A New Development for Gold: Now the Hedge Funds Are In

Monday, April 18, 2016

gold priceWe all know that gold has seen a positive 2016. Even with the stock market performing well, it seems as though many money managers and bankers the world over are perfectly happy to invest in gold. We’ve seen that in the past months with Chinese central banks investing more in gold. But what if it’s not enough that central banks are buying up gold? What if you needed to see the hedge funds move in on gold before you made a decision?

We might not recommend using that as the sole determinant of gold’s potential bull market status. But if that’s the case, then this morning’s news from Bloomberg will interest you. Although Bloomberg calls gold “gravity-defying,” as if it’s propped up in a bubble, it also notes that hedge fund managers are increasingly putting their money into gold—a move that suggests that they believe gold is currently at a low, not a high.

How do we make sense of this for the average investor? Let’s zoom in.

The Biggest Run Since 2012

Bloomberg notes that the increased gold held by hedge funds puts this gold at its highest level since 2012 when gold was at its high. Investors who are wary of gold falling flat on its face before coming up in price might note that this isn’t necessarily an indicator that the yellow metal is headed up, if anything, it might indicate the opposite. But Bloomberg quotes Josh Crumb, a chief strategy officer at a money managing firm, as saying that the “upside” of gold still beats the downside.

Bloomberg sees that money has been “poured into exchange-traded products tracking precious metals,” almost $14 billion. That’s a lot of money to be moved over a short period of time and it suggests that fund managers and strategists are looking for a long-term hedge against a bad economy.

Are Funds Reacting To The Economy?

Although we can’t say definitively why all of this money has been poured into gold and precious metals - the money obviously comes from different investors with different opinions on precious metals - we can still look for trends. One of them might be that there looks to be some pessimism about the economy. And even if gold is headed toward a “consolidation phase,” as it may be according to a recent UBS Group AG report, it still leaves plenty of room for gold to increase when the next phase of investment may begin.

Investors tend to see gold as a hedge against a weak dollar, since gold is priced in dollars, it often acts inversely with the dollar. With interest rates remaining low and economic data showing an uncertain 2016, it makes sense to hold some money in tangible assets like gold. (Be wary of jobless numbers job numbers tend to be a “lagging indicator” of an economy’s status; you’ll recall that it took a long time for the unemployment rate to sink back down to normal levels after the Great Recession.) Whether or not this is great as a short-term investment will remain to be seen.

Darren Capriotti

Darren Capriotti has been a market analyst for the past decade and is an expert in precious metals. He prides himself on his ability to analyze the market and offer true value to investors with questions about gold, silver, and other precious metals. Highly educated, incredibly passionate, and more accurate than most, Darren offers a true, unbiased look into what investors can expect in the precious metals market. You can reach Darren at dcapriotti@gold-eagle.com.