Paulson Cuts Gold, Goes Long Financials

Hedge fund manager John Paulson was active in the third quarter.

His fund, John Paulson & Co, cut one-third of its stake in the SPDR Gold Trust (NYSE: GLD), while adding to his positions in Bank of America (NYSE: BAC) and Capital One (NYSE: COF).

Paulson dumped stakes in several other companies including Comcast (NASDAQ: CMCSA) and JP Morgan (NYSE: JPM), while taking stakes in other companies like Motorola Mobility (NYSE: MMI) and InterDigital (NASDAQ: IDCC).

The decision to run from gold and into financials is somewhat interesting. Paulson's fund was notably annihilated in the summer when his positions in Bank of America, Sino-Forest (OTC: SNOFF), and Hewlett-Packard (NASDAQ: HPQ) sustained massive losses.

The SPDR Gold Trust was one of his only winning holdings. Why the decision to leave the winners and double down on the losers?

Perhaps Paulson's investment thesis has changed. A bet on gold may be seen as a bet on inflation, and Paulson, seeing the wreckage in Europe, may have joined the deflation camp.

Yet, deflation and trouble brewing in Europe might suggest trouble for US financials. Thus, if Paulson is anticipating contraction, increasing his stake in Bank of America may be foolish.

Instead, perhaps Paulson is as firm as ever in his bet on inflation and a US recovery.

The fund suffered from some investor redemptions, and so Paulson may have simply opted to sell a third of his gold stake to meet redemptions. The purchase of Bank of America may have represented a value investment for a stock that is unlikely to see such levels in a possible recovery ahead.

If you would like to see the full extent of what Paulson was holding as of the end of September, check out the actual SEC filing.