Gold Funds Know Something

  @ibtimes on January 13 2010 3:18 AM

Is the gold ship about to sink? Could that be the reason why some 'rats appear to be deserting' it?

We are talking about hedge fund managers here, many of whom appear to be selling to exit their positions. Are they intent on capturing profits, or could their actions be prodded by other things? A stronger dollar perhaps?  Or an unstable economy? Or insights on a gold price slump?

Gold is considered by many to be a good hedge during inflation. In fact, during the downtrend in equity markets most of last year, gold offered stability. So, it became a popular philosophy to add gold to the equity portfolio as insurance.

However, several hedge fund managers, smarting from the crisis that deepened after the collapse of Lehman Brothers Holdings in 2008, prevented investors from withdrawing money.

In 2008, as financial markets tumbled amid a global financial crisis, the average hedge fund world-wide lost 19 per cent on investments. Facing sagging asset values and hesitant to sell into a weak market, hundreds of managers in 2008 and 2009 put up gates, or restrictions on clients' ability to withdraw money.

The funds had plowed into convertible bonds, obscure companies, distressed debt, private placements and other assets that couldn't be dumped quickly.

Some investors suspected hedge funds were using the market's turbulence as an excuse to hoard their clients' cash. And then some got into gold, to shore up their positions.

Now, some fund managers are eager to sell their gold - and anything else they own that has done well - at the slightest hint of a turn in the markets.

And the markets are turning.

While many fund managers sold gold at the fag end of December to lock in their profits, others are eager to get their gains (and their bonuses) on what will have been an excellent year for gold.

What does that do for the gold price? Especially when other economic indicators are not as strong.

Economic woes

Government's, especially the US, are bailing out corporations, making financial promises that they can't keep, and adding layers of debt that most can't possibly repay.

And the real killer is turning out to be zero cash. Of course, government's have an answer to that too - if there is no cash, just print it.

And the bottom line: check out what the US government is doing to the dollar. Nothing else even comes close. As the US government persists with its spending spree, valiantly dousing the deficit fire with more debt-gasoline, it will continue destroying the dollar, analysts maintain.

The next step is bound to be a change in interest rates. The Bright Boys in DC will resist doing this, but while they seem willing to let the dollar slide to ease their mounting debts, they don't want it to crash.

They may soon be forced to raise interest rates.

And when that happens, Wall Street usually moves in the opposite direction. These moves affect gold price too.

Gold price

On Tuesday, bullion prices were flat around $1,150 per ounce after touching a five-week high in the previous session as traders continued to watch the currency market for direction.

Spot gold was flat at $1,153.45 per ounce at 6:10 GMT, compared to New York's notional close of $1,151.10.

On Monday, gold had touched a 5-week high of $1.161.50 after worse-than-expected US jobs data sent the dollar lower.

Friday data showed US employers cut 85,000 jobs in December, disappointing investors who were expecting a quicker turnaround for the world's largest economy.

In London, gold prices slipped early on Tuesday, dropping below $1148 an ounce as commodity prices fell.

Showing the way

Not all funds have flown the coop, though.

A growing number of managers, including big names such as John Paulson and David Einhorn, are buying up gold investments, helping fuel a widely watched run-up in the value of the precious metal.

Given that precious metals offer superior protection against inflation, which cannot be said of almost all other reasonably liquid assets, one needs to check out funds that primarily invest in equity securities of companies that are involved in mining and processing of gold and other precious metals.

Looking for decent returns, some fund managers see a continued upside in 2010. And what is boosting sentiment is that Canadian equities markets have rebounded strongly following their 33 per cent decline in 2008.

Many funds recovered a good portion of the ground lost in 2008. Especially resource-based mutual funds which delivered the best returns for Canadian investors in 2009, according to a report.

The strong rebound in natural resource equities last year was a reflection of several developments, including the stockpiling of many key base metals by China, prospective improvements in production growth and demand for energy and the start of a recovery in G7 nations, said Morningstar fund analyst Nick Dedes.

Precious metals funds too showed some firmness.

Julius Baer is also planning to capitalise on the success of its Physical Gold fund by giving UK retail investors access to three new precious metal funds in the New Year.

Switzerland-based Swiss & Global Asset Management, the exclusive manager of Julius Baer funds, listed the Physical Silver, Physical Platinum and Physical Palladium funds on the SIX Swiss Exchange last week.

The new funds will invest entirely in the metals themselves, in the form of standard bars held in high-security vaults in Switzerland.

Learn to swim

So, get ready for the deluge, which is sure to come. The renewed fury of the storm will sink many more ships, but it will also make vast fortunes for those who invest in the ships that survive and even thrive in the tumult.

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