Hedge funds’ bullish bets on gold jump to four-year high
Hedge funds and other large speculators boosted their net-long position in gold.
By Michael Lombardi, MBA for Profit Confidential
To say the very least, 2013 was an interesting year for gold bullion. The precious metal’s price surprised gold bugs and declined 24%.
As 2013 progressed, we heard calls for the yellow metal to fall even lower in price. The stocks of gold producers were slammed. Equity research departments at big banks like The Goldman Sachs Group, Inc. (NYSE/GS) called gold bullion a slam-dunk sell (and the last time I checked, their opinion hasn’t changed).
In the midst of all this, a very important phenomenon was forgotten: gold bullion prices are no stranger to price declines. In the table below, I’ve compiled a list of every period since 1974 when gold prices fell more than 20% and what happened after the decline.
| Year, % Drop in Gold Prices | Year, % Increase After Drop |
| 1974-1976 declined by 45.67% | 1976-1980 increased by 705% |
| 1980-1982 declined by 63.84% | 1982-1983 increased by 71.8% |
| 1983-1985 declined by 45.17% | 1985-1987 increased by 76.7% |
| 1987-2001 declined by 48.88% | 2001-2008 increased by 291.38% |
| Mar. 2008-Nov. 2008 declined by 28.8% | Nov. 2008-2011 increased by 169.56% |
Data source: www.StockCharts.com, last accessed February 6, 2014.
The table above illustrates that the bigger the decline in gold bullion prices, the greater the ensuing rebound.
Since gold bullion prices fell in 2013, gold miners have pulled back on operations at mines where $1,200-an-ounce gold no longer justifies production. This has resulted in a reduction in the supply of newly mined gold.
And while the supply of gold bullion is under pressure, demand for the precious metal keeps increasing. In China, both consumers and the country’s central bank have become gold hoarders over the past two years.
But demand for gold bullion in China is just one part of the demand equation. As I have documented in these pages many times, mints around the world are working in overdrive mode to satisfy the record demand from consumers and investors for gold bullion. (See “The Supply Shortage in the Gold Pits No One Is Talking About.”)
Dear reader, don’t cave in to the mainstream opinion that the U.S. economy is improving and that there is no need for gold anymore as a hedge against a weak economy and inflation. These are the same people who told us in 2005 and 2006 that a new era of homeownership was upon us and that the housing market was where the action was.
I like buying investments when they are down and out, when other investors shun them. And that’s why I’m liking gold more and more. Supply is tight; demand is rising. It’s only a matter of time before prices reflect this supply/demand imbalance.
