Now you know why John Paulson has been buying all that gold

It's called insurance.

This from Yves Smith's extended post on the SEC/Goldman headline-maker today. No better place than Yves' blog to get the inside track on this story:

"The SEC is now mounting a civil suit against Goldman against one of its Abacus trades, which was a series of synthetic CDOs used to take short positions in real estate. Interestingly, the deal in question was on behalf of John Paulson. Greg Zuckerman’s book on subprime shorts, The Greatest Trade Ever, indicated that Paulson wanted to take down the all the credit default swaps created through the CDO issuance process (which would typically leave him 95% short the par value of the CDO, since Paulson would put up the equity tranche, usually 4-5%). The SEC may have started with this transaction because the communications between Paulson and the SEC would make it easy to show the intent, that of putting crappy CDS in the CDO."

And by the way, if Paulson eventually has to liquidate holdings, today's $30/oz drop in gold is likely to be a mere hors d'oeuvre.
Not to mention Nadagold (NG).

UPDATE: Also recommended is Felix Salmon's take on the SEC charges, that gets to the heart of things and explains well.

UPDATE 2: The SEC complaint is here and it's explosive stuff. I'm on my second read-through and after a while it starts sinking in just how heavy this will be for GS. However I'm interested to know why Paulson is not a named defendant.

Sheesh, for a while there I actually thought John Paulson was smarter than the rest

You can see John Paulson's thought process. What with his highly touted gold fund only attracting minimal business (he's put up U$250m of the U$340m in capital so far from his own pocket), Paulson has worked out he needs more leverage to gold to get the punters to bite. Fair enough, because if you think about it for more than a second all that Paulson's gold strategy has offered 3rd parties so far is a 1:1 levered gold ETF....so why pay a fund manager his 2/20 when you can get precisely the same deal by buying the gold ETF (GLD) yourself?

So Paulson starts looking round for leverage and right at that time, guess who's hanging in NYC?

RICK!

Yeeeeaaah baby, Rick van Alphabet in da house. The result is watching yet another $100m get thrown at the biggest gold confidence trick of the 21st century. Paulson, I really thought you were smarter than to be suckered in by a snakeoil salesman. Here's the NR, out last night:

VANCOUVER, BRITISH COLUMBIA--(Marketwire - 03/04/10) - NovaGold Resources Inc. (TSX:NG - News)(AMEX:NG - News) today announced that it is proposing to issue 18,181,818 common shares of the Company at a price of US$5.50 per common share for gross proceeds of US$99,999,999 (the "Offering") to several investment funds managed by Paulson & Co. Inc.

The Company intends to use the net proceeds from the Offering to fund general exploration and development on the Company's advanced properties including Donlin Creek, Galore Creek and Rock Creek, its early-stage Ambler property, and for general corporate purposes, including funding yada yada continues here