Hedge Funds Gold Update

Big Hedge Funds Investing More and More in Gold

Earlier this year we reported the trend of hedge funds investing in gold (see this story). Hedge funds are concerned that government efforts to stabilize the economy will have a weakening effect on U.S. and European currencies. In economic uncertainty, gold is often seen as a safe and profitable investment. John Paulson is preparing to launch a gold fund in January and his hedge fund firm has become the largest holder of SPDR Gold Shares exchange-traded fund. Paulson is not alone, as the principal of Alpha Capital Management observes, "I can't remember in 20 years so many respected investors focused on a single strategy."

The Federal Reserve, headed by Ben Bernanke, responded [to the financial crisis] by slashing interest rates to almost zero and spending more than $1 trillion buying long-term U.S. Treasury bonds and mortgage-backed securities and other debts from collapsed housing giants Fannie Mae and Freddie Mac.

That stabilized the economy, but some leading hedge-fund managers worry about the long-term consequences of this so-called quantitative easing and are using gold to protect themselves.
"The Fed is making loans collateralized by toxic waste and has now begun a policy called 'quantitative easing'—a fancy term for 'printing money,' " Greenlight's Mr. Einhorn wrote in a January letter to investors.

Printing so much new money weighs on the value of the U.S. dollar, which could fuel rapid inflation. In such an environment, the solidity of gold could shine.
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