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Long Gold and Silver: A Lifeline for Struggling Hedge Funds?

by: Peter Cooper October 06, 2008 | about stocks: DBP / GLD / IAU / SLV    

Peter Cooper

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What sort of strategy can the battered hedge funds pursue now? Their alleged benefit of profiting in both falling as well as rising asset markets has been severely tested.

For one thing their shorting strategy has been made temporarily illegal in the banking sector at the very time that it could be used most effectively. Having to work with both hands tied behind your back can not be easy.

Nine out of ten hedge funds are not making enough this year to trigger their bonus profits, so at least subscribers are only paying a two per cent management fee for these losses. But getting your money out of hedge funds is becoming more difficult as exits are being closed.

You have to wonder if hedge funds should not think forward and go long on gold and silver, particularly silver where the investigation by US competition authorities has led to a swift removal of the massive short position overhanging this market for years. This is the most bullish outlook for silver prices since the days of the Hunt Brothers who cornered the market in the late 1970s.

But hedge funds are by nature short term traders and they look first at the outlook for the dollar which is rallying on a flight to quality and see that as a negative for precious metals. However, this is not necessarily the case in a financial crisis: gold and silver are classic safe havens too.

But many may choose to wait until the current deflation of assets from real estate to common stocks is over, and then choose precious metals as the asset class most likely to benefit from a period of higher inflation as a store of value with a fixed supply, or a currency by any other definition.

That could leave precious metals with a volatile ride ahead. Indeed, gold and silver have always been volatile which is why trading on margin is to be avoided, and ironically this does not suit the hedge funds either as what they really like is a leveraged, safe one-way bet.

However, as the surviving hedge funds reassess their strategies the winning approach is likely to be long gold and long silver, and for that the 20 per cent success fees will reappear.

Perhaps the hedge fund managers should take their cue from the central banks which are not going to be selling gold over the next 12 months as they have been over the past four previous years. Supply is coming out of the market at a time of rising demand for a hedge against inflation. So is that not what the hedge funds should be buying next?

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This article has 6 comments:

  •  
    Oct 06 10:13 AM
    The dollar play isn't a flight to safety. Institutions have to pay off debts and such in dollars and are selling euros and buying dollars to do so. After this temporary period, the dollar will resume its fall. I have to admit I'm astonished at how far the dollar has risen. But today it has fallen drastically against the yen, and gold and silver have risen significantly as well (despite oil's fall). Everything is volatile in this market. One ought to avert his/her eyes and do nothing.
    Reply
  •  
    Oct 06 10:33 AM
    Recent FED bailout amounts:

    Temporary Bank Swaps: $620 Billion
    Term Auction Facility: $450 Billion
    Wachovia Sale: $270 Billion
    Discount Window: $262 Billion
    Fannie/Freddie: $200 Billion
    FED Balance Sheet Fix: $100 Billion
    AIG Loan: $85 Billion
    Money Market Guarantee: $50 Billion
    Bear Stearns Guarantee: $29 Billion
    Ford/GM Loans: $25 Billion
    -----------------
    Total: $2.091 Trillion

    Hey, what's another $2+ Trillion when you're already $10 Trillion in debt? I'm sure it won't be inflationary in the least. The dollar will certainly hold its value and foreigners won't EVER begin to rethink their use of the dollar as the bulk of their reserves.
    Reply
  •  
    Oct 06 01:32 PM
    a trillion here, a trillion there....pretty soon you're talking about real money.
    Reply
  •  
    Oct 06 04:25 PM
    Jeje, that already sounds like real money, how are we supposed to pay that back? how long is it gonna take, assuming that Government spending actually comes down and the financial markets stabilize around 2001 levels? and productivity rises back up and unemployment decreases and people's live savings were re-established and and and and and, I'm 46 and I think I'm not likely to see it
    Reply
  •  
    Oct 06 10:48 PM
    Oops. This just in:

    Oct. 6 (Bloomberg) -- The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens.

    That Term Auctio Facility amount looks like it will need to be increased to $900 Billion.

    Chump change.
    Reply
  •  
    Oct 07 01:25 PM
    People, just stay calm, go out and find (hopefully) gold and silver and BUY IT! Then just wait (it won't be too long) and you will be VERRRRY glad you did.

    May God Bless us all, and may God enlighten the Democrats because if they don't get "enlightened"... we all are doomed!
    Reply
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