Bonds Slump in January, Hedge Funds Buy Gold

Date: Monday, February 2, 2009
Author: Peter Cooper, Arabian Money

This January was one of the worst on record for financial markets. US Treasuries crashed after enjoying a recession-beating run in 2008. Gold and silver were the only major asset class to end the month higher.

Hedge funds that previously ignored precious metals have become converts, with hedge fund star Greenlight Capital buying the yellow metal for the first time.

Another money manager Osmium Capital Management is offering a hedge fund priced in ounces of gold to protect it from exchange rate fluctuations. Subscriptions are in dollars, euros or pounds and then converted into gold.

Bonds slump

The conversion of the hedge funds to gold comes as they appear to be exiting US Treasuries. In January the Barclay’s Capital treasury index fell 2.8 per cent compared with a gain of 13.7 per cent in 2008.

There is a growing fear among hedge fund managers that treasury bonds will be the next shoe to drop in the global financial crisis. Government stimulus packages are going to massively increase the supply of bonds and the market has every sign of being in a bubble phase.

Hedge funds are therefore quietly heading for the side door before the mass panic to exit the bond market starts. Then, almost by default, the only safe haven remaining will be precious metals.

Prices of gold and silver will rocket to unheard of levels under such a scenario, predict gold experts. They point to the fixed and relatively small supply of gold, and especially silver, relative to the probable demand.

Inflation packages

In a world where multi-billion dollar stimulus packages are announced on an almost daily basis, this prediction has an air of inevitability about it.

Governments have seemingly lost all concern for monetary prudence in the face of a financial system in crisis, and inflation is the only logical outcome, although it is probably going to fire up gold and silver prices far more quickly than the global economy.

That might be part of the price the world will have to pay for its financial failure, and the investment implications for anybody still solvent are equally obvious.

-- Posted Sunday, 1 February 2009 | Digg This Article | Source:
About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.