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Paulson & Co. PFR Gold Fund Fell 16 Percent in September

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Hedge-Fund Manager John Paulson
Hedge-fund manager John Paulson started the PFR Gold Fund in 2010 with the expectation that the Federal Reserve’s asset purchases would ultimately trigger inflation and stoke demand for bullion and related securities. Photographer: Jin Lee/Bloomberg

Oct. 21 (Bloomberg) -- Hedge-fund manager John Paulson’s PFR Gold Fund fell 16 percent in September after bullion and related stocks declined, according to a report to investors obtained by Bloomberg News.

Last month’s loss brings the 2013 decline in the $350 million fund, which invests in gold stocks and derivatives, to 62 percent, according to the report from the New York-based firm. Bullion producers fell 9.4 percent and the metal dropped 5 percent in September after a Federal Reserve policy maker said a small reduction in bond purchases may occur in October and the threat of a U.S. attack on Syria eased.

Paulson, 57, best known for making $15 billion for clients in 2007 by betting against subprime mortgages before the housing collapse, started the PFR Gold Fund in 2010 with the expectation that the Fed’s asset purchases would ultimately trigger inflation and stoke demand for bullion and related securities. Paulson & Co. is sticking to that conviction even as strategists including Goldman Sachs Group Inc.’s Jeffrey Currie said gold is a “slam dunk” sell for next year.

“While actual inflation and inflation expectations remain subdued, we continue to believe we are at risk of high inflation in the future,” Paulson & Co. wrote in the report. “Our long-term thesis remains consistent,” even though gold prices have remained volatile, the firm said.

Gold Tumbles

Gold has tumbled 21 percent this year as some investors lost faith in the metal as a store of value, wiping $61.7 billion from the value of bullion-backed exchange-traded products, amid a rally in U.S. equities to a record and low inflation. Bullion will average $1,250 this quarter, dropping to $1,225 in the first three months of 2014 and $1,195 in the following period, according to respondents in a Bloomberg survey.

Currie, Goldman Sachs’s head of commodities research who correctly forecast this year’s rout, said Oct. 8 that gold prices will again fall next year because the U.S. economy will strengthen after lawmakers resolve the stalemates over the budget and debt ceiling. Goldman expects prices to be at $1,050 at the end of 2014.

Federal Reserve Bank of Chicago President Charles Evans, an advocate of monetary stimulus, said today in a CNBC interview that fiscal strife in Washington will probably delay the central bank’s tapering of its monthly bond purchases. The Fed on Sept. 18 maintained the pace of buying.

Long-Term Thesis

Paulson’s main strategies are rebounding from losses tied to gold and two years of wrong-way calls on the economy. His firm still believes quantitative easing will lead to inflation and that the price of bullion will be supported by demand from China and India and a diminished supply of recycled gold, according to the report.

The firm, which “would not be surprised if gold were to trade sideways over the near term,” expects the metal to trade “materially higher” when indicators start to show rising inflation, it wrote in the report.

In months when gold rises, the PFR Gold Fund can outperform bullion, the firm wrote in the report. In July, the fund climbed 14 percent, outpacing the metal’s 7.3 percent increase, and in August the fund rose 12 percent, more than gold’s 6.3 percent gain, Paulson & Co. said.

The PFR Gold Fund takes its name from the initials of Paulson and gold specialists Victor Flores and John Reade and is composed of mostly Paulson’s own money. Armel Leslie, a spokesman for the $18 billion Paulson & Co. at WalekPeppercomm, declined to comment on the report.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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