June 20, 2024

Hedge Funds Record Short Gold Positions Is A Bullish Contrary Indicator

The deluge of bearish articles on gold continues with a Wall Street Journal article entitled “Money Managers Shorting Gold In Record Numbers.”

Hedge funds and other investment managers held a record number of bets on lower gold prices on the main U.S. gold exchange, according to data released Friday by the Commodity Futures Trading Commission.

Managers tracked by the commodity regulator boosted their bets on lower Comex-traded gold futures and options by 33%, to 65,617 contracts, during the week ended Tuesday. That is the most in weekly CFTC data going back to June 2006.

The tone of the Journal article suggests that gold investors should be worried about bearish hedge fund positions.  However, when you look a little deeper into this situation, it’s actually another bullish contrary indicator for gold and here’s why – hedge funds have put up miserable performance numbers not just last year, but for the past decade.

According to Business Insider, an investor in a hedge fund would have been better off in a simple index fund.

The past year has been another mediocre one for hedge funds. The HFRX, a widely used measure of industry returns, is up by just 3%, compared with an 18% rise in the S&P 500 share index. Although it might be possible to shrug off one year’s underperformance, the hedgies’ problems run much deeper.

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio–60% of it in shares and the rest in sovereign bonds–has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation. Gallingly, the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.

Now that we have the facts on hedge fund performance, we realize that what appears to be a slanted bearish article on gold is in reality another contrary bullish indicator for future gold price performance (also see Financial Advisors Bearish On Gold Represents Buy Signal).

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