Gold investors know about the SPDR Gold Shares (GLD) exchange-traded fund. You can buy and sell "shares" of gold bullion much like shares of stock. No one knows GLD better than John Paulson does.

Paulson is a New York hedge fund manager who famously made billions by short selling subprime mortgage securities in 2007. More recently, he turned very interested in gold. Paulson's funds are the SPDR Gold Trust's largest investors.

As recently as 2005, gold was selling below $500 per ounce. The subsequent bull market briefly paused in the 2008 financial crisis before topping above $1,900 in September 2011. Now it is around $1,330, about 30 percent below the peak. Paulson's leveraged gold fund reportedly lost about 54 percent in the first five months of 2013 alone.

How does such a smart trader make such a bad bet?

First, we do not know it was a bad bet. Gold accounts for only about 2 percent of the $19 billion in Paulson's private funds. This relatively small amount could be one component of a broader strategy. Maybe he views his gold as a hedge against losses in other markets. We don't know.

What we do know, according to data from the Commodity Futures Trading Commission, is that large speculators like Paulson are leaving the gold market. Their "open interest" in gold futures and options is about one-fifth where it stood just before the 2011 top. The "official" line from Wall Street is that gold will trade sideways or down for the rest of the year. The big money is looking elsewhere.

Maybe the big money is right, but I'm not so sure. Have you tried to buy gold coins lately? If so, you probably paid a big premium to the "wholesale" price of proxies like GLD. Demand is likewise strong in Asia and the Middle East. People around the globe want gold in their hands, not on paper.

Someone is wrong here. If the third-world street markets are right, Wall Street is making a big mistake. The difference, I suspect, is in the timing. Traders are in the business of trading. They have to care about the short term. That is why they prefer their gold in electronic form.

Normal people just want a safe, secure, portable place to store their savings. For most of the world, this means gold or silver. Even in the developed West, people are rapidly losing faith in banks and government. This is why physical gold is more precious than electronic gold is.

In other words, digital gold is in a bear market. Wall Street is right. Physical gold is different. If you are lucky enough to have some, think twice before you let it go.