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Long gold, long silver, a lifeline for hedge funds?

Date: Friday, October 3, 2008
Author: Peter J. Cooper, Goldseek.com

What sort of strategy can the battered hedge funds pursue now? Their alleged benefit of profiting in both falling as well as rising asset markets has been severely tested.

For one thing their shorting strategy has been made temporarily illegal in the banking sector at the very time that it could be used most effectively. Having to work with both hands tied behind your back can not be easy.

Nine out of ten hedge funds are not making enough this year to trigger their bonus profits, so at least subscribers are only paying a two per cent management fee for these losses. But getting your money out of hedge funds is becoming more difficult as exits are being closed.

You have to wonder if hedge funds should not think forward and go long on gold and silver, particularly silver where the investigation by US competition authorities has led to a swift removal of the massive short position overhanging this market for years. This is the most bullish outlook for silver prices since the days of the Hunt Brothers who cornered the market in the late 1970s.

But hedge funds are by nature short term traders and they look first at the outlook for the dollar which is rallying on a flight to quality and see that as a negative for precious metals. However, this is not necessarily the case in a financial crisis: gold and silver are classic safe havens too.

But many may choose to wait until the current deflation of assets from real estate to common stocks is over, and then choose precious metals as the asset class most likely to benefit from a period of higher inflation as a store of value with a fixed supply, or a currency by any other definition.

That could leave precious metals with a volatile ride ahead. Indeed, gold and silver have always been volatile which is why trading on margin is to be avoided, and ironically this does not suit the hedge funds either as what they really like is a leveraged, safe one-way bet.

However, as the surviving hedge funds reassess their strategies the winning approach is likely to be long gold and long silver, and for that the 20 per cent success fees will reappear.

Perhaps the hedge fund managers should take their cue from the central banks which are not going to be selling gold over the next 12 months as they have been over the past four previous years. Supply is coming out of the market at a time of rising demand for a hedge against inflation. So is that not what the hedge funds should be buying next?

Peter J. Cooper