Now that most 13F filings for the second quarter of the year are available, it is time to take a look at them and check what hedge funds have been up to. Particularly interesting, is to check hedge fund holdings and trades regarding precious metals (in this case special gold) and how it closed the quarter with a record loss of 22.7%, which certainly led many investors to get rid of the once beloved metal .
George Soros, for example, sold his entire position in gold, as he believes the current economic environment will no longer drive gold prices higher. John Paulson, the largest SPDR Gold Trust holder, halved his position by selling more than ten billion shares in the fund. The decline in gold prices have been dragging his entire portfolio’s performance down because gold assets represents more than 25% of Paulson’s holdings. He is now planning for possible further declines.
Investors are selling gold because it is losing its appeal as an inflation hedge. Even though the U.S Federal Reserve (FED) has been injecting trillions of dollars into the U.S. economy, inflation has been relatively stable, and with the recent talks about quantitive easing (QE ) “tapering”, there is a lost faith in gold.
However, gold prices aren’t just driven by investment demand, as physical demand should play a role too. In fact, and as we mentioned before in the article, “Physical Gold Buyers Are Forcing Futures Delivery”, there is a missing link between physical demand and gold prices— since future prices have been overshadowing reality.
While investors fold their gold bets, consumers in China and India are buying the physical asset aggressively. Rather than being chased by a massive decline in prices, they see this as an excellent opportunity to invest. As reported by the World Gold Council (WGC), demand for gold surged 53% in the second quarter in what they see as an unusual movement for this time of the year. Opportunistic buying in emerging markets pushed the total purchases of gold jewelry, bar and coins to 1,083.2 metric tons— a rise of 53% over the same period of last year. India accounted for the biggest share at 310 metric tons, followed by China with 275.7 metric tons. These countries experienced rises of 71% and 87% respectively while the bar and coin demand was pushed to an all-time high in China.
In our view, the gold market has been driven by too much speculation with investors buying and selling at any price without looking at the fundamentals. The fact that the marginal cost of producing gold was around $1,287 last year is something we should consider before selling gold at current prices. If gold declines below that price, gold miners would cut on production until the price rises again. There has already been some speculation of companies closing down their mines and if the price doesn’t rise, others would follow. At the same time, demand in India and China keeps beating records, which puts a seal on gold as a good investment.
Our final word goes to speculation. It may be the case that the FED reduces QE programs, but we believe the central bank won’t engage in any kind of abrupt tapering. At the same time, the global stance towards monetary policy is still largely dovish and expansionary—thus, giving support to gold prices.
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