Gold and its beguiling promise of assured riches have lured clever men into making bad decisions for millennia.
The latest to have fallen under its alchemical spell is apparently John Paulson, hedge fund billionaire and the man who made his name – and a $5bn (£2.5bn) profit – betting against that other supposedly safe bet, the housing market.
In just two days last week, the 57-year-old hedge fund manager lost almost $1bn as the gold price slumped at a speed unseen in decades. With a personal fortune valued by Forbes magazine at $11.2bn, Paulson can weather the loss, but this is not his first stumble since his historic bet on the property crash made him the world's most famous hedge fund manager. And despite recent events, he is still flying the gold standard.
Paulson, known to his friends as JP, had been running a hedge fund for more than a decade before he shot to fame betting against the housing market.
The New Yorker, an alumnus of Harvard Business School, had specialised in merger and acquisition share trades before turning his attention to the housing market. But betting against sub-prime mortgages earned him a record $5bn in 2010 – $13.7m a day.
His funds became money magnets, managing just shy of $36bn at their height. For some, that's where Paulson's problems began: he had become too big not to fail. The funds are now thought to manage around $18bn in total.
"He's a talented and upstanding guy," says Keith McCullough, chief executive of hedge fund adviser and analyst Hedgeye Risk Management. "The problem is that he's the victim of gravity. There has never been a hedge fund manager who has run that amount of money and continued the run [of profits]."
With so much money to invest, McCullough says, the bets that a hedge fund manager is forced to take become bigger and bigger.
"It becomes more and more difficult to hit the home runs," he says. "Once you get that big, you can't get out. And once you can't get out, you're done."
Paulson is still betting that the return of inflation and a meltdown in global currencies will save his gold investments.
"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," Paulson partner and gold specialist John Reade told Bloomberg last week.
"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."
Gold prices rose throughout the economic crisis and were boosted by Federal Reserve chairman Ben Bernanke's decision to pump billions into the US economy each month. But now the Fed looks as if it may slow down its largesse, the US economy is stumbling into the light and there's still no sign of inflation.
"Gold is a bet on the end of the world," says McCullough. "Gold hates growth. If you actually get, God forbid, any economic growth, gold is not going to like it."
Paulson is stuck in a huge one-way bet – a position not unlike that of the investors he bested who presumed the housing bubble would inflate forever.
"I've been a very vocal gold bear," says McCullough. "I have 60 slide presentations, multiple institutional clients who have the other side of the Paulson trade. We have a very articulate case with a lot of fundamental underpinnings. But if I didn't have any of that, I could be right just by him being wrong."
Paulson wouldn't the first hedge fund manager to fall victim to his own success. There is a grand tradition of hedge funds performing in a "really horrible fashion" once they get too big, says Gregory Zuckerman, author of The Greatest Trade Ever: How John Paulson Bet Against the Markets and Made $20 Billion.
George Soros, the man whose trades famously "broke the Bank of England", together with hedge fund legends Michael Steinhardt and Julian Robertson, all stumbled after success swelled the size of their funds.
"I've discussed it with Paulson and he seems confident that relative to the rest of the market his 30-something billion is small. That's true, but when you manage that much money, you are forced to go with not all your best ideas," says Zuckerman. "He was no housing expert. He came to it with a lot of research and saw something that other people didn't. He took the same approach with gold … He put a lot of research into it. You can make mistakes like that as well.
"He's married to his position. He started a gold fund, what's he going to do, short gold? Probably not."
Paulson's woes are not all of his own making. Even some of the best-known hedge fund managers say the golden days are over for the industry. There are simply too many people running hedge funds with too much money.
This year, Soros spoke at the World Economic Forum in Davos. "Since hedge funds are now a dominant force in the market, they can't, as a group, outperform the market," he said.
Research from BarclayHedge and TrimTabs Investment Research suggests he is right. In 2012, the hedge fund industry as a whole was up just 7.8%, while the S&P 500 was up 14%.
"There are around 10,000 hedge funds. How many can be right at the same time?" asks McCullough.
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