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Interpreting Hedge Fund Approaches to Gold as a Rate Hike Looms

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Gold and equity

For most of 2015, the US Federal Reserve’s decision about raising interest rates above the zero level has been a key indicator for determining gold prices. Gold is trading almost 5% higher than it was before the Fed held its September meeting.

On October 15, 2015, gold prices touched their highest level since June 22. This rise in price is due to positive economic indicators that could bring about an interest rate hike.

Meanwhile, global equity markets slipped, halting after a four-week rally ahead of the policy-setting meeting by the FOMC (Federal Open Market Committee). Below is a chart that gives a comparative price performance of gold futures relative to the S&P 500 Index. As a general rule, when equities drop, gold prices are expected to surge, as we saw during 2008.

Fed may delay, but speculators positive

Speculators and hedge funds have seen a fifth straight week of increases in gold. According to the data by the Commitment of Traders, hedge funds added more than 47% to their long positions in gold futures in the week of October 20, which saw prices rise by 66% from the previous week.

These hedge funds and speculators have also made deep cuts to their short positions ahead of the previous week’s rally. Apparently, they are betting that gold will be cheaper to buy in the future. Net longs now stand at 12.2 million ounces—345 tons, the highest we’ve seen since February 2015.

As of October 15, the Miners ETF like the VanEck Vectors Junior Gold Miners (GDXJ) and Global X Silver Miners ETF (SIL) have seen positive returns on a 30-day trailing basis. The positive returns have likely followed returns in precious metals.

Most mining companies have also encountered 30-day trailing profits. Among these companies, the top gainers are Sibanye Gold Corporation (SBGL), Cia De Minas Buenaventura (BVN), and Franco-Nevada Corporation (FNV). These three companies together contribute 10.60% to the price changes in the VanEck Vectors Gold Miners ETF (GDX).

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