Hedge Fund Managers Sell Gold at Low Prices (Again!)

Mike Fuljenz
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Posted: May 17, 2017 12:01 AM
Hedge Fund Managers Sell Gold at Low Prices (Again!)

The net-long (bullish) position among hedge fund managers is the lowest in seven weeks, after the biggest weekly sell-off since mid-2008, before the financial crisis.  The weekly Commitment of Traders report for the week ending May 9 showed that money managers lowered their speculative “long” (bullish) gold contracts by 22.4%, from 195,331 down to 151,419.  Their “short” (bearish) positions rose by 7.2% to 55,457.  Put those two numbers together and the professionals reduced their “net long” positions by 33%.

These professional traders are using the well-worn excuse that the Fed might raise interest rates in June, although experience has shown that gold tends to rally after the Fed’s most recent rate increases.  These professional money managers also cited “falling geopolitical tensions,” but that was right before North Korea launched another missile test.  It’s important to realize that Wall Street acts like a herd.  When “everybody” is selling, you don’t risk your reputation by following the herd, but if you go against the herd and lose, you have a lot of explaining to do.  It’s much safer to stay in the middle of the herd.

Bart Melek, head of commodity strategy at TD Securities, said that many investors took gold profits right after “they saw the yellow metal breaking through the 100-day moving average to a low of $1214.39.”  Translation: These fund managers sold gold near its absolute intra-day low of the last two months!

Later this week, we will see the SEC’s report on hedge fund gold holdings. It, too, may verify that these hedge fund managers are a “contrarian” signal on gold – that is, they usually sell near a cyclical bottom.

Gold Was Flat Last Week

Gold was flat last week, while stocks declined slightly.  Gold has basically stabilized following three weeks of selling, but gold has closed over $1,220 (in London) every day since March 16, 2017 – the day after the Federal Open Market Committee (FOMC) last raised short-term interest rates.  We will probably see another month of sideways gold motion until the Fed meets again in mid-June.  Gold rallied each of the last three times the Fed raised rates, and we could see another rise after the June 14 FOMC meeting.

Gold Imports to India Quadruple in April

Last spring was dismal for the gold markets in India.  India’s government was cracking down on dealers with a high excise tax (tariff) to fight India’s trade deficit. Many jewelers in India went on strike for most of last April.  That means the year-over-year comparisons were bound to be good this April, but nobody expected quite so large a leap in India’s gold imports.  Bloomberg reported last week that gold imports to India expanded four-fold in April, rising to 98.3 metric tons in April 2017, vs. 22.2 tons in April 2016

Late last year, the Indian government started taking “large” rupee bills – although they are only worth the U.S. equivalent of $7 and $14 each – off the market, but consumers rapidly adapted to the new monetary system. In fact, gold buyers are now using far more credit cards to buy gold, which was previously rare. 

Prior to the currency call-in, few Indians carried credit cards.  Cash was the basis for 80% of gold market transactions prior to 2017.  The use of credit vs. cash is now about 50-50, according to Sreedhar G. V., managing director at Sree Rama Jewels and former chairman of the All India Gems & Jewelry Trade Federation. “After demonetization, the entire country was at a standstill,” he said, but “now the money flow has started and gold prices have also come down [so] there has been good demand in the market.”

It’s also important to remember that India has been the fastest-growing economy in the world for the last two years, since China’s red-hot economy slowed down during 2015 and 2016. In the first quarter of 2017, India’s GDP growth rate was 7.0%, barely above a resurgent China, at 6.9%. Due to this rising tide of middle class wealth, gold demand is up. The World Gold Council speculates that total annual gold purchases in India this year may be at the upper end of their estimated range of 650 to 750 metric tons.

Silver Dollar Collecting Started Here

How do people get started collecting coins?

In my case, the spark was ignited by my grandfather, Red Lievens, when I was a youngster growing up in Louisiana.  Starting when I was just 7, in 1962, Grandpa Lievens – nicknamed “Red” for the color of his hair – gave me a dollar every time I got an “A” on my report card.

The dollars Grandpa gave me weren’t paper bills bearing George Washington’s portrait.  They were much more special:  Grandpa would go to the bank and exchange his dollar bills for silver dollars – something people could still do at that time.  He would give me one of these fascinating coins – which I later learned were Morgan dollars – for every “A” on my report card.

I was intrigued by these popular old coins and set out to learn more about them.  This started me on the path to a lifetime of pleasure in a hobby that’s a source of endless satisfaction and knowledge.

As time goes by, I’m more and more impressed by my Grandfather’s intuitive understanding that precious metal coins always trump paper money of equal face value.  The dollar bills he took to the bank are still worth a dollar apiece.  But the silver dollars for which he exchanged them are now worth $29 each, even in worn condition.

Thinking about Grandpa Red’s wisdom and kindness fills me with nostalgia for the way things used to be.  I find myself remembering that great song by the Judds, “Grandpa, Tell Me ’Bout the Good Old Days.”  It won a Grammy in 1986 for Best Vocal Performance by a Duo or Group.

“Grandpa,” as this song is sometimes simply – and fondly – recalled, expressed a heartfelt desire to return to traditional American values – marriages that lasted a lifetime, fathers who were steadfast in supporting their children and families that bonded by bowing their heads in prayer.  The silver dollars I got from my own Grandpa were part of that value system – old-fashioned coins whose worth was completely real, not just symbolic.  

The dollars Grandpa gave me had the desired effect:  I studied diligently in order to earn more A’s – and more silver dollars.  As a bonus, I discovered a tremendously fulfilling avocation and vocation that has brightened my life ever since.

If you have children, grandchildren or other youngsters who are special to you, I urge you to follow my Grandfather’s example by giving them something with intrinsic value next time there’s a reason to celebrate.  You can’t get silver dollars for a dollar apiece any more, but chances are they’ll still go up in value a lot faster than today’s dollar bills.

While you’re at it, inquire about owning a variety of American gold and silver coinsDon’t wait, silver and gold have been rising in 2017!