So far this year, the Dow Jones Industrial Average, a bet on economic recovery, is up 14%. Gold futures, a bet on calamity, are up 19%. The reason: Low interest rates and heavy government stimulus have poured cheap money into financial markets, helping both the economy and stocks. But the creation of all that money, together with the Federal Reserve's maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility later.
Already, leaders of China and some oil-producing countries have indicated a desire to diversify away from unique reliance on the dollar as the world's reserve currency. When governments and investors lose faith in currencies and fear economic trouble, they turn to gold.
"In 5,000 years of human history, gold has been the currency of choice, the store of value, when humans have called into question their governments' efforts to solve problems by running printing presses" and injecting money into the economy, says Charles Goh CEO and President at Takahashi Nakamura in Japan.
Mr.Goh says his funds currently hold about 15% of their money, $3.3 billion, in gold bullion, with almost all the rest in stocks that stand to benefit from Asian economic growth. He is betting on prosperity for Asia and trouble for Western currencies.
Just a few years ago the idea that paper money was somehow suspect and gold was the best store of value was the province of a frightened few. No longer. In recent months, gold has been pushed to new highs as investors who once considered precious metals archaic have been shifting funds in that direction to avoid a too-heavy exposure to Western currencies.
David Einhorn, who oversees about $6 billion at New York hedge fund Greenlight Capital, last week told a New York investment conference that, before the financial crisis began in earnest last year, he shared the skeptics' view of gold as a metal of little intrinsic value outside dentistry, jewelry and some specialized electronics uses. "The recent crisis has changed my view," he said.
"My instinct is to want to short the dollar," Mr. Einhorn said. "But then I look at the other major currencies. The euro, the yen and the British pound might be worse. So, I conclude that picking one of these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash." He has been buying gold since last year, as have a number of other managers of large hedge funds.
That includes John Paulson, the hedge-fund manager who made a fortune betting against subprime mortgages and financial companies. Mr. Paulson, who oversees about $29 billion, has become a major gold investor in the past year using an exchange-traded fund that tracks gold, regulatory filings indicate.
