In the troubled hedge fund world, there haven't been too many positive stories in recent months. Funds across the country are continuing to face an uphill battle against dwindling assets, disinterested investors who have grown frustrated with high fees, and lackluster returns. In the past few days, though, many hedge fund managers were able to get ahead of the Federal Reserve's decision to raise U.S. interest rates, marking a successful series of bets on gold. In the aftermath of the rate increase, gold prices suffered their largest weekly loss in over a month. Fortunately for many hedge fund managers, a number of funds had already exited SPDR Gold ETF before the prices could fall.
Hedge Funders Withdrawing From Gold Investments at Rapid Pace
Generally, money managers trimmed their net-long position in gold by 11% for the week ending June 13, just before the Fed announced the rates change. The total as of the end of that week was 155,037 futures and options contracts. This data was reported by Bloomberg Markets, which also revealed that gold futures fell by 1.2% last week, reaching a final price of $1,256.50 per ounce. This signifies the biggest decline in the price of the precious metal since May 5. Traders and analysts seem to remain bearish on the metal for another week, restarting a trend that was last seen in December. On news of the rate hike and the general loss of interest among hedge funds, gold futures slipped further at the beginning of the week.
Fed Signals More Trouble for Gold to Come
Last week's rate hike may not be the end of the troubles for gold this year. The Fed has reiterated its plans to institute another rate hike later in the year. At the same time, the European Central Bank is reviewing its policies and may loosen its monetary regulations. As borrowing costs go up, the appeal of gold bullion tends to go down, considering that gold pays no interest. In fact, the result is that investors are withdrawing from SPDR Gold Shares, the largest ETF backed by gold bullion, at the fastest pace so far this year.
According to Rob Haworth, a senior investment strategist for U.S. Bank Wealth Management, "gold probably heads lower here, just because of the fundamental factors lining up against it. The Fed is on this path for better or for worse, to normalize rates."
Beyond increasing borrowing costs, the Fed has also maintained its projections for three additional rate increases for 2018. This has contributed to the dumping of options contracts which bet on further gold gains. Aside from the impact on gold, some analysts are questioning whether the Fed may be acting too aggressively "in raising rates and contracting the balance sheet," according to Walter "Bucky" Hellwig, senior vice president of BB&T Wealth Management.