A Gold Rush Wanes as Hedge Funds Sell

By: Julie Creswell,
The New York Times

 

Is the smart money fleeing gold?  

For the better part of the last two years, some of the world’s biggest hedge funds have been piling into gold, betting the precious metal would provide an effective hedge against inflation or be a safer place to park cash as equity markets around the world stumbled. 

 

But to the surprise of many investors, when equity markets across the globe tumbled once again on Thursday, gold moved sharply lower as well.

Gold futures for September delivery fell $66.30, or 3.7 percent, to $1,739.20 an ounce in New York. It was quite a turnabout for the metal, which has been soaring in recent months amid the turbulent stock markets. 

Hedge funds, which have been ratcheting down their positions in gold futures since early August, were quickly named as the culprits in the latest sell-off. 

Some traders said that hedge funds were beginning to unwind, or close out, what has been a very popular and profitable trade for the last 18 months as they bet the dollar would fall and that gold would rise. In the last month alone, the euro has fallen nearly 4 percent against the dollar amid worries about the European debt crisis. 

The sell-off in gold was part of a broader move in the markets that had investors shifting away from perceived riskier assets, like commodities, and into the dollar in reaction to the Federal Reserve’s announcement on Wednesday of its new stimulus program. 

In addition, the Fed, said that there were “significant downside risks” to the United States economy, which sent several commodities, including crude oil and copper, tumbling on Thursday on fears of a global slowdown in demand. 

Other market participants said hedge funds were selling their positions in gold to raise cash to meet increased capital demands for their borrowings from Wall Street banks as the assets they have put up as collateral, like other commodities or stocks, have declined sharply in value. 

“On the one hand you have a lot of strength in the U.S. dollar, historically gold and the dollar do trade inversely,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “The hedge funds are long gold and they need to raise cash and it looks like they are definitely selling some gold.” 

Others say some hedge funds may be selling to meet redemption requests from investors who have been spooked by the recent market volatility and fear a repeat of the problems of late 2008. 

“A lot of investors are waking up to the realization that something is off. We’ve seen Goldman Sachs close its flagship fund, legendary hedge funds are down sharply, and I suspect we’re going to see significant withdrawals from some hedge funds this year,” said Michael A. Gayed, the chief investment strategist of the investment advisory firm Pension Partners. 

“The tendency for individual hedge funds or anybody is to sell winners before they sell losers. What’s been one of the few winners this year? It’s been gold,” Mr. Gayed added. 

Still, some are not yet ready to call the end of the gold rush. Even with the pullback, gold remains one of the most profitable investments this year with a gain of 22 percent. 

Some strategists have even predicted that gold will reach a record of above $2,300, which it hit during the early 1980s when adjusted for inflation and translated into current dollars. Likewise, the world’s largest exchange-traded gold fund, the SPDR Gold Shares [GLD  161.22    -7.83  (-4.63%)   ], fell 2.6 percent on Thursday, but remains up 22 percent for the year. 

Gold, whether through futures contracts or via exchange-traded funds, has been a popular investment among some of the world’s largest hedge funds. One of the best known “gold bugs” is John A. Paulson, whose firm, Paulson & Company, is the biggest shareholder in the SPDR Gold Shares ETF. But many other hedge funds have embraced the metal as well. 

After peaking in early August, hedge funds have been reducing their exposure in the gold futures market, according to Mary Ann Bartels, the head of United States technical analysis for Bank of America Merrill Lynch. 

“A lot of speculators were very long in July,” Ms. Bartels said. “But they’ve been taking it down ever since.”

SOURCE: http://www.cnbc.com/id/44638898

Soros: US Is Already in Double-Dip Recession

Published: Thursday, 22 Sep 2011 | 1:51 AM ET

By: Reporting by Maria Bartiromo, Writing by Antonya Allen, CNBC.com

Billionaire investor George Soros said he believed the United States was already experiencing the pain of a double dip recession and that Republican opposition to Obama's fiscal stimulus plans was to blame for sluggish growth.

Asked by CNBC if he believed the US risks falling into a double-dip recession , Soror said: "I think we are in it already."

"We have a slowdown and basically a conflict about whether the rich ought to pay taxes to create jobs or not and there was a deal in the making which would have balanced the budget over the long term, but would have allowed short-term fiscal stimulus, which would have been the right policy," Soros said in an interview late Wednesday.

"That was rejected, it fell apart… so it will come to the electorate next year to decide what they want," he added.

Euro zone policymakers have repeatedly followed the wrong policy shifts, creating a situation in Europe "more dangerous" to the global financial system than the collapse of Lehman Brothers in 2008, Soros said.

"It is a more dangerous situation [than Lehman Bros] and I think that the authorities, when push comes to shove, will do whatever it takes to hold the system together, because the alternative is just too terrible to contemplate," he added.

A number of smaller euro zone nations  could default andleave the single currency area, Soros said, but he warned if it happened on an ad hoc basis, there would be considerable risk to the global economy.

"I think that you could have two or three of the small countries default or leave the euro provided it is prepared and done in an orderly way," Soros said.

"If it were to happen unprepared it could actually disrupt the global financial system, but that's why it's important to allow for it to happen and then those countries have a genuine choice it doesn't mean they are being pushed out."

Soros said he believed the so-called 'Troika' of the EU, ECB and IMF would release the next tranche of aid to heavily indebted Greece, but he stressed the creation of a European bailout fund would determine whether Greece received another bailout in December.