Gold Loses Its Luster


AND THE first one now will later be last. It's a line from Bob Dylan's '60s anthem "The Times They Are A-Changin'. " But it applies as well to a couple of hotshot hedge funders who prospered mightily due to prescient bets during the financial bust—and whose golden reputations are now being tarnished by ill-timed forays into gold.

Gold, an investment that pays no dividends and produces no earnings, long had a cult following among libertarians, right-wingers, inflationphobes, and catastrophists—think Glenn Beck. But in the years since the world's central banks began flooding the economy with newly created cash, gold went mainstream. Individuals and institutions came to regard gold—and gold-mining companies—as a hedge against Federal Reserve chairman Ben Bernanke's continual efforts to boost the economy. (Theory holds that when the money supply expands rapidly, the dollar should fall and gold should rise.) By making aggressive short bets against subprime debt (chronicled in Gregory Zuckerman's The Greatest Trade Ever), John Paulson morphed from an anonymous middle-aged trader into a billionaire and guru. In early 2010, he established a special fund to invest in gold and gold stocks. David Einhorn, the beloved activist investor who famously shorted Lehman Brothers stock in 2008, started an offshore gold-only fund, which offered investors the ability to take their returns in gold rather than dollars. And why not? From the beginning of 2009 through September 2011, the price of gold rose by more than 100 percent, peaking at about $1,923.

But 2013 has been very unkind to the metal derided by economist John Maynard Keynes as a "barbarous relic." One by one, the pillars underlying the gold investment thesis have been knocked over. The global economy is slowing, which means inflation remains under control. The crisis in Europe, while far from solved, is being managed. And Bernanke last month signaled that the Fed will start reducing its stimulative efforts sooner rather than later. Boom! The spot price of gold has fallen below $1,300—a decline of about one third from the peak. An exchange-traded fund that tracks the performance of gold miners has been scythed in half so far this year. The Paulson Gold Fund, now dubbed the PFR Gold Fund, which once had $1.2 billion, has informed investors that the fund has lost 65 percent of its value in the first half of 2013, and 23 percent in June alone. Einhorn's gold fund fell more than 10 percent in June alone.

There are several lessons here. Money managers who excel in one economic period won't necessarily excel in another. Even steely contrarians like Paulson and Einhorn can get caught up in fads. And all that's gold doesn't glitter.