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Wall Street Quietly Returns to Gold
Before the election, we (and many other advisors) thought that the presumed chaos under this untested president and his controversial policies would be good for gold. Wall Street thought otherwise, unloading gold during the first few weeks of the bumpy transition period in November and December. However, it turns out that the Trump presidency is becoming just as controversial as his critics feared, so the “chaos factor” is heating up the price of gold the deeper we move into the President’s first 100 days in office.
Speaking of 100 days, February 16 marks the 100th day since the election of Donald Trump on November 8, 2016. You can divide those 100 days into two divergent gold trends – a $150 decline, then a $100 rise:
Goldman Sachs, among others, has recently stated that the new president’s constant flow of controversial executive orders might outweigh any positive implications of his plans for tax reform. We won’t know for sure how much gold the hedge fund managers are buying this quarter (until their 13F filing of May 15), but the circumstantial evidence points to a quiet campaign of gold accumulation on Wall Street.
In the middle of each quarter, hedge fund managers must file a 13F form listing their holdings as of the end of the previous quarter. Even though the information is 45 days old, it reflects any changes of strategy that the hedge fund manager may not have disclosed in any other public forum, so these reports are a valuable lesson in “do as I DO, not as I say.” (The middle of the current quarter fell on February 15.)
Stanley Druckenmiller Returned to Gold in December
A week before the filing deadline, former fund manager Stanley Druckenmiller made his gold buying public in an interview with Bloomberg. Druckenmiller, 63, formed Duquesne Capital in 1981. He closed the fund in 2010 at $12 billion in assets. In the interim, he also managed money for George Soros, as the lead portfolio manager for Quantum Fund. He is reported to have made $260 million in the market crash year of 2008, a time when gold and other commodities gained ground while global stock markets tanked.
On election night, 2016, Druckenmiller made headlines when he said, “I sold all my gold on the night of the election,” explaining that “all the reasons I owned it for the last couple of years seem to be ending.” At the time, he reasoned that a Trump administration, combined with a Republican Congress, would be good for business and global growth, thereby minimizing gold’s role as a “crisis hedge” in 2017.
Last week, however, Druckenmiller made it clear that he had ALREADY bought gold back in December and January because he realized the Trump administration might not have such smooth sailing in the New Year. While looking at various currency options, he decided gold was the best choice. “I wanted to own some currency and no country wants its currency to strengthen,” he said in the Bloomberg interview.
In simplistic terms, he explained, “Gold was down a lot, so I bought it.” That was excellent timing, since gold bottomed out at $1,129 on December 15, the day after the Fed raised short-term interest rates by 0.25%. However, the news of his gold purchase only surfaced last week, when gold was 9.2% higher.
Two Famous Hedge Fund Legends Sold Gold Last Quarter
George Soros and his Soros Fund Management LLC sold all of its 2.85 million shares in Barrick Gold Corp. (ABX) in the fourth quarter, when share prices ranged from $14 to $18, but we can only hope he bought some shares back in January, since Barrick is currently up 36% from its late-December lows.
As of December 31, billionaire hedge-fund manager John Paulson announced that he owned 4.36 million shares of the largest gold ETF, SPDR Gold Shares (GLD). That’s down almost 10% from his 4.8 million shares held as of September 30. Each share of GLD represents one-tenth of a Troy ounce of gold (each share is worth about $118 today), so his company’s GLD shares are currently worth over $500 million.
Overall, investors sold $4.7 billion worth of GLD shares in the fourth quarter, which is the largest share redemption in GLD since the second quarter of 2013. However, their timing is unfortunate, since gold has staged a strong recovery since mid-December – up 7% in 2017 so far, and up 9% since recent lows.
As this chart of money flows into and out of GLD shows, the biggest sales of GLD came after the major price declines last year, especially in the fourth quarter, after most of the price decline had taken place. By contrast, GLD money flows turned positive in January, fueling gold’s early 2017 recovery.
In the first half of February, over a million ounces of gold have been added to various gold ETFs. Since the start of 2017, GLD has added 601,000 ounces, while another large gold ETF, iShares Gold Trust (IAU) has added 163,000 ounces. (It’s worth noting that GLD and other gold ETF funds have just been approved for the Islamic Shariah financial system, which should boost gold ETF demand in 2017.)
Using weekly data, the trend becomes more clear. Last week (February 6-10) marked the seventh straight week of a bullish bias by analysts and traders, as surveyed by Bloomberg. Note how the bullish sentiment among analysts and traders reached its nadir in December, when gold prices were at their lowest.
A Return of Inflation is Also Boosting Gold in 2017
Another news release on February 15 is worth noting. The Consumer Price Index (CPI) came in at a shocking 0.6% monthly rate (a 7.2% annual rate), double the expected 0.3% increase (3.6% annually). The 12-month total gain through January is +2.5%, the biggest year-over-year rise since March of 2012.
Gold prices declined from 2012 to 2015, when inflation was also declining, but there has been a pick-up in price momentum since last year, paralleling the rise of gold from its late-2015 low of $1,049 per ounce.
The 10-year Treasury rate is also rising. It currently stands at 2.44%, meaning that investors in long-term bonds are netting no “real” income, after the 2.5% inflation rate is subtracted. When interest rates are negative in terms of real return, gold has historically been a superior investment for long-term total return.
Bottom line, long-term gold investors should hold through corrections, or buy more, not sell into a panic. If investors wait until hedge fund managers announce their return to gold, prices will likely be higher.