Enter The Hedge Funds on Gold

Posted: Feb 20, 2012 12:01 AM

Gold traded in a narrow range between $1,720 and $1,730 last week as investors took stock of the appalling fiscal state of most industrialized nations. 

While that was going on the gold and silver market saw the quiet return of hedge funds to exchange-traded products backed by bullion.  Speculators in gold futures are the most bullish they’ve been since September and central banks continue to accumulate gold as insurance against currency manipulation. 

It makes me nervous to see the return of hedge fund managers like John Paulson to the gold market as nothing good comes from them being here.  It gives me roughly the same feeling in the pit of my stomach that I used to get seeing vultures circling over my south pasture.

The influx of hedge fund cash to bullion-backed products will almost certainly trigger a rise in gold prices next week.  Hedge funds have boosted their net long positions in gold futures nearly 9 percent this month alone. 

What it all means is that central banks and institutional investors see inflation on the horizon.  Given how much gold they’re laying on and their investment in futures, it seems also likely we’re going to be paying more for almost everything in the months to come. 

We can also not expect any help from the Federal Reserve.  If they were worried about inflation, the Fed would be making noise about raising interest rates.  As it is, the Fed has promised the near zero interest loans for Wall Street will continue until at least 2014.  If Chairman Bernanke does anything, it will be to print even more money with another round of quantitative easing.  If inflation is a fire, quantitative easing is kerosene. 

Keep in mind also that Wall Street hedge fund investors seem to know what the Fed is going to do before they do it.  That’s because they do. 

Fortunately, you’ve been making small, disciplined investments in physical gold and silver prior to this time, right?   Well done if you have, but I’m not sure I’d start this month if you have not.  As a retired Marine warrant officer used to tell me, when the elephants are dancing, don’t cut in. 

A better strategy in the near term might be making small sales on price spikes, particularly if you intend to exchange the cash for long-term durable goods.  Make any big purchases of things like washer/dryers, refrigerators, cars, and upgrades to your central heating and A/C before inflation kicks in. 

Hedge fund managers are fickle investors and at the first hint of improving economic conditions, or if inflation doesn’t materialize, they’ll roll out of the gold market and you’ll be able to buy back your gold at a discount. 

Chris Poindexter, Senior Writer, National Gold Group, Inc