Billionaire hedge fund manager John Paulson, who told investors as recently as last month that they should own gold, cut his holdings in the metal by more than half as prices plunged into abear market.

Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 "due to a reduced need for hedging," according to an e-mailed response to questions. It also sold options to buy shares in Barrick Gold Corp.

The hedge fund is following other money managers who have been more aggressive in getting out as investors lost faith in gold as a store of value. Prices plunged by a record 23 percent in the second quarter as U.S. equities rallied and inflation was muted, while the Federal Reserve suggested it will reduce fiscal support for the economy. Billionaires George Soros andDaniel Loeb sold their entire SPDR stakes in the past quarter, U.S. Securities and Exchange Commission filings showed.

David Fuller's view This article was cited in last night's Audio, as an important factor behind gold's surge yesterday. Overhanging supply from these medium-term trend-following and also hedge investment positions had been a dead weight for the market, helping to drive gold (weekly & daily) prices lower since bullion last encountered resistance near $1800 last October.

Additionally, there were substantial short positions trying to force Paulson and others to cut their long positions. They have certainly been covering some of the gold shorts since July and are a major factor behind the rally to date. When gold's recovery loses upside momentum, it will be a sign that short covering and new investment buying is waning. However, there is now a good chance that gold's short to medium-term corrective phases will find support above the late-June low during a base formation extension phase.

Plenty of other countries are buying gold, led by China. Low short-term interest rates in the US and many other countries will ensure that monetary conditions remain favourable for gold, despite the inevitable rise in long-dated government bond yields as economies recover. Gold is unlikely to regain its 'Armageddon premium' any time soon but there are plenty of other reasons for buying and holding this monetary metal, including accommodative monetary policies.