Is John Paulson Wrong or Just Early on Gold?

Hedge fund manager John Paulson continues to lose a ton of money in gold, a commodity that’s a huge part of his investment strategy. But unlike so many of his billionaire colleagues, Paulson is continuing to bet both his reputation and a big chunk of his personal wealth on gold. Either he’s once again being smartly bold when others withdraw in fear, or he’s headed for another one of those painful public apologies.

Paulson’s Gold Fund lost 18% in February, bringing the losses to 26% this year, according to news reports Thursday. The $900 million fund invests in gold-based equities like mining companies and in derivatives.

Paulson is still best known for predicting the subprime mortgage crisis before others saw it. He has made billions of dollars for himself and his investors over the years but apologized in 2011 for major losses in his funds. He has been a fan of gold for several years. Last year, he stepped up his gold investments just ahead of a slump in gold prices. That helped send share prices for some of his mining investments down too.

Mining stocks -- including Anglogold Ashanti (AU) Goldcorp (GG), Kinross Gold (KGC), Gold Fields (GFI) and Novagold (NG) -- have been falling faster than the actual price of gold.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

Gold’s weakness has caused a lot of major investors to flee the metal in recent months. (Warren Buffett's takedown of gold is must reading for those mulling an investment.) Several reports indicate that hedge funds are more bearish on gold now than they have been since before the 2008 financial crisis. George Soros, revered as the wise man of gold gambling, was among those who reduced his exposure to gold in the fourth quarter. He cut his stake by more than half.

Paulson’s confidence in gold appears to be unshaken, having left his gold holdings intact during that nasty fourth quarter. He touts the metal as the best long-term investment largely because he expects that the recession fighting programs of governments around the world will eventually fuel inflation and weaken currencies. (Programs like the one by the Federal Reserve that buys $85 billion in bonds every month.) In the U.S., however, inflation has remained muted, the currency has remained strong.

Real Trade Weighted US Dollar Index: Broad Chart

Real Trade Weighted US Dollar Index: Broad data by YCharts

Paulson remains the biggest investor in the SPDR Gold Trust (GLD). That fund saw some gains in recent days after U.S. and European central bankers reaffirmed their dedication to stimulus programs. Paulson, it appears, hasn’t changed his assumption about what such programs can do for the price of gold. He’s probably thinking his timing was just off.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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