Another Reason to Go With Gold

John Paulson's announcement that he is setting up a gold fund sends a bullish signal to gold bugs and retail investors that the yellow rock still has room to run.

I currently hold the Market Vectors Gold Miners ETF (GDX - commentary - Trade Now) and the Market Vectors Junior Gold Miners ETF (GDXJ - commentary - Trade Now) as a play on the mining industry, and the iShares Comex Gold Trust (IAU - commentary - Trade Now) as a play on the actual commodity.

I would advise investors to hold on to gold ETFs for the time being. Although prices of the metal dipped from their record highs on today, I feel the current economic environment is well suited for further upside.

For Paulson, investing in gold is not a new endeavor. In fact, according to The Wall Street Journal, the hedge fund manager's firm has amassed considerable holdings in both AngloGold Ashanti (AU - commentary - Trade Now) and Kinross Gold (KGC - commentary - Trade Now) throughout this year. Both AU and KGC are top holdings in GDX.

Paulson, who pocketed $20 billion shorting the housing market prior to the downfall, has made a name for himself by successfully forecasting recent events. He also practices what he preaches: he reportedly followed up his announcement by saying that he would invest a quarter billion dollars into his own new fund.

I personally like GDXJ for its small-cap exposure. Although it is a more volatile play on the gold industry, any moves on the upside in the sector will be magnified by holding the smallest firms. Less risk-tolerant investors can aim for larger-cap exposure with the GDX or physically backed gold ETF funds such as IAU and the SPDR Gold Trust (GLD - commentary - Trade Now).

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At the time of publication, Dion was long GDXJ and IAU.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.