Hedge funds have been stocking up on gold to hedge against inflation as the equity markets have faced some tough times over the past two years.
Shockingly, investors were surprised to see gold tumble down a bit after the equities market slipped again yesterday.
September delivery for gold futures dropped to $1,739.20, losing $66.30, or 3.7 percent.
No one seemed to expect this, as gold has been soaring in recent days.
Some traders said that hedge funds were beginning to unwind, or close out, what has been a very popular and profitable trade for the last 18 months as they bet the dollar would fall and that gold would rise. In the last month alone, the euro has fallen nearly 4 percent against the dollar amid worries about the European debt crisis.
Experts suggest the sell-off is happening because investors are building up some of their faith in the dollar after the Fed's stimulus announcement Wednesday and, therefore, turning away from risky assets.
Historically, gold and the dollar trader inversely of each other. Right now, hedge funds want to raise cash, so they're selling some gold.
But, it's not the end of the gold rush just yet...it's just a pullback. Even with today's losses, gold is one of the top best investments of this fiscal year – with 22 percent gains.
Gold strategists recently predicted gold to surge all the way up to $2,300, as it did back in the 1980s (when adjusted for inflation).
Gold, whether through futures contracts or via exchange-traded funds, has been a popular investment among some of the world’s largest hedge funds. One of the best known “gold bugs” is John A. Paulson, whose firm, Paulson & Company, is the biggest shareholder in the SPDR Gold Shares ETF. But many other hedge funds have embraced the metal as well.
After peaking in early August, hedge funds have been reducing their exposure in the gold futures market, according to Mary Ann Bartels, the head of United States technical analysis for Bank of America Merrill Lynch.
So, yes gold is experience some pull-back today. Perhaps, this is an ideal time to buy...because gold's going to maintain its popularity for quite some time...
*Indented excerpts from CNBC.
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