Why Hedge Funds Liquidated Some of Their Gold

Hedge funds increased their bets on gold as prices fell after gold’s gains in 1Q16. However, hedge funds and money managers curbed their bets on gold as it fell steadily in May. The COMEX net bullish position on gold was also trimmed down at the end of May.

As the cautious sentiment spread across the Market and gold investors’ hopes dissipated, large money managers liquidated some of their gold. During the last week of May, money managers, who have been bullish since January, reduced their wagers on gold.

The primary reason behind the negative sentiment of gold investors is the prevailing fear of a rate hike by the Fed (Federal Reserve). However, the probable delay in the interest rate hike gives some breathing room to non-yield–bearing assets like gold, silver, platinum, and palladium. All these metals bear no yield and thus underperform the Treasuries if the latter offer a higher interest rate.

The tumbling precious metals also led to the fall of funds like the ETFS Physical Swiss Gold Shares ETF (SGOL) and the PowerShares DB Gold Fund (DGL). These two funds fell 3.6% and 3.7%, respectively, on a trailing-30-day basis. Among silver-based funds, the ETFS Physical Silver Shares ETF (SIVR) and the VelocityShares 3x Long Silver ETN (USLV) fell 6.5% and 18.5%, respectively, during the same timeframe.

The holdings of the SPDR Gold Shares ETF (GLD), the world’s largest gold-backed ETF, rose 0.71% to 881.4 tons on Friday, June 3. This is the highest level since October 2013.