Will Gold be Paulson's Next 'Greatest Trade Ever?'

When famed hedge-fund manager John Paulson speaks, people listen.

And it's no wonder.

Paulson made his way into the financial history books thanks to what many now call the "greatest trade ever".

Paulson & Co. shorted the subprime mortgage market before the collapse, banking a $15 billion gain.

So when Paulson went big again by buying gold in 2009 and 2010, investors took notice.

At the time he said, "As an investor, I became very concerned about having my assets denominated in US dollars," Paulson told his audience. "So I looked for another currency in which to denominate my assets in. I feel that gold is the best currency."

In fact, Paulson's holdings in the SPDR Gold Trust (NYSE: GLD) make his firm the biggest stakeholder in this ETF, with a position currently valued at $2.9 billion.

So that begs the question....

Is Paulson still a gold bull?

In a recent letter to investors he wrote, "By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold."

And he's not alone.

Recent filings showed that another legendary hedge-fund investor, George Soros, has nearly doubled his stake in GLD to 85,450 shares.

But "Bond King" Bill Gross's latest words and actions may well be the most significant of all.

In his February newsletter, Gross mused "Recent central bank behavior, including that of the US Fed,... may as well induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper."

So not only do some of the largest and most successful fund managers all agree on gold, but now even central banks and entire nations are figuring this one out.

Last year global demand for gold hit the highest level since 1997 – 4,067.1 tonnes.

Most of the gains are thanks to a 5% increase in investment demand which largely originates in Asia.

What's especially eye-catching is the stepped-up buying by central banks.

Last year, they bought 439.7 tonnes, which is six times the level in 2010, and the most since the gold standard ended in 1971.

According to the World Gold Council (WGC), China became the largest gold market in Q4/2011, overtaking India's top seed, and soaking up 770 tons for the year.

(Chart Sourced from US Global Investors)

Overall for 2011 however, India remained the leader, consuming a total 933 tons.

But China's appetite for gold seems insatiable. Hong Kong imports were 10 times their average levels from January through November.

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