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Hedge-fund stars are backing gold

Gold prices have risen nearly 20% since January 1, making the opening months of this year the best time to be a gold bug in three decades.

The rise GCM6, +0.24% was driven by fears of a recession that sent investors running away from equities into the perceived safety of the yen, government bonds and gold.

The demand for physical gold was up 21% in the first quarter of the year, according to the World Gold Council, with the biggest gain coming from investment flows into gold exchange-traded funds.
ETFs that are backed by physical gold, such as SPDR Gold Trust GLD, +0.45% bought 363.7 tonnes of the commodity. That compares to 25.6 tonnes in the first quarter of 2015.

Meanwhile, investors continue to leave equity funds in droves, partially explaining stagnant stock values. The S&P 500 SPX, -0.85% is up less than 0.7% year to date.

Analysts have also cited the dollar’s weakness so far this year as another factor in gold’s rise.
“The biggest reason behind the nice pop in gold prices is the fact that the U.S. dollar [index] peaked at 100 last December and climbed down to around 94-95,” said Colin Cieszynski, senior market analyst at CMC Markets.

“Over the long-term, gold can rally further, though in the short-term, with many geopolitical events this summer, such as Fed meetings in June and July, Brexit referendum in the UK, elections in Spain and Australia, gold prices will be volatile,” Cieszynski said.

The rise in the price of gold has caught the attention of a number of prominent hedge fund managers, including Stanley Druckenmiller, who earlier this month told Sohn Conference attendees he was very bullish on gold and bearish on the stock market.

Duquesne Capital, which Druckenmiller runs, held 2.88m shares of the SPDR Gold Trust ETF GLD, +0.45% since the second quarter of 2015, according to regulatory filings. “We regard [gold] as a currency, and it remains our largest currency allocation,” Druckenmiller said during his presentation at the Sohn conference.
His reasoning behind the bullish case for gold and a bearish case for stocks has to do with the Federal reserve’s years-long ultraloose monetary policy, which in Druckmiller’s opinion has created “reckless behavior” among corporations that have taken out too much debt.

Paul Singer, another hedge fund manager, said that gold’s first-quarter rally is probably just the beginning of a rebound. His reasoning behind the rally in gold has to do with global investors losing faith in central banks.
Commodities investor Dennis Gartman said Friday on CNBC that he has become more bullish on gold as inflation picked up.

Core CPI, which measures prices excluding food and energy, rose 2.2% over the past 12 month in March. While, Federal Reserve’s preferred measure of inflation PCE index, increased 1.6% in March year over year.
Gartman said prices of commodities are rising because central banks outside of US are still buying up bonds to stimulate their economies.

His other hypothesis for investing in gold is hedging against deflation, should the Federal Reserve hold rates at current levels or even go into negative interest rates. In either case, he is increasing his gold allocation.

http://www.marketwatch.com/story/hedge-fund-stars-are-backing-gold-2016-05-13