Commodity analysts from Societe Generale report that money managers bought $7.1 billion in gold in February. This is the fourth-biggest week of bullish buying since 2006, when CFTC started its updated reporting. Most explanations for this rise point to recent geopolitical instability. While gold is an imperfect hedge for funds, it is an appealing asset against inflation and other stock market risks.
Covid Vaccine Could Spell Trouble for Gold Markets
Vaccines against the Covid-19 virus are predicted to be a bonanza for pharmaceutical giants Pfizer (NYSE:PFE) , Moderna Moderna (NASDAQ:MRNA) and Oxford University/AstraZeneca (LON, NASDAQ: AZN), and there is virtually no way to measure the impact the trio of vaccines will have on most global industries.
The gold market could be the notable exception. After hitting a record high of US$2,067.15 per ounce on August 7, 2020, the precious metal closed on January 6, 2021 at US $1906.90, a drop of 7.75 percent. In addition, the Royal Bank of Canada slashed its annual forecast for gold to $1,810 per ounce from $1,893.
In addition, Reuters reported a spike in short trades vis-à-vis the gold market at the end of 2020, with Barrick Gold bolstering its trade volume from 14.9% to 24.8% for the second half of the month.
The report also said that competitors Newmont Corp moved from 8.8% to 11.4%, from 8.8%, over the same period, while trades in Kinross Gold rose to 20.6%, from 18.2%.
Precious metals are seen as an accurate benchmark to measure macroeconomic trends. As tangible asset, many investors see them as a safe investment during periods of economic uncertainty. During pandemic-ravaged 2020, gold provided security and stability as volatile industries such as travel and sports struggled.
Now, as hope grows that the vaccines will allow a resumption of normal commerce and trade, many investors are likely to be more willing to trade the security of gold for the potential of higher returns in other sectors.
“While we are by no means out of the woods in our view, the light at the end of the tunnel means that gold markets should begin to see an unwind of the trends that became quite exaggerated over the course of 2020,” Royal Bank of Canada analysts told Reuters.
Bridgewater’s Dalio Looking to Golden Lifeboat
Traditionally gold is where investors park their money in troubled times, such as inflation or a rocky stock market. But with inflation low and the market reaching historic highs, why would Ray Dalio, the superstar hedge fund manager of the world’s largest hedge fund, Bridgewater Associates, recommend a move to gold.
Dalio is predicting that gold will surge by 30%, hitting even higher than $2,000 for one ounce. He sees three reasons why this startling growth is a strong possibility for the near future:
A change in direction of the Federal Reserve: Despite lowering interest rates three times in 2019, co-CIO Greg Jensen says the Fed and other central banks will keep interest rates down, even if inflation goes past the stated target values. Others have different worries about the Federal Reserve. They fear the Feds are intervening in a dangerous way with the repo market. Bridgewater recommends gold to protect their investments in case the US dollar becomes the world’s reserve currency.
Brewing turmoil in China and Iran could lead to unstable economic conditions worldwide. When markets are risky, gold rallies as investors bale from risky assets and put on their golden life preservers.
Political turmoil is not just something that happens far, far away. With a contentious US election rearing its head just beyond the horizon, the USA might be in for some bumpy rides. There could be a strong reaction to a Bernie Sanders nomination in the stock market as investors worry about how Sanders’ policies could affect the economy and business world. Once again, gold acts like an oasis in a desert of uncertainty.
Bridgewater sees trouble a foot just below the surface of the country’s longest expansion in its history. The political climate could easily interfere with the economic climate, making gold a safe bet in troubled times.
Gold Adds Element of Stability to Tumultuous Times
Money managers see chaos looming in the international markets, making them buy gold more than have been in at least six months. Prospects of global growth seem dim, bringing equities down and making investors nervous. This is at least part of the reason why investors have purchased about $1.25 billion worth of precious metals via ETFs during December. Interest in gold futures is also rising.
During the past month gold prices grew by more than 2%, the largest one-month growth since August 2017. Investors ran to gold when news from Washington DC grew chaotic, inspiring further stock market declines. Slower global growth also whittled away at investors confidence after the Federal Reserve raised US interest rates on December 19, causing the value of the dollar to dip.
“The market is questioning whether the Fed is making a policy mistake, and that could lead not only to slower growth, but perhaps to a recession,” said Quincy Krosby, the chief market strategist at Prudential Financial Inc. For equities, when you see this “heavy selling, it’s indicative of fear, and gold becomes a safe-haven allocation.”
As Economy Recovers Managers Withdraw Gold Bets
Predicting that the Federal Reserve will be reducing stimulus activity to the economy, hedge fund managers have been lowering their bullish bets on gold. Last week managers added the highest number of short contracts in a month, and stakes in commodities fell the most since April.
During the week ending November 5th the total amount invested in gold dropped by 13 percent to 87,689 futures and options, according the data from the US Commodity Futures Trading Commission. On the other hand short bets grew by 37 percent, the highest amount since October 15. Long bets went down 4.9 percent. The total amount held by investors of 18 US-traded commodities of all types fell by 20 percent, down to 658,263 contracts. Cotton positions are the lowest for the year, and crude-oil bets are the least since June.
The price of gold slid by 24 percent so far this year, heading towards the largest value-loss since 1981, a sign that investors are losing faith in gold as a place to store value. Investors are reacting to the news that October payrolls were higher than expected, and the expansion of the economy is happening at a faster rate than predicted. The economic recovery should lead to reduced government stimulus, such as bond buying, which helped the economy in the past. Barclays Plc and Credit Suisse AG are both saying that commodity prices will most likely head south as supplies increase.
The “U.S. economy is showing ample signs that it is growing, and that means the Fed will start looking at tapering either end of this year or early next,” said Dan Heckman, a Kansas City-based national consultant for U.S. Bank Wealth Management, which oversees about $112 billion. “We are underweight on commodities as the support of stimulus will go away at a time when supplies are rising and worries about Europe are increasing.”
Investing in Gold as a Hedge Against Inflation
As the economy begins to show positive signs of pulling out of its long recession, including lower unemployment figures, lower deficit spending, and increased revenues, there is a concern that inflation can take a bite out of the economic turnaround. Gold, in the form of coins and bullion, has been a traditional way for investors to maintain an edge against inflation.
Investors Bearish on Gold as Economy Recovers
Investors have been continuing the bearish trend with gold as analysts, advisors and investors wonder how the Federal Reserve bank is going to relate to the improving US economy, perhaps decreasing the amount of monthly bond purchases by the Feds.
The trend began this past April when a few investors began to doubt gold’s ability to store value while inflation stalled and there was an historic amount of money printed by the central banks. Federal Reserve presidents in Chicago, Cleveland and Dallas- Charles Evans, Sandra Pianalto and Richard Fisher said that they may be close to shrinking debt-buying as the US labor market makes a comeback. The jobless rate reached its lowest point since November 2007 during the four weeks which ended on August 3.
“We expect the global inflationary environment to remain subdued, so we would not rush into buying gold,” said Jim Russell, a Cincinnati-based senior equity strategist. “Inflation has not played out as anticipated, and we don’t think it’s going to.”
Gold Gains After Remarks from Bernanke
Hedge funds continued to pour money into gold for the second straight week as Federal Reserve Chairman Ben S. Bernanke quashed expectations of a tapering of stimulus soon. Futures had their steepest rise since 2011.
Investors added to their net-long position by 4.1 percent to 35,691 futures and options, data for July 9 shows.
On July 10 Bernanke commented that the US needs “highly accommodative monetary policy for the foreseeable future.”
Transcripts from the Federal Reserve’s June policy meeting showed that many officials wanted to see a better labor market before tapering bond purchases. The price of gold more than doubled from 2008, reaching a record price of $1,923.70 per ounce in September 2011. At that time the Fed sliced interest rates to a record low while also buying debt. In April the price of gold began to crash as investors no longer felt secure with gold as a secure place to store value.
“Bernanke’s comments put some positive feeling back into gold and into all commodities,” said Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio. “The Fed has been working hard to show that taking back a little bit of bond buying isn’t removing accommodation, and Bernanke was very firm on that. There was a bit of a sentiment shift.”
Hedge Funds Reducing Gold Exposure
The Federal Reserve’s announcement that it will reduce stimulus activity, combined with the recent slip in the value of exchange-traded products sent hedge funds to cut their bets on gold.
It is the largest reduction in gold exposure since last February, lowering investor net-long positions by 29 percent, down to 38,951 futures and options by June 18, according to data from the US Commodity Futures Trading Commission. Short contracts holdings climbed by 14 percent, the biggest upward move in 8 weeks. Bullish bets for 18 commodities shrank by 2.2 percent as investors are becoming more skittish on wheat and copper.
Last week Chairman Ben S. Bernanke of the Federal Reserve said that there is likelihood that the central bank will slow-down its bond-buying program in response to the continuing improvement in the US economy. This news sent gold crashing to its lowest price since 2010.
“There’s certainly a rush to the exits in gold,” said Jim Russell, a senior equity strategist in Cincinnati at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “The nudge up in the Fed’s expectations economically suggests they may unwind their program a little quicker than investors thought.”
Paul Singer Still Betting on Gold
Yes it’s true that in recent days gold has been losing value, but for many analysts, including Paul Singer of Elliot Management Corp, gold is still a good investment with the best store of value.
Singer is the founder and president of Elliot, which has assets under management of more than $22 billion. And he still has faith in the value of gold.
“We remain unconvinced that genuine normalization of global economic and financial conditions has been achieved,” said Singer in a recent interview. “There is only one store of value and medium of exchange that has stood the test of time as ‘real money,’ and that is gold.”