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Resolving the Main Question on Hedge Fund Manager´s Minds After Gold´s Rally

September 02, 2014 | About:

After the rally of the first half of 2014, in which gold beat all the other investments such as commodities and equities, Hedge funds are reducing their positions in this "safe-haven" asset.

Gold is a limited commodity that retains consumer´s purchasing power even under inflationary economies. The advantages are that gold is not at the mercy of government policy, so it cannot be easily issued or mined. Additionally, it is used to hedge, so it is a currency hedge an inflation hedge and a most importantly, a diversification tool in your portfolio.

Gold exchange-traded fund

An ETF is a special type of fund that invests in a portfolio of stocks or bonds. The aim is to mimic the performance of a specified index. As well as the shares, they are traded in the secondary market at any time (market hours) and investors can sell short. The advantages of this investment vehicle are that they provide an efficient method of diversification because investors gain exposure to an index or a particular sector. Secondly, investors know the composition of the fund at all times. Moreover, as they are a passively managed fund, they have good operating expense ratios.

The SPDR Gold Shares (GLD) is an investment fund incorporated in the U.S. and is managed by a team at SSgA Funds Management Inc. This fund is one of 126 SSgA Funds Management Inc. exchange-traded funds launched since 12/16/1998. The investment objective of the Trust is to reflect the performance of the price of gold bullion (less the trust´s expenses). It is the largest and most liquid physically backed gold offering.

The SPDR Gold Shares has returned an annual rate of about 11% since inception. More recently, on a year-to-date basis, the ETF has returned 6.67%, favored by the tensions in Eastern Europe, Iraq and the Middle East. These violent events have increased the appeal of the metal as a haven.

What hedge funds are doing now

According to the U.S. government data, hedge funds are bearish now on the metal. They cut their bullish gold bets for the fourth week in five. As a result, they sent holdings to a two-month low.

The net-long position in gold declined 21% to 92,734 futures and options contracts, according to the U.S. Commodity Futures Trading Commission. This data was the biggest decrease since June 3.

Price movement

As we can see in the next chart, gold prices fell more than 2% since June, heading for the first quarterly loss this year.


Due to a faster economic growth and a scenario of rising interest rates, hedge funds cut demand for an inflation hedge.

Jim Paulsen, the chief investment strategist at San Francisco-based Wells Capital Management Inc., said Aug. 29, “In an environment of sustainable growth, gold is not very attractive, and higher interest rates cannot be good for gold in the long term”.

Final comment

In a world where inflation has been almost nonexistent in most countries, there is low demand for gold as a safe-haven asset and inflationary hedge.

The U.S. economy is showing signs of improvement and the dollar is getting stronger and we expect for the upcoming future that production costs may still be rising. The greater mystery is how investors will react to this economic data.

The actual world scenario is one where Japan is expanding its credit in order to stimulate the economy. Recently, the European Central Bank cut interest rates for the first time since 2012 as well as several countries such as Australia, India, Turkey, Denmark, Israel, Poland, Mexico, Kenya, and South Korea. Further, China has recently cut its corporate tax rate and increased infrastructure spending.

Hedge fund gurus have also been active in relation to this ETF. Gurus like Ken Fisher (Trades, Portfolio) and Jean-Marie Eveillard (Trades, Portfolio) have taken long positions in the second-quarter of 2014, while John Burbank (Trades, Portfolio) has reduced his position.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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