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Hedge funds will regret selling gold when GDP data disappoints on Friday

 -- Published: Monday, 21 July 2014 | Print  | Disqus 

By Peter Cooper

Hedge funds reducing their holdings in precious metals last week will wish they had jumped in the opposite direction if preliminary GDP figures for the second half due on Friday show that the US economy continued to contract or slow down.

Revised data for the first quarter already show that the US economy contracted by a jaw-dropping 2.9 per cent after a preliminary estimate of a one per cent fall was radically revised downwards.

What recovery?

Recent figures on housing starts, the huge fall in full-time jobs and retail sales give little reason for the overwhelming confidence on Wall Street that the economy has bounced back to life since then. Indeed, the US economy could easily have slipped into an actual recession with two quarters of negative growth (click here).

Money managers trimmed their net-long position in gold by 8.5 per cent in the week through July 15th and prices dropped by two per cent. But gold is still out front for this year, with prices up by nine per cent, outperforming gains for commodities, equities and Treasuries, partly as tensions between Ukraine and Russia have increased demand for safe haven assets.

The argument being used by Goldman Sachs and other to support a bearish case against gold is that the US economy is now improving and that higher interest rates will inevitably follow.

But what happens if the US economy is not growing or growing only very slightly? What if it is going through a more typical cycle after all and the recovery is behind and not in front of us?

Then the Goldman Sachs case against gold can be turned on its head. The Fed will have to resume its money printing, presumably after the initial shock GDP announcement has crashed the stock market.

2008/9 precedent

In the 2008/9 crash gold and especially silver were the best assets to buy for the recovery cycle and gold held up better than most assets on the way down. The fear then was that Fed money printing would result in inflation as it has for stock market prices.

Hedge fund managers who think gold and silver’s recent outperformance is now over are barking completely up the wrong tree because the US economic recovery is an illusion created by wishful thinking rather than economic activity.

With the Fed forced to maintain and even boost QE in another crash then the rush towards precious metals will be even stronger, particularly as the metals are so cheap after their three-year correction.

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 -- Published: Monday, 21 July 2014 | E-Mail  | Print  | Source:

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