My hunch was realized only days later when Zero Hedge posted that Morgan Stanley Wealth Management suggested that its customers dump two of John Paulson’s funds. As MS customers redeemed their shares, the hedge fund giant became a forced seller of gold and gold stocks.
What complicates the gold marketplace is the reality that Paulson is such a large fan of the yellow metal that he offers a “gold share class” to investors, which means shares are denominated in physical gold. The drawback is when an investor redeems shares, his firm needs to convert from gold back to dollars, which forces him to sell his hedged position in the SPDR Gold Shares ETF (GLD). The unfortunate consequence of his actions is really a short-term decline in the gold price because the marketplace adjusts.
The charts indicate how gold, the S&P 500 Index and the 10-Year Treasury yield had been plodding along together, until December 12, when the metal dramatically dropped off. This is possibly the day “Paulson may have gotten the redemption fax,” says Zero Hedge.
Paulson is only one high-profile example of a stream of hedge fund managers who have suffered liquidations this year. Much to our chagrin, gold and the gold mining industry have been on the wrong side of these trades. Gold Coins, Silver Coins, Rare Coins Learn More >> http://www.silverdollar.cc/
The metal also took a hit recently when a large investor, or a group of investors, made a negative bet on gold futures, with a speculative put position from January to February nearly doubling in size. Credit Suisse suggests it may be the action of a hedge fund.
Paulson’s loss can be your gain. At U.S. Global Investors, we study probability and statistical models to help us improve our odds in the marketplace. It’s like counting cards in Vegas-there’
One of our favorite charts will be the oscillator that shows the probability of gold returning to its mean after a dramatic rise or fall. We believe it helps investors put the current correction in context with historical moves and determines potential purchasing and selling opportunities.
Based on the last 10 years of data, gold seems to be approaching an oversold position after this latest correction. In standard deviation terms, the percentage change in year-over-year rolling returns, gold has made a downward move of 1.2 standard deviations. An event like this only happens about 10 percent of the time, with high odds favoring a reversion to the mean.
Life is about managing expectations. With gold and gold stocks, there will be short-term anomalies, such as hedge funds’ liquidation. Another historical difference for gold stocks relates to the presidential election year cycle. As we have mentioned before, gold miners tend to perform poorly in the year of a U.S. presidential election. Regardless of which party is in the White House and which party wants to take it back, going back to 1984, the Philadelphia Stock Exchange Gold and Silver Index (XAU) has declined an average of 18.4 percent in the year Americans are busy thinking about voting for a leader.
It’s not the finish of the world for gold and gold stocks. Take a look at what happens the year following a U.S. presidential election: Going back to 1985, the XAU historically has increased substantially in post-election federal years, rising 23.4 percent, on average.
With governments lacking courage for fiscal discipline, I expect that interest rates will remain in negative territory for a long time. Central bankers will continue to maintain the printing presses warm as policies aren’t expected to change. I believe this will maintain the Fear Trade purchasing gold throughout 2013.
In addition, emerging marketplace central banks have been diversifying into gold. Net official sector purchases of 425 tons year-to-date is really a drastic difference compared to only a few years ago when central banks had been net sellers of the precious metal. Only recently, UBS reported that in November, Russia purchased nearly 3 tons of gold and Brazil bought almost 15 tons. Iraq-a notable new buyer-bought 25 tons from August through October. Given that this will be the country’s first increase since the early 2000s, “having a new buyer in the central bank space and especially from a new region is an important development,”
While the Love Trade has been subdued this year, we see light at the end of the tunnel, not a train. One recent development will be the increase in mutual fund flows of $32 billion into emerging markets since the announcement of the third round of quantitative easing (QE) in the U.S. This appears to be a powerful precursor for a stronger 2013, which would reignite the Love Trade in China and India. My advice is to buy gold and buy silver today and stash it safely away for the long term. How High Will Silver Go? Learn More Kitco Silver >> http://silverdollar.cc