Gold Speculative Longs Plummet, Worry Accumulates

According to a Bloomberg/Business Week report, hedge funds are bailing out of gold at a fast clip. That bailing out has contributed to the metal's worst year's start since 1997.

Managed-money funds held net-long positions, or wagers on rising prices, totaling 134,473 contracts on the Comex in New York as of Jan. 18, U.S. Commodity Futures Trading Commission data showed on Jan. 21. The gold holdings have plunged for three straight weeks, dropping 21 percent since the end of December, while net-long positions in silver are down 24 percent.

Gold has fallen 5.7 percent this month, which would be the worst start to a year since a 6.3 percent drop in January 1997...

According to Brian Hicks, who helps manage $1 billion in the Global Resources Fund at U.S. Global Investors Inc. in San Antonio, the exits are prompted by profit-taking after a huge fall run and greater opportunities in the equity markets. Of note is the fact that gold is down by much less than 10% despite that rush for the exits.


Adding to the clime of worry, Brian Hunt of DailyWealth is preparing his readers for an all-out correction in gold. Noting that no widely-tracked asset (or asset class) has had 10 straight years of increases in 10 calendar year, he says there's a real risk of gold declining 20% or more.

Here's the thing: That uninterrupted 10-year uptrend is not a natural state for gold. It's not a natural state for any asset.

Knowing this... and knowing that even the biggest, healthiest multi-year bull markets need to take "breathers," it's as natural to expect gold to correct and end the year lower as it is to expect someone who has run flat out for 10 miles to take break.

How deep could gold's "break" go? Below is a 10-year chart of gold. As you can see, gold could correct all the way down to $1,100 an ounce and remain in the confines of its big bull trend.

Despite that pessimism, he's still a long-term gold bull that expects further monetary and fiscal irresponsibility. His bearish argument is solely based upon gold moving too far, too fast. (It also ignores the 30% drop in 2008, which reversed enough to allow gold to eke out a gain for that year. There's a good argument to be made that the 10 years of straight gains is in part a calendrical artifact.)


His comments, from the near-term perspective, dovetail with the hedge-fund exit noted at the beginning of this post. Both show that the gold market is far, far from being beset by euphoria.