Wish You Could Invest Like John Paulson? Here's Your Chance

By
A A A

John Paulson is one of the most famous and successful hedge-fund managers of all time. He shot to stardom in 2007 after TheWall Street Journal revealed his firm had scored a jaw-dropping $15 billionprofit from making big bets against the housingmarket .

Although Paulson catapulted himself into the record books with what is referred to as the "greatest trade ever," his path to those riches was anything but smooth.

Before bagging his record trade, Paulson had been betting against housing for years, defying one of the biggest rallies of all time. Paulson'scontrarian view had many a naysayer and even his own clients saying he had lost his mind as hisfund continued to losemoney on its bets against housing, buying into the growing narrative that theeconomy was in anew paradigm and that house prices rarely, if ever, went down.

Paulson's bet against housing flew in the face of popular opinion. If it hadn't, his trade wouldn't have been such a massive success, because hugegains are possible only when one stands willfully against the masses.

Five years later, Paulson is again embroiled in a controversial trade -- one that is unfolding just like his signature bet against housing.

Since the financial crisis, Paulson has been making huge bets on gold. But after gold's 13% drop in the first three weeks of April -- a drop that saw gold minerstocks fall even more -- the choir of skeptics is once again growing, claiming that Paulson has lost his touch.

I couldn't disagree more. The recent pullback in gold is totally normal, particularly for anasset that's jumped more than 500% in the past 12 years. In fact, it is the perfect platform for gold's next leg higher -- because the forces that first sent gold higher continue to accelerate.

Currency Devaluation
The biggestfactor thatwill continue tosupport gold's ascent is global currency devaluation, with central banks worldwide racing todevalue their currencies against one another to stimulate economic growth and thestock market.

Even the Federal Reserve acknowledges this dynamic, with Dallas Fed President Richard Fischer estimating that 30% of the S&P 500's gains in the past four years have been coming fromcentral bank stimulation. The market is addicted towaves of freshliquidity from the central banks, so even if these financial behemoths wanted to withdraw from the market, they can't.

With the central banks well aware of the coordinated devaluation of fiat currency, they are moving aggressively to protect their currency reserves from thebearish trend. And the way they are doing that is by swapping out their currency reserves for gold.

In 2012, central banks bought $500 billion in gold -- the most in 50 years. And despite gold's biggest drop in 30 years last week, central banks are still net buyers of the precious metal, most recently with central bankers in Sri Lanka and South Korea using the dip as a chance to buy.

Retail Investors
Retail investors are also an important part of gold'sbullish ascent in the past few years. Through financial innovation, it has never been easier for investors to own gold. Popular exchange-tradedfunds ( ETFs ) such as SPDR GoldShares ( GLD ) and PowerShares DB Gold Double Long ETN ( DGP ) have seen billions incapital inflows in the past few years, enabling investors to avoid the costs of storing and securing gold bullion.

Gold Sentiment
The last reason gold still has plenty of room to run higher is sentiment.

Bubbles never end with skepticism. They end when the bullish fever runs so high that investors don't think they can lose. That's how the housing and dot-com bubbles ended.

But despite gold's incredible run in the past 10 years, it is the one trade people still love to hate. When that changes, we will have finally seen the top of the gold market.

Risks to Consider: Gold has shown a propensity for extreme volatility in the past week. That makes gold a very high-riskinvestment that should represent a very small percentage of most people's portfolios.

Action to Take --> Despite gold's recent sell-off, the forces that have lifted the precious metal to more than a 500%gain in the past dozen years are still well in play. That makes gold's recent pullback an opportunity to buy when others are fearful.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Commodities

Referenced Stocks: DGP , GLD

StreetAuthority

StreetAuthority

More from StreetAuthority:

Related Videos

Stocks

Referenced

100%
78%

Most Active by Volume

33,082,461
  • $4.57 ▲ 4.58%
29,366,385
  • $15.61 ▲ 1.50%
24,173,452
  • $96.80 ▲ 1.66%
21,783,521
  • $15.90 ▲ 4.67%
21,714,230
  • $15.03 ▲ 5.62%
20,161,602
  • $67.84 ▲ 2.26%
19,278,741
  • $48.515 ▲ 3.22%
15,670,787
  • $54.64 ▼ 0.58%
As of 7/14/2014, 12:21 PM