Gold Price Hits Six Months Lowest-Hedge Funds Unloading Gold
Gregory Meyer reported on FT.com that spot gold prices in London fell to $1,523 per troy ounce down $400 from a nominal record made last year. Gold prices are at the lowest in almost half a year. Investors are exchanging the yellow metal for US Dollar. US Dollar is on the surge again with the dollar reaching 15 month high against the Euro.
Gold has been making steady gains in the last few years. It almost gained 8% in 2011. This was 11th straight year of gains that outperformed many commodities and stock indexes. The record was made when gold prices reached $1,920 per troy ounce in early September 2011.
Gold is often viewed by the wealthy investors as a safe hedge against inflation and as a haven against the devaluation of paper currencies. Inflation worries have abated in the recent few months as grain and oil prices pulled back in 2011 and the growth has stalled in the developed economies.
According to Douglas Hepworth, Director of Research at Gresham Investment Management in NY gold is a good hedge against stagflation. But when there is stagnation and not stagflation, gold is a bad hedge.
Despite almost zero interest rates and concerns about the monetary easing in the US, US Dollar has held firm. The latest fall in the gold prices have come as the banks and some big traders were in need of cash at the end of the year. They turned to US Dollar, the most liquid asset. The largest gold exchange traded fund has unloaded 44 tonnes of gold during December 2011. One hedge fund offloaded SPDR Gold shares equivalent to 34 tonnes!
According to one analyst in London as reported by FT.com article when you are in an environment of stronger dollar and people are looking for the most liquid thing that they can put money into, it builds pressure on the gold price. According to another analyst, gold definitely works in some environments but we are not in one of those environment at the moment.