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Hedge Funds Still Love Precious Metals

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Hedge Funds Still Love Precious Metals

Even the managed money (i.e. hedge funds) on Wall Street is starting to wake up to the importance of precious metals in any portfolio. After years of shunning gold, silver, and platinum, the professional investing community is finally recognizing these precious metals for the indispensable safe haven assets that they truly are.

Hedge Funds Buying Bullion

money-bag-dollarsFor those who have merely heard of the phrase "hedge fund" but are a bit unsure of its meaning, it's basically an investment package that is complexly arranged to provide the highest possible return to its investors. Naturally, these are expensive, high-end investments that have a very high minimum entry cost. As the name implies, these funds are often used to hedge against the standard performance of stocks and bonds.

Ironically enough, precious metals are the supreme hedge for an investment portfolio! It's only recently that these hedge funds are taking notice by piling into the gold market in particular. Hedge funds are always chasing the highest possible returns—remember, they cater to only the wealthiest investors—and, in the past, the safety and security of precious metals was not appealing enough to ambitious money managers. Yet, the current era of NIRP (negative interest-rate policy) and the strong surge for gold prices during the first quarter have changed their perspective.

hedge funds love goldData from the Commodity Futures Trading Commission (CFTC) indicates that hedge funds have piled back into gold futures at their highest levels in four years. Earlier this year, these funds' holdings in gold futures were historically low, coinciding with the bottoming of the gold price in December and January. (The CFTC began gathering such data in 2006.) "Holdings have almost doubled from two months ago," reports Bloomberg.

Gold-and-Silver-BarsThis growing net long position in gold is expected to remain in place even as the consolidation period where the gold price trades flat around $1,250/oz continues.

It's not just gold, either. Managed money raised its position in silver futures by 30% last week alone. Meanwhile, silver futures have surged 18% thus far this year. For platinum, the number of futures contracts that were long on the metal jumped by 15% over the course of the last week.

Reasons to Hedge

One of the main cogs driving gold demand is always China. Interestingly, China plays a win-win role in terms of gold. If the world's second-largest economy and manufacturing giant continues to falter toward a "hard landing," it means that economic conditions around the world will continue to deteriorate; this leads investors to flee for the safety of precious metals.

china-goldIn the opposite scenario where the Chinese economy significantly improves (or avoids disaster, at least), this means that the globe's #1 buyer of the yellow metal will have more cash and confidence to spare for gold purchases. While the country's central bank has been an aggressive buyer of gold, the general population also maintains strong demand for bullion. The most recent consumer data from China showed that a 25% increase in purchases of gold coins and bars helped fourth-quarter gold demand increase by 3% year-on-year.

Of course, the interest rate environment (and monetary policy in general) will also invariably influence the gold market. With the odds of a single rate hike by the end of 2016 now down to a 50-50 shot according to the betting markets, it seems that low interest rates in the U.S. won't change any time soon—which continues to be bullish for gold.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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