Hedge Funds Increasingly Bullish on Gold As Uncertainty Drives Prices

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Last Updated on: 28th December 2020, 10:47 pm

Gold prices have continued their impressive rise long enough for the hedge funds to take notice. The prices for gold futures are up an impressive 20% so far in 2016. This has been mostly fueled by the 17% run during the first three months of the year alone. Monetary policies, hedge fund participation and strong positive opinions, and uncertainty in the U.S. and Britain are helping to sustain this gold price rally.

Monetary Policies Drive Gold Exchange Traded Funds Inflows

Central banks continue to be a lynchpin in gold's success. Investors once confident that the Federal Reserve would raise interest rates have wavered in their opinions. At the beginning of 2016, investors saw a 90% chance the U.S. rates would rise by December. These Fed fund futures now have the odds of such a rate increase by the end of the year down to 56%. Lower interest rates support gold and the precious metals since they mean that competing investments have little to offer in the way of yields. Gold's returns come from price increases alone.

Add to this the sub-zero lending rates now available in both the Euro Zone and Japan and it is a recipe for higher gold prices. Investors see the very real possibilities that the central banks' stated goals to raise inflation while supporting growth may backfire and exceed their hoped for expectations. Higher inflation means higher gold prices as the yellow metal acts as an effective hedge against rising inflation.

As a result of this, participation in the Gold backed exchange traded funds continue to surprise observers. So far in 2016, over $16 billion has made its way into the precious metals' backed ETFs. Gold holdings in the SPDR GLD alone were up over 28% for the first quarter of the year. This represented the biggest inflows since the year 2009.

Hedge Funds Turn Bullish on Gold

A noteworthy development in gold in the first five months of 2016 has been the bullish change in attitudes from many of the hedge funds and their leading managers. George Soros' Soros Fund Management purchased 19.4 million of the Barrick Gold shares for a total $263.7 million. Barrick Gold represents the largest producer of gold bullion, and Soros has put 7.5% of his entire portfolio into the single position. Eton Park Capital Management also voted for gold with its investors' money by taking a $422 million position representing 3.59 million shares in the ETF GLD. This holding is a new position for the fund.

Endorsements for rallying gold have also poured in from statements from across the hedge fund spectrum. Paul Singer, a hedge fund billionaire manager, has stated that with central bankers busy debasing their own currencies owning gold “makes a great deal of sense.” Hedge fund manager David Einhorn claims that “increasingly counterproductive and aggressive monetary policies are bullish for gold.” Billionaire investor and money manager Stan Druckenmiller is banking on gold because of policy makers and their unchartered experiments involving “absurd notions of negative interest rates.”

Uncertainty in the U.S. and Britain Encourages Gold Investing

Gold prices are also getting a lift from pending decisions in the United States and Britain. In the U.S. the national election uncertainty hangs over the geopolitical landscape. Britain will vote in June on whether it remains in the European Union or leaves it as well. Both of these events have been enough to encourage a German bank Joh. Berenberg Gossler and Company to say that it will boost its gold and overall precious metals holdings in the near future. They believe that demand will rise because of the major decisions that hang over the U.S. and Britain.

Paulson Hedge Fund Reduces Massive Gold Holdings

One lone dissenter from gold in the first quarter of 2016 came from hedge fund manager John Paulson. He has recently sold around a million shares of his SPDR GLD holdings since the end of 2015. Paulson's action has to be considered in the proper context to be fairly understood. This still leaves him with 4.8  million shares of the GLD ETF. Paulson first invested in gold back in 2009, years ahead of many of his hedge fund rivals. He believed that the unparalleled monetary stimulus going on in the U.S. and Britain would drive prices substantially higher. His bet turned out to be a smart one, as gold prices rose around 70% from the end of 2008 thru June of 2011 as the Federal Reserve continued to pile on debt. Prices then reached a five year long low in December of 2015 as the Fed prepared to raise interest rates in the U.S.

Paulson's clients still have massive holdings in gold backed products that they wish to own as a hedge against the dollar's value. His fund offers its own class of gold shares. They utilize the GLD from SPDR to back their shares with gold. Paulson and his clients have simply taken some profits from their gold holdings with this action. They still remain one of the largest investors in the GLD ETF.

David Crowder
David Crowder

W.D. Crowder is an American published author. His background and areas of expertise include history, economics, expatriate living, international relations, investments and personal finance. A widely read and top of his class graduate of Stetson University, he obtained his bachelor of arts degree in History with minors in Latin American Studies and International Relations and a special emphasis in Economics. He was President of his Phi Alpha Theta (National History Honors Fraternity) Stetson University chapter and a Phi Beta Kappa (National Honors Fraternity) member.

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