Hedge Funds Are Still Not Buying Gold: Should You Too?

Billionaire John Paulson once told a source connected with Bloomberg he would not funnel more investments into his gold fund. Did Paulson, as well as many hedge fund managers pulling back on gold, made the right call?

Paulson had reason to believethat he was better off holding back on the yellow metal. Revenues for his hedge fund, Paulson & Co, dipped by 7.4 percent in March, bringing down year-to-date earnings to 2.6 percent, Reuters said in a report. The Paulson Enhanced Fund also dropped by 6 percent, with year-to-date earnings down by 2.4 percent. 

As some of you may know, hedge funds got bet wrongs twice in April during the gold price rally. It probably took speculators by surprise, considering that hedge funds’ net positions seem to influence gold prices. Dan Norcini, an off-the-floor commodities trader, detailed so in a blog post using a Commitment of Traders reportfrom the U.S. Commodity Futures Trading Commission.

Hedge funds piled into precious metals like gold, silver, and copper in January, until it started cashing in in March following Federal Reserve Chair Janet Yellen’s announcement. Yellen made dovish remarks that the Fed may increase credit rates in 2015, and this, along with tensions in Russia, have shaken hedge funds’ confidence in gold. Bloomberg noted this in an article.

In April second week, however, gold futures reached $1311.10, up from its seven week low of $1,277 from the week prior. Disappointing payroll figures, as detailed by a Bloomberg report, helped gold prices recover, starting mid-March. On April 9, the Fed announced it won’t be increasing interest rates anytime soon, boosting prices to $1,311.10.   

Right now, gold futures have softened due to “a lack of bullish news” for the sector and as the economy recovers from the winter slowdown, Nasdaq reported. Comex gold is down to 1283.8, CME Group data showed.

The world’s largest gold ETF, SPDR Gold Trust (GLD) is also down by 0.34 percent on Thursday, according to Yahoo! Finance.

Indeed, the picture isn’t rosy even for North America’s top mining company Barrick Gold Corp ABX, which saw a 90 percent year-to-date profit decline.ABX underperformed during the period due to limited metal production, as well as bearish precious metal prices. The Q1 earnings results came amid ABX’s failed merger with Newpoint Mining (NEM), according to a report on Forbes.com. 

All hope is not lost on the yellow metal though. With the Russia-Ukraine crisis still dominating world market news, some investors are likely to cling on to the safe harbor asset. ABX could catch a break if this happens, and so do smaller mining but promising precious metals companies like Premium Exploration, Inc. PMMEF.

Smaller but value companies like Premium Exploration, in particular, which focuses on high-grade ore mining, is ripe for a merger or takeover.  High-grading, Money Morning columnist Peter Krauth said, is one of the four trends that will push gold prices back up. The other trends are physical gold buying, fewer explorations, and limited production.  

Currently, hedge funds are focused on adding TV, health care, energy and oil and gas stocks, mortgage funds, and retail (i.e. Staples) to their portfolios, as reports from TheStreet, the New York Timesand Market Watchhave noted.

With gold prices corrected, hedge funds are getting bets right as of the moment; question is, will they remain bearish for long?