Hedge Funds Favor Gold as Fear of a Rate Hike Looms

As of mid-October 2015, gold prices have been recovering from previous five-year lows in the recent months. As investors remain skeptical about an interest rate hike, gold has witnessed a constant rise and fall in its prices over the past year. Although Fed officials had signaled a willingness to tighten their monetary policies this year, recent economic data pointed to slower hiring and falling inflation, which likely buoyed gold prices.

Meanwhile, silver followed a similar route as gold. Investors and most traders are now eyeing 2016 as the year that the rates will lift after more than eight years.

Some traders also scooped up gold ahead of the two-day FOMC (Federal Open Market Committee) meeting in October. The US central bank is widely expected to keep monetary policy unchanged for the year 2015. Janet Yellen, Chair of the Fed’s Board of Governors, has indicated that the FOMC will take a “data-driven approach,” to its decision as it weighs whether to raise short-term interest rates for the first time in nearly a decade.

Investors should also keep a watch on the US Department of Labor as they release two additional national employment reports before the FOMC’s December meeting. This may likely provide the FOMC members with enough data to help them guide their decision.

Leveraged ETFs like the Direxion Daily Junior Bull Gold 3X (JNUG) and the Proshares Ultra Silver (AGQ) declined by 7.40% and 0.17%, respectively, on Monday, October 26. Both these ETF also have YTD (year-to-date) losses of 59% and 5.40%, respectively.

Mining companies still showing negatively affected prices on a YTD basis include Alamos Gold (AGI), First Majestic Silver Corporation (AG), and Royal Gold (RGLD). These three stocks together make up 6.10% of the Market Vectors Gols Miners ETF (GDX).

Continue to the corresponding part of this two-part series for a further look at gold prices and the reactions of hedge funds.

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• Part 2 - Interpreting Hedge Fund Approaches to Gold as a Rate Hike Looms