PHYS ETF carries a 99.9% allocation in 400-ounce gold bars. The rest is allocated to cash. Further, the trust states clearly that it “only holds fully allocated and unencumbered gold — no exceptions.” Further, stakeholders “can redeem their units for physical gold bullion on a monthly basis, subject to certain minimum requirements.”
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
