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Portfolio > Alternative Investments > Hedge Funds

What’s Behind Gold’s Sudden Turnaround?

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Until gold’s recent rapid appreciation, rising about 8% in four weeks, writing obituaries for the yellow metal has been a full-time job in the financial commentariat.

Indeed, the recent spike in price has not yet removed gold from official bear territory. The precious metal is down a tad more than 20% year to date, and before the spike, had fallen over 26% in the first half. The two brutal quarters, combined perhaps with buyers’ fatigue after 12 consecutive years of rising prices, all on top of renewed hopes for a recovering economy all likely played a role in writing off gold.

But gold’s steady climb in recent weeks is leading to the fresh analyses as to whether the market is merely taking a breather from its frenzied selling or whether a renewed advance is afoot.

Two new analyses argue for a revival in gold, but from different perspectives, one based on technical indicators and the other more broadly economic.

Asbury Research, which provides investment guidance to hedge funds and other professional investors adduces technical indicators to argue that gold is going back up. The Schaumburg, Ill.-based firm notes that commercial enterprises who make their living from gold tend to hedge gold prices. These “commercial hedgers” aren’t looking for huge price gains—rather, they are looking to smooth out their profits by taking the other side of gold trades through short contracts.

Yet today commercial hedgers are net short a miniscule 19,041 contracts, a blip on Asbury’s chart not seen since January 2002, as gold was just beginning its long journey towards more than quadrupling in price.  

“These commercials, a.k.a. the ‘smart money,’ are collectively the least bearish (read most bullish) on gold prices that they have been since January 2002,” the Asbury Research report concludes.

Axel MerkAs to the broader factors that might be at work here, Axel Merk (left), the president and CIO of Merk Funds says in a new “Merk Insight” newsletter that economic weakness, poor corporate earnings, a dovish Fed compel the market to think better of gold than the lack of respect it has shown in the first half.

Merk, who has been an advocate for gold as a hedge against easy money, does acknowledge the importance of the recent selloff. By freeing gold of speculators, gold can resume its traditional role as monetary policeman, he argues.

And Fed Chairman Ben Bernanke’s retreat from “tapering,” as well as the recent electoral victory of Japanese prime minister Abe’s easy money party, suggest the need for gold to keep watch over loose fiscal and monetary policies.

“As monetary policy appears on a more accommodative path than a couple of weeks ago when ‘exit’ and ‘taper’ talk was all the rage, [gold is] the ugly duckling that gets to shine,” Merk writes in acknowledgement that buyers of risky assets may desire selloff victims.

The fund firm exec also suspects the bloom is off the rose of the supposedly budding recovery, with increasing doubts about the employment and housing axes of the economy. In particular, Merk notes that the U.S. is excelling in the creation of part-time jobs as corporations seek to avoid Obamacare liability. And the real estate boom in places like his Bay Area base are unaccompanied by a construction boom, “suggesting the recovery is all financial.”

These economic tea leaves, Merk argues, are swaying Bernanke toward dovishness, and he notes that Bernanke’s most likely successor, Fed Vice Chair Janet Yellen, is even more dovish.

Add to this mix the “lackluster revenues” we have seen in earnings season so far, and this may explain the sudden turnaround in gold as a still weak economy and looser expected monetary policy draw the vigilance of rising gold prices.


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