Hedge Funds Backing Off From Gold

Once again, it looks like investors are backing off their wagers on gold against hedge funds, right around the time the feds begin hinting at a rate increase in coming months. 

Is this the end of gold’s upward climb, or just a temporary setback?

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After huge gains during the beginning of the year, gold futures have begun to decline sharply. 

They have dropped down to levels not seen since February—and there is potential for them to decline further. 

In fact, the recent drop is almost as sharp as the incline at the end of January and beginning of February.

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Why the Sudden Decline?

Federal Reserve Chair, Janet Yellen, has made it clear that there may be another Federal interest rate hike, and soon. 

A rate increase sweetens the pot on yield-bearing investments—i.e., not gold—thus reducing its attraction for investors, who will turn to the aforementioned yield-bearing investments. 

It strengthens the dollar, which according to Marketrealist tends to have an inverse relationship with gold.

Also, gold is where people frequently turn to invest when the economy is not doing well. 

The Fed raising interest rates is usually a sign that—in their estimation, at least—the economy is strong enough to handle it. 

According to the Week, Yellen cited positive outlooks on industrial production, consumer spending, inflation and economic growth as reasons for a rate hike in the next few months.

In fact, with the economy better, more people may turn to higher-risk investments like stocks, which is good news for the stock market if not so much for gold.

What the Numbers Say About Wagers

• In the week ending May 24^th, the net-long position was reduced to 169,491 contracts
• Last week, futures went down 2.9%, which was the largest loss since November 6^th.
• As of Monday, futures were down to $1209.70.

What About Prices?

May wasn't great for gold prices, either, with the U.S. economy strengthening and demand dropping as a result. 

Prices still haven’t fallen as low as they were at the beginning of the year, however.

Meanwhile, the U.S. dollar gained in May, as indicated by the following graph:

Again, there is often an inverse relationship between gold and the dollar, and this May’s data is no exception.

In Spite of the Recent Downturn, Gold Has Been a Serious Bull Market This Year

• Prices have still landed at 14% up this year, even with recent losses.
• Demand has been high with doubts about European and Asian markets.
• Just this year, $8.9 billion was invested in SPDR Gold Shares.

In Fact, Some Remain Optimistic About Gold

MarketWatch reports that Adam Koos, for instance, of Libertas Wealth Management Group, says that at these prices, it’s a good time to get into the market, as he believes the downturn to be merely a temporary setback.  

Maria Smirnova of Sprott Asset Management believes that gold has dropped as far as it is going to for the time being and that with global interest rates still negative, the rise in the United States’ rate will do no substantial harm to the commodity.

Apparently, the December rate hike had a similar effect on gold positions back in November 2015.  According to CNBC, gold prices went from $1200 to $1,050 on that occasion, which is not an insignificant drop. 

It may be that gold is just feeling the pressure of the imminent rate hike and will return to its climbing afterward.

Nevertheless, the Drop in Hedge Funds for Gold is Real

Traders say the odds of a rate hike in the United States before July are more than 50%. 

As a direct result, investors are ditching gold as an investment, and prices reflect this—having dropped at least 7% since the year’s high on May 2^nd.

Mariann Montagne, of Gradient Investments, says that people are now looking to reap what profits they can, and return later on when the outlook is rosier. 

She points out gold’s recent 20% growth and says that under those circumstances, one would expect some selling off to occur.

Conclusion

Gold has definitely lost some serious ground in the last few weeks, and it is almost certainly because of the talk of hikes in the Federal interest rate.  On the one hand, this sort of drop has happened very recently, right around the time that a rate hike was being discussed in November. 

Gold then proceeded to recover and shoot skyward.

On the other hand, the United States’ dollar is doing better, as is the economy generally, both of which are usually indicators that gold is going to decline. 

This is due to its nature as a frequently utilized hedge for when the dollar and the economy are not doing so well. 

It’s anyone’s guess whether gold will recover and skyrocket again, or stay down this time.