In his gold investment, John Paulson faces a similar situation to what he faced with the subprime trade. His gold investments are not initially panning out the way Paulson had hoped. Rather than rally above $2,000/oz like many bulls expected, gold prices have fallen significantly since 2012.

Still, Paulson is sticking with his gold trade.

The bottom line The fundamental story for gold is still intact. The Federal Reserve has a lot of money in circulation. If the economy picks up and the velocity of money increases, inflation will likely send gold prices higher.

In addition to the Federal Reserve's balance sheet, gold prices may rise because India's newly elected prime minister Narendra Modi may roll back tariffs on gold imports. India made up about one quarter of global gold demand in 2013 so any changes in Indian tariffs will likely affect gold prices.

John Paulson may not be able to beat the market every year, but he is right when it counts. His continual conviction in gold is welcome news for long-term gold bulls.