The two hottest personalities in the hedge fund industry just disagreed about the hottest investment in the world.

According to the latest regulatory filings, George Soros reduced almost all of his gold-related equity investments while John Paulson increased his exposure. 

So, who is right about gold?

Soros had bought gold as a trader. He said it was the “ultimate asset bubble” that developed in the environment of loose monetary policy.

Paulson, on the other hand, bought gold as an investor. In late 2010, he said inflation would hit double-digits by 2012 and boost gold’s attractiveness. He said gold prices could hit $4,000 per ounce.

He reasoned that as the Federal Reserve drastically increases the US monetary base, gold prices should naturally rise in response. When inflation hits consumers, gold prices would even rally more, said Paulson.

Looking at a chart (seen below) of gold prices versus the US monetary base, it seems that both have gone up in the last decade. However, the chart doesn’t really show a cause-and-effect relationship.

Instead, gold’s persistent rise is probably due to speculative buying. In the first quarter of 2011, Soros may have, for whatever reason, judged that the speculative buying fever is over and therefore sold his position.

Nevertheless, the last few years have proven that it’s generally unwise to bet against gold bull Paulson. With a dovish and trigger-happy chairman at the Federal Reserve’s helm, the gold rally may have more life yet.

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