Sunday, December 13, 2009

John Paulson's new gold fund

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Highlights, for those who can't read the full article:

One of the biggest investors is placing a huge new bet on gold.

John Paulson, who scored about $20 billion of profits between 2007 and early 2009 wagering against the housing market and financial companies, is launching a hedge fund dedicated to buying up shares of gold miners and other bullion-related investments, according to investors.
The affinity for gold represents something of a shift for Mr. Paulson, who gained recent recognition as a contrarian. As the dollar has fallen, investors lately have flocked to gold, which traditionally served as an alternative to paper currencies. As the supply of these currencies has risen lately amid government efforts to stabilize global economies, some investors believe their value will fall, helping gold.
Mr. Paulson at Tuesday's investor meeting countered that the bull run was only beginning for gold.

He noted that central banks around the globe have gone from sellers of gold to buyers, and that the global supply of gold is constrained.

While harmful inflation isn't on the horizon, he said, Mr. Paulson argued that there is a risk of a burst of inflation down the road. That's because in the past there's been a lag between a surge in money supply and higher inflation. Gold often does well when inflation rises.

Mr. Paulson told investors that the Federal Reserve will prove reluctant to raise interest rates, given the weakness in the economy, which also could pave the way for higher inflation, at least at some point, another reason for his growing conviction about gold.

Worth about $6 billion, Mr. Paulson said he was starting the new fund in part to give himself more personal exposure to gold, according to an investor at the meeting.

The embrace of gold is relatively new for Mr. Paulson. The hedge-fund manager, who mostly invested in merger deals until detecting a housing bubble in 2006, had done no gold investing as of a year ago.

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