Hedge funds pile into gold on rebound hopes

Date: Tuesday, July 30, 2013
Author: Kyle Caldwell, Investment Week

Hedge funds have heavily upped exposure to gold in recent weeks, viewing the metal's poor relative performance year-to-date as a buying opportunity.

According to Bloomberg data from the US Commodity Futures Trading Commission, hedge fund investors have boosted their net long positions in gold by 26% over the past week, representing the fourth consecutive weekly increase.

The yellow metal has sold off considerably in 2013, falling around 20% year-to-date to trade just above $1,300, amid concerns over a winding down of quantitative easing in the US.

Last month gold slipped into bear market territory, having dropped 32% since its peak in September 2011, when an ounce was worth over $1,900.

Hedge fund investors argue the US Federal Reserve may postpone plans to scale down QE if growth and inflation continue to undershoot.

If this scenario plays out gold is likely to remain well supported, with investors using the metal as a safe haven asset.

But as Investment Week reported earlier this month a number of multi-asset managers have cautioned against buying back into gold, arguing the precious metal ‘momentum trade' no longer exists.

Mark Harris, manager of City Financial's multi-manager fund range, said after being a gold bull for the past decade, he sold out of the asset class at the start of the year and has no intention of buying back in.

The US dollar has historically had an inverse relationship with gold and, as there are no catalysts for the currency to weaken, the precious metal can no longer be labelled a safe haven asset, the manager said.

"Gold has historically been used as a safe haven to hedge against US dollar weakness, but with the US economy continuing to improve, I cannot see the dollar falling," he said.