[Guest Post] Inversely Proportional?

The effect of gold on hedge funds

Is It Time to Invest in Gold?

Several well-known hedge fund managers still hold gold in high esteem, despite its fluctuating prices—in fact, gold has been added to many portfolios during the third quarter of 2013. Gold is also a part of South Africa’s thriving hedge fund industry, which reached a new high ($3.97 billion/ R40 billion) according to last year’s surveys. This is could be due to the vocal support of billionaire hedge fund manager John Paulson, who reaffirmed his belief in the precious metal as an effective inflation hedge. It was in 2012 when he told investors that by the time inflation occurs gold will be seeing a movement, so there’s no better time than the present to build a gold position.



Gold and Hedge Funds

Does this conviction stand, or has it changed? For this question to be addressed we must first determine the relationship between hedge funds and gold. Hedge fund managers face the dilemma of determining whether gold will be a protection against “deflationary implosion” or “hyperinflation”. Singapore’s MAM recommends up to 50% gold presence for its investors. However, a leading authority in the UK gold mining sector, Peter Hambro, made an observation that hedge funds distort gold markets. In an article on the Telegraph, he was quoted saying that there’s potentially a “disaster” in the industry. Big changes are happening in the market, so it’s advised that investors consult investment experts first for more gold advice before plunging head on into investments. “Because of these strange machinations and the distortion between the physical market and the paper market, it’s very hard to say what’s going to happen,” Hambro added.


An inverse relationship

Gold goes up when hedge funds come up short, according to Dollar Collapse. In its analysis, it was stated that this is due to commercial traders preying on hedge funds. This happens when fabricators who purchase the commodity for their businesses push down gold prices. Later, these buyers switch sides and start purchasing, thus cleaning out hedge funds. This is the seeming pattern, so it’s won’t be surprising if short hedge funds translate to bullish gold markets.

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