Hedge fund gold positions defy worst slump in 33 years

Paulson View

Central-bank stimulus will “eventually lead to inflation,” Paulson & Co. said in a letter to clients obtained by Bloomberg News, reiterating a bullish outlook for bullion. The hedge fund is the biggest shareholder in the SPDR Gold Trust, the largest exchange-traded fund backed by the metal. The price plunge was a “panic event,” Catherine Raw, a fund manager in London at BlackRock, which oversees about $3.8 trillion, said in an interview April 16 on Bloomberg Television.

While the net-long position in gold climbed last week, most of the gain was attributable to a retreat in short holdings rather than an increase in long wagers. The divergence shows that the gain in the net position may reflect short traders taking profit, rather than investors becoming more bullish, according to Stanley Crouch, who helps oversee $2 billion as chief investment officer at New York-based Aegis Capital Corp.

“Sometimes you have to peel the onion when you look at this data,” Crouch said. “It looks like that after such a big drop, people who were short were ready to take their gains. That might also be why the price stabilized, and it could mean that it’s even more vulnerable now.”

Short Holdings

Short positions narrowed 8.2% to 59,742 contracts, and longs gained 0.1% to 121,321. The short holdings reached a record 70,126 in the week ended March 12, and are still more than triple the average since 2006, when the CFTC data begins.

Assets in ETPs backed by the metal tumbled 11% this year as investors shunned the metal in favor of equities and inflation remained subdued. Societe Generale SA said April 2 that the metal was in bubble territory and would fall to $1,375 this year, when it was $200 higher. Goldman Sachs Group Inc. advised traders on April 10 to sell the metal. Prices may need to drop to as low as $1,050 after gold entered a “new reality,” Deutsche Bank AG said April 18.

“This drop happened so fast and so violently,” said Mary Ann Bartels, the chief investment officer of portfolio strategies at Merrill Lynch Wealth Management, which oversees more than $2.2 trillion in assets. “People are asking ‘Why do I have this in my portfolio?’ But when we run the analysis, nothing has changed, gold adds diversification. Unfortunately, sometimes a diversifying asset doesn’t go up.”

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