Is Gold Rally Finally Over? What History Tells Investors

Published: Monday, 26 Sep 2011 | 12:25 PM ET

Gold's toppling from record highs, culminating in Monday's huge price plunge, has investors asking whether a decade-long bull run is over. History would suggest that while gold has taken a beating, it is far from down and out.

Monday's tumble to around $1,535 an ounce dragged prices 20 percent below the record $1,920 reached this month. But since its rise from just over $250 in early 2001, gold [XAU=  1623.89    -2.96  (-0.18%)   ] has bounced back from bigger drops, having fallen 25 percent between May and June 2006, and 27 percent in October 2008. 

The 2008 episode saw gold treated like any other high risk asset when the collapse of Lehman Brothers sparked heavy selling across financial markets in a widely-documented "dash for cash"—after which it bounced back hard to record highs. 

"Gold and other real assets are not immune from global sell-offs, and this is a textbook example we are seeing now," said Bayram Dincer, an analyst at LGT Capital Management. 

"If you want to draw an analogy, look at 2008, when the Lehman fall saw gold collapsing around $250. The markets are in this 2008, global post-Lehman sell-off mode." 

In the short term, the sharply higher volatility in gold typified by Monday's trade will have battered its already tarnished reputation as a haven. Prices could have further to correct, given their hefty run-up of recent months. 

But expectations that, longer term, other asset classes could prove still more of a risk, coupled with the low interest rate environment, are likely to push prices higher when selling peters out. 

While gold may be seen as less of a haven than in the days before $50 daily price moves became a regular feature of the market, it is hardly alone in seeing heightened volatility. 

"Clearly any move like this is going to make people at least question the assumptions they had that any euro zone stress might be positive for gold," said David Jollie, an analyst at Mitsui Precious Metals. "General financial market volatility is a threat to any asset." 

Riskier assets

 

The euro, stock markets and raw materials such as oil and copper have all posted losses this month as investors sold these nominally riskier assets in response to growing concerns over the euro zone debt crisis. 

Gold seemed to have reached a tipping point as worsening financial market conditions forced some investors to realise fat profits in the metal to cover losses elsewhere, and on a rush to the greater liquidity of the dollar and Treasurys. 

"For now, investors are only finding comfort in the relative safety of cash," said UBS analyst Edel Tully. 

These kinds of fears usually benefit gold, so its switch in role from haven to source of funds shows not only how much stress the financial markets are under, but also how overstretched the metal had become. 

Signs that gold was ripe for a correction were rife after its sharp rally to record highs in early September—which saw it surge by 28 percent in just over two months—was followed by a period of intense volatility.

"The rise in volatility taking place in the gold price was clearly an indication that gold was no longer a low-risk asset," said Natixis analyst Nic Brown. 

"We are unwinding much of recent move over last two to three months. It's too early to say whether it's the big burst. It could be, but it's equally possible that it could be what allows the market to push over further highs over the next few months." 

Long-term investors hold on 

Holdings of gold-backed exchange-traded funds have remained relatively steady during recent sell-offs, suggesting they have been reasonably resilient to short-term moves. 

Analysts say recent sharp price moves are a likely result of repositioning by large institutional investors like hedge funds. But these are not the only, or even the main, buyers of gold. 

Small-scale retail investors, particularly Asian buyers looking for a store of wealth and a hedge against inflation, have also been key bullion buyers, and are likely to remain so. 

In the short term, investors are likely to be wary of "catching a falling knife," and buying into the market before the correction has fully run its course. But they may be swift to do so as prices stabilize, analysts predicted. 

While gold's retracement was sharp, spot prices are still up 7 percent this quarter, and nearly 14 percent on the year, despite the failure of a number of key risk factors, like fears of a U.S. default or fresh monetary easing, to materialize. 

"In Q4 2008... the gold price fell by 25 percent over a fairly short period," said VM Group analyst Carl Firman. "But it does tend to recover at significantly higher levels." 

"I think what you will see could be a gold recovery very similar to the one you saw in Q1 2009, when the gold price recovered long before other assets hit bottom," Firman said.

"We are still looking at a high inflationary environment, we are looking at negative real interest rates, there are all sorts of uncertainties out there," he said. "That has got to benefit gold, at some point." 

Copyright 2011 Thomson Reuters.

SOURCE: http://www.cnbc.com/id/44671131 

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.