Totally agree. If I send goods out I use either a courier or recorded delivery. If something didn't turn up, it would be down to me to make sure the buyer wasn't out of pocket. Thats not a trader thing, thats a moral thing. Contact Paypal and lodge a dispute. They will take the money back from him till it is sorted.
Will Paypal get involved though, given that the money was sent as a gift?
No they wont, I tried it when my UTEC was faulty