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When Hedge Funds Go Short, Gold Goes Up

by John Rubino on May 20, 2013 · 21 comments

Bloomberg is reporting on the rising number of hedge funds shorting gold:

Gold Bear Bets Reach Record as Soros Cuts Holdings
Hedge-fund managers are making the biggest ever bet against gold as billionaire George Soros sold holdings last quarter and Goldman Sachs Group Inc. predicted more declines after the longest slump in four years.

The funds and other large speculators held 74,432 so-called short contracts on May 14, U.S. Commodity Futures Trading Commission data show. That’s the highest since the data begins in June 2006 and compares with 67,374 a week earlier. The net-long position dropped 20 percent to 39,216 futures and options, the lowest since July 2007.

Gold prices that surged sixfold in the past 12 years fell 19 percent in 2013, including a seven-session slump through May 17 that was the longest since March 2009. Soros joined funds managed by Northern Trust Corp. and BlackRock Inc. in cutting holdings of exchange-traded products in the first quarter. ETP assets are now at the lowest since July 2011 after some investors lost faith in gold as a store of value amid improving economic growth, low inflation and a rally in equities.

“Gold has faced disappointment after disappointment,” said John Stephenson, a senior vice president and fund manager who helps oversee about C$2.7 billion ($2.65 billion) at First Asset Investment Management Inc. in Toronto. “It’s had a 12-year run, but the whole fear-mongering that the world is going to end is just not working. So, I think that any last vestige of an investment thesis for gold has been stripped.”

Soros Fund Management LLC lowered its investment in the SPDR Gold Trust, the biggest bullion ETP, by 12 percent to 530,900 shares as of March 31, compared with three months earlier, a Securities and Exchange Commission filing showed May 15. The reduction followed a 55 percent cut in the fourth quarter last year. Paulson & Co., the top investor in the SPDR fund, maintained a stake of 21.8 million shares, now valued at $2.86 billion. Global ETP holdings slid 16 percent to 2,207.1 metric tons this year, valued at $96.5 billion.

Goldman Outlook
Gold’s slump “has been faster than we expected,” Goldman analysts led by Jeffrey Currie wrote in a May 14 report. A further drop in ETP holdings would “continue to precipitate this decline,” said the analysts, who forecast prices at $1,390 in 12 months. The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.

Physical buying will help to support prices, said Paul Dietrich, the chief executive officer of Middleburg, Virginia-based Fairfax Global Markets, which oversees about $120 million.

India Premiums
Gold premiums in India, the world’s biggest buyer, more than doubled to $40 an ounce May 15 from $17 to $18 a day earlier, according to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. China’s bullion demand jumped to a record 294.3 tons in the first quarter, the World Gold Council said in a report May 16.

Prices surged 54 percent since the end of 2008 as central banks printed money on an unprecedented scale to boost growth. The Federal Reserve is buying $85 billion of assets a month to stimulate the world’s biggest economy, while Japan is making monthly bond purchases of more than 7 trillion yen ($67.8 billion).

“The case for gold is still there,” Dietrich said. “All the central banks are joining in a massive printing of money. Physical demand may be helping provide a floor on prices, and while there’s not a lot of downside risk right now to gold, there is a lot of upside potential.”

Some thoughts
This article is a great illustration of how a news organization can shape the tone of a story by deciding what to put where – and what to exclude. Bloomberg chooses to make the dominant theme the bear market in precious metals, framing the record level of bearish hedge fund bets as, well, bearish. So after mentioning the hedge fund shorts, the reporter inserts negative quotes from analysts. Only at the end of the article does he mention the record level of physical demand and soaring premiums in Asia.

But the data here could just as easily – in fact more easily – be the basis of a bullish story. Hedge funds are massively short? What happened last time they were really short? Gold and silver soared. Is this a pattern? Yes, in fact every time hedge funds get really short, gold and silver soar. Why? Because commercial traders (the fabricators who buy gold and silver for their business and the banks they trade through) like to prey on hedge funds. They push down prices, which induces trend-following hedge funds to go short. Then the commercials switch sides and start buying, pushing the market up and cleaning out the hedge funds. It’s amazing that the funds being suckered this way have any capital left.

Bloomberg could have done a little digging, found the pattern and structured the story as follows: A paragraph or two on the hedge funds’ record shorts, followed by an explanation of what this has meant in the past. Then segue to the massive Asian physical demand and some quotes from analysts who understand this dynamic.

Click on the next chart for a video from gold dealer Bullion Vault showing just how short the hedge funds are now (“managed money short futures” refers to hedge funds). Note that the last time they were really short (though nowhere near as short as today) was in the depths of the 2008 gold price correction – which was followed by an epic bull market in precious metals.

Hedge fund shorts

 

  • sculptor Bill

    This is old news as far as Soros’s position as well…didn’t he just buy back into gold as well as buying a new 25 million dollar option position on junior miners calls? Thats a pretty dang bullish bet.

    There blood in the streets and fear and loathing of PM’s, a 40-50% fall from peak prices……hmmm, sounds like a buy to me! I bought Silver under $ 22/oz ($700 per kg) last night and gold at $1340($43200/kg) it was another special Sunday night sale!

  • brian scrocca

    When the numbers get bigger the lies get bigger and so does the volatility.

  • didier

    It is difficult to understand hedgefunds don’t know they will lose their shirt shorting the metals. They are not stupid, they are smart.

  • http://twitter.com/kooblet Bill Johns

    NEAT!! I wasn’t aware of the relationship between the hedge funds and the commercial traders. Follow the hedgefunds’ short contracts and BTFD, like a good contrarian. Personally I’ve not considered PMs as an investment as much as insurance. Just me. :-)
    Bill

  • Antiehypocrite
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  • Bruce C.

    I wasn’t going to comment about this piece because it’s just so ridiculous, but that got me to thinking about it anyway.

    What came to mind is that markets (in general) seem to follow a path of LEAST certainty: The proverbial “wall of worry” that seems to fuel, or at least accompany, bull markets.

    For example, I think what has made the seemingly inexorable rise of the stock market, since the Fed started “quantitative easing” in 2009, so confounding was that it seemed so obviously contrived and fraudulent and doomed to fail and yet investors responded so conventionally – so trusting of the insight and wisdom and intent and of the Fed. Especially now, the main justification for the stock market continuing to rise is because of continued Fed stimulus. I don’t think anyone thinks things will end well, but there is no consensus opinion on what that will mean.

    So is there a “wall of worry” concerning the price of gold and silver, and if so, what is it? Maybe it’s simply the concern that the price of PMs will be forced down again, for whatever reason. Or, that PMs will continually be repressed indefinitely and there will never be a day of reckoning. Or, that the fiat money/fractional reserve banking and monetary system has successfully reasserted itself and could last another hundred years or so, as it has for so many centuries before, so PMs will remain “barbarous relics” of primitive money no longer relevant .

    Personally, I doubt any of those concerns, but I also doubt any popularized statistical relationship like the title of this piece implies. On the other hand, gold should continue to rise against fiat even in the short run, and it certainly will in the long run.

  • http://theyenguy.wordpress.com/ theyenguy

    Great article.

    A see saw destruction of fiat money, that is currencies, credit and stock wealth is going to commence soon as the world central banks’ monetry policies have crossed the rubicon of sound monetary policy, making “money good” financial assets bad. In the age of Authoritarianism, the only forms of genuine wealth, will be diktat and physical possession of gold, that is gold bullion or bullion in online trading vaults such as Bullion Vault

    There be many who have no knowledge that Jesus Christ, is at the helm of the economy of God, and that He in dispensation, Ephesians 1:10, has brought Liberalism to fulfillment and completion and is now introducing Authoritarianism as the world ‘s paradigm for economic and political experience.

    The final phase of the Business Cycle got fully underway on Monday 20, 2013, with the trade lower in Elctric Utilities, XLU, and Mortgage REITS, REM, such as IVR, on the rise of the US Interest Rate, ^TNX, to 1.97%, the steepening of the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, seen in the Steepner ETF, STPP, steepening. and the trade lower in Greece, GREK, and its bank, NBG, as well as the trade lower in the US Dollar, $USD, UUP.

    The end of Global ZIRP, as well as the termination of the world central banks’ monetary authority is confirmsed with the parabolic trade lower in China’s Electrical Utility, HNP. Investors derisking out of Biotechnology, IBB, such as AMGN, SGEN, ALXN, REGN, CELG, RGEN, and BRMN, as well as out of US Homebuilding, ITB, such as DHI, PHM, and LEN, reflects that the monetary policies of the US Federal Reserve are no longer stimulative, but rather have crossed the rubicon of sound monetary policy, and have made “money good” investments, bad. Yes, another bust just like 2008, has commenced, only much, much worse this time.

    Earlier in the month, with the commencement of competitive currency devaluation on Friday May 10, 2013, specifically with the world’s individual currencies excluding the US dollar, trading lower, and with not only Aggregate Credit, AGG, trading lower, but also the highly indebted Electric Utilities, XLU, as well, the world pivoted from Liberalism’s age of investment choice, to Authoritarianism’s age of diktat; the epoch of inflationism ceased, and the epoch of destructionism commenced.

    In compliment of the currency traders, who have started a sell of the world currencies, the bond vigilantes have gained a nascient control of interest rates, as is seen in their call of the Interest Rate on the US Ten Year Note, ^TNX, higher to 1.95%, and a steepening of the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, seen in the Steepner ETF, STPP, steepening.

  • Baghdad Bob

    @ Bruce C.

    Sir, I respectively disagree with you on one point. The “inexorable rise of the stock market” has another contributing factor I believe many Americans fail (or refuse) to recognise. While I don’t dispute QE seeds the phenomenon, I believe it quickly turns into a self-feeding monster.

    At the start of May I returned home to Australia after a two week, multi-city, business trip to the US. While in the US, I was astonished to be confronted by the shear willingness of people I talked with that wanted to throw money at this obviously manipulated market. People I consider intellegent professionals falling over themselves to invest in stocks and bonds because their broker told them to, CNBC convinces them to, or the feeling that they were going to miss out on a big surge upwards because all their work colleagues were doing likewise.

    Amazing and concerning, at the same time.

    • Bruce C.

      Yes, in the beginning relatively few investors entered this stock market and even up until the middle of 2011, say, it was considered “the most hated rally” or some such thing. A lot of people missed out on it. But since then, and increasingly so, people are finally capitulating as you observed. It’s pretty classic behavior and, to my point, as soon as “everyone” concedes that it’s onward and upwards from here and the sky’s the limit (i.e., no more “wall of worry”) then there won’t be any greater fools around to sell to.

      I’m just amazed that things have held together for as long as they have. I think it’s a testament to how many people want the status quo to continue.

  • sculptor Bill

    this is the game: Hold Physical gold, and short the paper market, as it plunges cover, use the profits buy more physical at its depressed price…………then, as gold value rises, short itthe paper mkt again, rinse repeat. You ratchet up the ounces you own each time, then if you get caught in a short squeeze…you don’t lose because you are hedged in actual physical already.

    This is the game the big boys are playing…
    I confess I do it too with a percentage of my PM holdings.from central banks

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  • figjam

    The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.
    Really ??? its $1410.00 now and the vaults are nearly empty , physical buying is huge and the mining company’s are reducing production or going into C & M because of the low price . SUPPLY and DEMAND ..its not Quantum physics…

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