Friday, July 2, 2010

Hedge-Fund Explanantion For Gold's Plummet

Over at Motley Fool, "goldminingXpert" offers this cause for gold's plummet: hedge funds had levered up to buy gold earlier, as well as the U.S. dollar, as a way to play the Eurocrisis. Both were dumped so as to meet margin calls when stocks and the greenback tanked.
When large margin calls (or something) were unleashed last night and the dollar fell 3 cents against the Euro (the biggest move in awhile), it's only natural that the same margin calls also rocked the precious metals world. The fast-moving hedge funds who gorged themselves on dollars, gold and other "safer" assets ... often as a hedge for their declining US equity positions ... were forced to unload. Thus the harrowing decline in the dollar, gold, and miners today. Many junior miners are down 8 or more percent, and this is on top of steep declines in the past few days. While a lot of these miners that are getting killed (Nadagold, Seabridge, Allied Nevada and others deserve their loses), there's some genuine bargains starting to emerge.

That said, as long as the hedge funds remain overlevered and are long commodities with hot money, expect gold to take further losses. They will unload the assets that are showing gains (US dollars and precious metals) rather than the ones showing losses (mortgage equities, real estate, US equities, European debt, etc.) Live by the hot money, die by the hot money.

When the US$ index and gold decouple, we'll know the hot money has moved on to a different trade. But for now, be cautious. We're at an interesting crossroad in gold and mining shares.

There were no recommendations as to which mining shares were bargains now.

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