MasterMetals

September 26, 2011

chicagotribune.com

Laurence Fletcher and Tommy Wilkes

Reuters

7:49 AM CDT, September 26, 2011

LONDON (Reuters) - The recent sell-off in gold may not be enough to make some hedge funds with long-term bull positions change their views that the metal is still one of the best bets for profit in a perilous global economy.

Gold has dropped around 11 percent since the start of last week as liquidity-strapped investors scrambled to convert gold into cash amid fears over Greece's near-bankruptcy, likely hitting a number of hedge funds which have profited from its bull run in recent years.

However, the yellow metal is still around 7 percent above its level at the start of July, and is up 14 percent this year, leaving long-term holders comfortably in the black for now.

"I don't think... people who hold it as another currency... are changing their view," said Morten Spenner, chief executive of $2.8 billion fund of funds firm International Asset Management (IAM).

"For some people who are long-term holders ... and who have banged that drum, they're likely to take it (the price fall)," Spenner said, adding that short-term market volatility that put pressure on the price of gold would not sway managers to abandon their positions.

Some big-name hedge fund managers have been successfully betting on the gold price this year, including John Paulson and Paul Tudor Jones.

Meanwhile, some managed futures funds -- whose investment decisions are dictated by computer models -- such as Man Group's AHL and Winton Capital may have been hit by the fall in gold, although profits in other areas have offset the damage.

The AHL fund has sold down much of its long position in gold in recent weeks -- one of the $23.9 billion fund's best-performing trades in 2011 -- after its models showed that the metal's price was losing its momentum, although it still has a small long position.

"If you look at the price action in precious metals, particularly over the last four weeks, it's been pretty sideways and choppy. That is the sort of scenario where we actually start reducing our positions because it does indicate to us that there is no strength in that trend," Kevin Chuah, senior client portfolio manager at AHL, said.

The fund, which has also taken out a small short position on base metals including copper recently, gained last week after profiting from short positions on equities and crude oil and long positions on bond markets, Chuah said.

Winton, which manages $25 billion in assets and whose flagship fund is up around 1 percent this month, declined to comment.

Coast Sullenger, managing director of Gaia Capital, which buys commodity-related stocks, said gold equities had performed well recently, despite last week's sell-off, and he may buy more gold equities if prices continue to fall.

"Gold equities is one of the only sectors that has been performing," he told Reuters. "If the sell-off continues, it will probably create more of a buying opportunity... Gold shares are trading at a very, very low valuation, vis-a-vis their own history.

"We're of the opinion that gold shares is an asset class you should be overweight."

(Editing by Sinead Cruise and Mike Nesbit)

Hedge funds seen sticking with gold despite sell-off - chicagotribune.com

What is happening to gold? Buy opportunity once liquidation is done?

Tags: Commodities, Gold, News

Gold was down $124 at one point this morning, hitting a recent low of $1,532. At the time we are writing this email, Gold has rebounded up to $1,620 only down $36. What is causing all this sell-off and volatility?

Speaking with investors this morning in Europe it appears that the main causes are:

1- CME margin requirements have increased by 21%. IMPORTANT TO NOTE THAT THIS IS THE THIRD TIME SINCE EARLY AUGUST THAT THE CME HAS RAISED MARGIN REQUIREMENTS. THEY HAVE NOW INCREASED BY 90% IN A FEW WEEKS. THIS IS CAUSING FORCED LIQUIDATION. Most investors believe that once this forced liquidation is done and the weak hands are gone, gold will rebound.

2- ETF concerns that the gold backing may be questionnable.

The article below provides a good summary of some of the current concerns.

Why Gold's Decline Is Accelerating?
TMO ^ | 9-25-2011 | DK Matai

Posted on 26 September 2011 06:12:15 by blam

Why Gold's Decline Is Accelerating?

Commodities / Gold and Silver 2011
Sep 25, 2011 - 04:34 PM
By: DK Matai

"The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences."

That was Churchill in a speech to the House of Commons at the Palace of Westminster in London on November 12, 1936, as the clouds darkened over Europe. Dark clouds are hovering once again in regard to the euro, eurozone sovereign defaults and an interlinked banking crisis. More than $3.4 trillion has been erased from global equity markets last week, sending a prominent world index of shares into bear market territory, on concern that governments are running out of tools to avert another deep recession.

As the global financial crisis gathers momentum, why has gold dropped 15 percent since reaching a record $1,923.70 an ounce on September 6? Also, silver has plunged the most since October 1979. In two days, gold dropped 9.3 percent, the most since February 1983. The weekly decline of 9.6 percent was also the most in nearly three decades.

These are the possible fundamental causes for the accelerating decline in the price of gold:

1. Exchange Traded Funds (ETFs)

The UBS rogue trader, who caused the chief executive of UBS -- Oswald Gr�bel -- to lose his job over the $2bn black-hole, has accidentally highlighted the problem with ETFs. As the recent ATCA briefing, "Are The $1.4 Trillion ETFs The New WMDs? Anatomy Of The Highly Toxic UBS Scandal" points out:

"Think of all the gold ETFs and then ask yourself: How much physical gold actually underpins the gold ETFs? Answer: Not a lot! As much as half of the trades in gold are now driven by ETFs, while some blame them for speculatively driving up [commodity] prices."

Top gold sources say that some ETFs are involved in fractional selling in ratios of 1:100 and there is only 1 kilo of gold for every 100 kilos of gold-equivalent ETF units which are sold and re-sold. As queries for physical gold repatriation start, gold funds and myriad financial institutions and shadow banking vehicles -- such as prominent hedge funds -- may keel over?

Attention is just beginning to gather on the accounting principles of the popular but tainted gold and silver Exchange Traded Funds (ETFs). The gold inventory is under scrutiny for usage in COMEX -- Commodity Exchange -- deliveries, enabled by questionable shorts to the GLD and SLV shares by its own custodians. The Bar Lists are regularly seen as erroneous and suspicious.

The biggest gold and silver funds are now on the defensive, as they may soon face mass investor exits on the back of heavy discounts to the precious metal spot prices and doubts about the levels of physical gold they actually hold.

2. Paying for Losses and Booking Profits

There is clear evidence that investors are selling gold to pay for massive losses in other asset classes like equities and commodities. In parallel, many investors have made a solid profit in their gold-linked investments. As the markets crash and there is a need to find ready cash and report profits, it is easier to do so by selling their hitherto profitable gold positions.

3. Source of Liquidity and Margin Calls

Gold has become the source of liquidity for global margin calls. It is difficult to say at what level this liquidation will stop. COMEX -- Commodity Exchange -- is making it more expensive for speculators to trade. CME -- Chicago Mercantile Exchange -- Group has increased the margin requirements on gold and silver. The minimum cash deposit for gold futures will rise 21 per cent to $11,475 per 100-ounce contract in the speculative Tier 1 category at the close of trading on September 26, Chicago-based CME has said. For silver, the minimum cash deposit has been raised to $24,975 from $21,600.

4. Flight to Cash

We are seeing a flight from illiquidity to liquidity, ie, from all asset classes -- including precious metals -- to cash because 2008 is still very fresh in people�s minds. In October 2008, gold prices tumbled 18 percent as the most-severe slump since the Great Depression spurred losses in global equity and commodity markets. However, the yellow metal jumped 23 percent in the next two months.

5. Too Fast Too Soon

The summer run-up in the gold price was too far too fast and too soon as institutional speculators extended their long positions in paper derivative markets. All these tell-tale signatures suggested a big fall at some stage, which has now arrived. Rather than any dramatic reversal in world physical markets, it looks like gold's precipitous price decline in recent days and weeks can be attributed at some level to the same set of speculators -- including some prominent hedge funds and the trading desks of the big Wall Street, European and Asian banks -- reversing their positions or cashing out of gold altogether.

6. Deflation and Commodities

Slowing world growth has created pressure on gold and commodities from the deflation angle. The broad slide in commodity markets also helped drag gold lower, as declines in the commodity indices prompted managers to liquidate gold.

Conclusion

The fall in the price of gold at a time of increased global uncertainty can be counter-intuitive for some investors to understand. Of all the reasons cited for the accelerated decline in the price of gold, knowledgeable senior executives -- with board level responsibilities in gold mining and gold bullion trading -- suspect that worries about Exchange Traded Funds (ETFs) and investors pulling out of their leveraged gold positions are amongst the most likely suspects. The increased margin requirements may still be a minor contribution but would likely cause a further modest dampening of sentiment.

Is this a short-term or long-term correction? Could the correction in gold prices be short-term and similar to initial losses suffered in 2008 or is this a more long-term correction like the one in the early 1980s that lasted for more than two decades? The length of the fall in gold prices depends perhaps on how long will it take for the ETF situation to normalise!

Some senior executives from the gold industry feel that the long-term upward trend in the price of gold is likely to continue because physical supply from new production is very limited and the overhang from central banks pretty securely locked-in for the moment. This leaves open the question that how long will the transition period of falling gold prices be before the long-term trend resumes?