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Drop in Gold Price Hurting Hedge Fund Returns

December 15, 2011 | About:

The fall in gold prices and gold mining stocks has most likely hurt the performance of several hedge fund managers including John Paulson and David Einhorn.

Bloomberg reported that Paulson's paper losses this week were almost $700 million.

"The GLD exchange-traded fund, of which Paulson was the largest shareholder as of Sept. 30, fell 10 percent from the end of last month, and all eight of his gold stocks slumped with a 9.6 percent decline for bullion. The declines would translate into a $672.1 million paper loss on those securities for Paulson & Co., assuming his holdings haven’t changed since the end of the third quarter, when the firm reported its equity stakes in a regulatory filing."

The reasons for the sell-off in gold are impossible to discern.

Many traders feel that the fact that the ECB has not engaged in full-scale money printing means that gold is less attractive.

For example, Jens Weidmann, president of the Bundesbank, denied that there would be any money printing by the ECB: "The idea that the required money will be created through the printing press should finally be brushed aside."

In addition, the Federal Reserve has stated that they will not come to the rescue of European banks which further negates the central bank money printing thesis.

Another negative for gold prices has been the technical damage that chart watchers claim is severe. Gold failed to make a new high on it's recent rally and it appears to be making a lower low.

Fortunately, for gold holders, there appears to be support between $1,549 and $1,577. In addition technicians also see support overlaying between $1,519 to $1,572. However, if gold cuts through these support levels in the next few weeks, there could be a massive sell-off and that has traders nervous as gold would break its 200-day moving average.

For contrarians, gold is now a "hated" asset class according to Hulbert Gold Newsletter Sentiment Index (HGNSI). Basically, this index calculates the average recommended gold market exposure among a subset of the shortest-term gold market timers.

Hulbert reported that two weeks ago this average stood at 13.7% and today it stands at 0.3%. Essentially, the average gold timer is essentially keeping all of his gold-oriented portfolio out of the market.

Rating: 3.2/5 (6 votes)


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