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ETF investors outsmart hedge funds that miss out as gold rebounds

Hedge funds could learn a thing or two from exchange-traded fund (ETF) holders, at least as far as the gold market is concerned.

[NEW YORK] Hedge funds could learn a thing or two from exchange-traded fund (ETF) holders, at least as far as the gold market is concerned.

As a trade war between the US and China broke out, bullion futures posted their best weekly gain in two years on demand for a haven. Unfortunately for the funds, they were too focused on interest rates to anticipate the move.

Money managers pared their wagers on a gold rally to the lowest this year ahead of a Federal Reserve meeting where policymakers eventually raised borrowing costs. But the rate hike did little to pressure gold as trade tensions overtook the market. ETF investors were smart enough to look beyond the Fed as they boosted their bullion holdings to the highest in almost five years just as prices took off.

"On the surface, it looks like the ETF holders got it right," said Frances Hudson, an Edinburgh-based global thematic strategist at Aberdeen Standard Investments, which oversees more than US$770 billion.

"It could just be they're using gold as a hedge against things that hit the headlines and maybe the hedge funds haven't been focused so much on political news."

In the week ended March 20, money managers reduced their net-long positions, or the difference between bets on a price increase and wagers on a decline, by 16 per cent to 121,838 futures and options, according to US Commodity Futures Trading Commission data released on Friday.

By contrast, holdings in gold-backed ETFs rose about 1 per cent in the same period. As at Thursday, the hoard stood at 72.9 million ounces, the highest since May 2013. Gold futures for June delivery rallied jumped 3.3 in the week ended Friday to settle at US$1,355.70 an ounce in New York.

Bullion's recent rally pole-vaulted the metal ahead of this year's performance for the S&P 500 index of shares. While global growth pressured gold earlier in 2018, there are signs of cracks to the expansion even before the US and Chinese tariffs take effect. The euro area's private sector grew at the slowest pace in 14 months, Japanese manufacturing lost steam and German business confidence fell to the weakest level in almost a year, reports on Thursday showed.

Gold has jumped 28 per cent since the end of 2015, defying conventional wisdom that rising borrowing costs damp demand for the non-interest bearing metal. The reason could be traced to the financial stress that comes with rising rates as Americans are already struggling to pay down their credit cards and auto loans, said Trey Reik, a Connecticut-based senior portfolio manager at Sprott Inc.

Still, there are investors who are convinced that the US economy will hold up, prompting the Fed to raise interest rates faster than the three hikes projected for 2018. That scenario could help the dollar rebound and damp demand for gold as an alternative.

"We believe that the Fed has got some potential to surprise even this year, in terms of the number of rate hikes, so we think that's a headwind for gold," said Rob Haworth, a Seattle-based senior investment strategist at US Bank Wealth Management, which oversees US$151 billion.

In the meantime, "investors are a little worried about equity market valuations and are looking at gold as the potential opportunity". "The appetite seems to be bullish on gold," he said.