Are Hedge Funds Wrong to Sell Gold?

The Bullion Bank: Why Fed Taper Expectations are Naive

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All the taper talk is just that, talk. By constantly hinting at tapering the Fed can keep the public’s inflationary fears at bay, and keep the velocity of money from escalating.

Chantilly, VA (PRWEB) November 15, 2013

Hedge funds have been cutting their bullish bets on gold, with a 37% increase in short positions for the week ending November 5th, as gold has tumbled 24% this year. (1) Fed Bank of Atlanta President, Dennis Lockhart, said on October 8th that, “The central bank will consider reducing its $85 billion of monthly bond buying at the December policy meeting.” So are the hedge fund’s right to be dumping their gold holdings on Fed taper expectations?

On and off since 2009 the Fed has bounced back and forth between QE and no QE, between taper and no taper. The reason they have increased and not decreased stimulus over that time period is simple. They can’t. All the taper talk is just that, talk. By constantly hinting at tapering the Fed can keep the public’s inflationary fears at bay, and keep the velocity of money from escalating. If the public knew that the Fed would never taper they would instantly dump their dollars and bonds, driving the interest rates through the roof. Just hinting at tapering in September drove rates up 20 basis points in one month. (3) Thebullionbank.com sees that in order to keep the big banks liquid and keep rates down the Fed must continue to make larger and larger bond purchases, artificially suppressing interest rates. This is of course will lead to an inevitable inflation, despite what the officials say about tapering.

Fundementals for physical precious metals products remain strong. The US Mint (http://www.usmint.gov/about_the_mint/?action=PreciousMetals&type=bullion) gold sales have already surpassed all of 2012 while silver eagle sales have hit an all time single year sales record. China, for the first time, will surpass India as the world largest consumer of gold. The World Gold Council (2) estimates that in 2013 Chinese gold demand will be up nearly 40%. "The flow of gold from the west to east is continuing," said WGC's Cheng. "Western investors do not see the opportunity in gold, but Asians are picking it up – more so in China than India."

1. (http://www.bloomberg.com/news/print/2013-11-10/hedge-funds-cut-bullish-gold-bets-on-fed-stimulus-outlook.html)
2. (http://www.thestar.com.my/Business/Business-News/2013/11/14/China-well-ahead-of-India-as-top-gold-consumer-WGC.aspx)
3. (http://www.thestar.com.my/Business/Business-News/2013/11/14/China-well-ahead-of-India-as-top-gold-consumer-WGC.aspx)


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