December 30, 2011

Gold Headed for Bear Market: Soros

Analysts say otherwise, but some hedge funds selling as 'death cross' occurs

George Soros sees trouble ahead for gold. George Soros sees trouble ahead for gold.

If you ask George Soros, who sold 99% of his gold holdings in Q1 of 2011, gold is on the brink of tumbling into a bear market. But although several hedge fund managers joined Soros in selling bullion in 2011, many analysts and traders still come down on the side of the bulls, foreseeing further appreciation in 2012 of perhaps as much as 40%. Still, would-be gold bugs might want to take notice: gold has formed a "death cross," which could give them pause.

On Friday morning the precious metal was heading for its first quarterly loss in over three years, after hitting a nosebleed high of $1,920.30 in September (though not its all-time high when adjusted for inflation; that was $850 in 1980, which translates to about $2,335 in today's money). On Thursday it did indeed stumble into bear territory, thanks to technical losses and weak end-of-year trading. Reuters reported that the 20-day moving average crossed below the 200-day moving average for the first time since 2009, resulting in a so-called "death cross."

Tim Riddell, head of ANZ Global Markets Research, Asia, said in the report, "A negative crossover in moving averages can be seen as a selling signal. But in gold's profile, it is probably a confirmation signal that gold has made a cyclical high in the third quarter, and will likely see a more protracted consolidation phase than the market would initially wish to see."

Gold looks set to provide returns of almost 10% for the year as 2011 draws to a close. However, despite its dizzying gains over 10 straight years, it failed to provide as much of a return to sellers as Brent crude, which added 13.5%; U.S. 10-year Treasuries, which gave their owners about 17%; and German 10-year Bunds, which offered the richest reward of all at 31.1%.

Gold was plagued repeatedly in 2011 by sellers’ need to divest in search of cash in tight money markets beset by euro zone debt worries. Otherwise it might have continued on its upward path in a year marked by political and environmental disturbances that have not yet come to an end. But billionaire investor Soros, who called it the "the ultimate bubble" in September 2010, got out early, followed by John Paulson, Paul Touradji and Eric Mindich, fund managers for whom gold has also lost its luster.

Bloomberg reported, however, that in a survey of analysts and traders the median estimate of gold’s path in 2012 is up, up, up, with gains of as much as 40% to $2,140 per ounce—though opinions in the survey were widely divergent. Options traders were most bullish, with the two most widely held contracts according to Comex reportedly giving them the right to buy the precious metal at $2,000 per ounce at the ends of March and May.

Even Soros may be a bit optimistic, despite seeing gold as a bubble earlier in the year. Soros Fund Management bought more SPDR Gold Trust shares in the third quarter and added options, according to Securities and Exchange Commission data.

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