John Paulson’s Gold Fever Dream Has Lost Him $1 Billion in Two Days

By
John Paulson Photo: Sylvain Gaboury/Patrick McMullan

I always thought it was somewhat bizarre that John Paulson, the hedge-fund billionaire and imaginary IM pal of Jessica Pressler, was heavily invested in gold. Gold, unlike the credit default swaps on mortgage-backed securities that made Paulson his billions, isn't a thinking man's investment. Betting on gold requires no counterintuitive analysis, no Paolo Pellegrini whispering insights in your ear. It's a fairly obvious reactionary play for doomsday preppers and Fed-haters, and has been since Paulson began piling into it in 2009.

What's weirder is that Paulson, who is temperate (if conservative) in his personal politics, isn't simply betting on gold as a speculator. That, at least, would be an understandable move. (Rough investment thesis: There are a lot of gold bugs in the world, and the Fed's quantitative easing efforts will likely create more, driving up the price of gold and making me rich[er].) No, Paulson seems to be a true believer, who really does think that the Fed's expansionary monetary policy will create massive inflation and debase the dollar. 

"What's the only asset that will hold value? It's got to be gold," Paulson said back in 2009, as reported in Greg Zuckerman's book The Greatest Trade Ever.

Either way, dude is taking it on the chin. Bloomberg reports that Paulson has lost $1.5 billion — that's billion, with a B — since the start of the year by betting on gold, including a $1 billion loss in the last week alone, as gold prices have suffered their biggest crash in 30 years.

Like Joe Weisenthal, I'm generally happy about the gold crash, even if it does mean fewer donations to neighborhood parks. But I'm also fascinated with the story of how John Paulson — by all accounts a wise and thoughtful investor — was taken in by gold fever and hasn't given up even with gold's recent problems. Here's what John Reade, a "partner and gold strategist at Paulson & Co.," told Bloomberg yesterday:

“Federal governments have been printing money at an unprecedented rate creating demand for gold as an alternative currency for individual and institutional savers and central banks alike. While gold can be volatile in the short term and is going through one of its periodic adjustments, we believe the long-term trend of increasing demand for gold in lieu of paper is intact.”

That's fairly standard goldbug defensiveness — and, amusingly, if you take out "gold" and replace it with "Bitcoins," it also sounds like the kind of thing we heard from those alternative currency fans during another crash last week.

A refusal to give up on gold isn't only Paulson's problem, of course. Lots of hedge-fund managers with fancy Upper East Side homes have also found themselves shilling for the shiny metal as their disillusionment with the Fed has grown. (I had dinner with an investor just the other night who couldn't say "Bernanke" without growling.)

But John Paulson was supposed to be the exception! The clairvoyant! The guy who zigged when everyone else zagged!

Maybe the next billion-dollar loss will make him reconsider his thesis.