Paulson & Co. is seeking to reassure clients that its thesis on gold will be vindicated, in spite of this month's historic losses for the precious metal.
The New York hedge fund told investors that demand from central banks and in Asia will buoy gold in the short term, and economic stimulus programs will push the metal higher in the long term. Paulson was badly burned by gold's biggest fall in 30 years last Friday and Monday; gold is down 16% this year.
"Although inflation and inflation expectations remain subdued, which appears to have dampened the appetite for gold so far this year, we believe that ongoing central bank purchases and strong gold demand from China and India will help support the gold price in the near term," the firm wrote in a letter obtained by Bloomberg News.
"With ongoing, open-ended bond purchases, the Federal Reserve's balance sheets continue to expand, and the Fed has now confirmed that there is not going to be an unwinding of the stimulus through bond sales," Paulson continued. "This, in our view, increases the probability that money printing will eventually lead to inflation."
Firm founder John Paulson, who has 85% of his assets in his hedge fund's gold-denominated shares, is thought to have lost about $1 billion due to gold's precipitous drop this month. And his firm's funds were badly hit, with its flagship Advantage Fund seeing its year-to-date returns cut to just 1.3% as a result of gold's fall.