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
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
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
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.
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 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
) such as
SPDR GoldShares (
PowerShares DB Gold Double Long ETN (
have seen billions incapital inflows in the past few years,
enabling investors to avoid the costs of storing and securing
The last reason gold still has plenty of room to run higher is
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
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.