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Hedge Funds Reenter Gold Market

Following the recent drop in prices, hedge funds have increased bets on a gold rally in widespread belief that bullion will rebound.

Fund managers and speculators have increased their net-long positions in gold by 9.8 percent to 61,579 futures and options in the week ending April 16, according to data from the Commodity Futures Trading Commission. Additionally, CFTC data indicates investors turning again bullish on silver.

Paulson & Co., one of the best known hedge funds and chaired by Hank Paulson, wrote in a letter to its clients last week that official sector purchases and demand for gold in Asia will support the price of bullion. Paulson joins BlackRock Inc. in predicting a rebound in precious metals.

Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio, said people may have been looking to get back into the market and are taking advantage of the price to do so as people still have a long-term belief in it and physical buyers have stepped up.

According to Paulson, central bank stimulus will eventually lead to inflation, a view widely held by long-term forecasters who believe the effects of quantitative easing by the Federal Reserve will eventually result in a devaluation of the dollar.

Catherin Raw, a fund manager at BlackRock in London who oversees about $3.8 trillion, said in an interview with Bloomberg that the recent price drop was a panic event.

With increases in net-long positions and physical bullion buying demand up sharply, investors with longer-term views are reentering the market to take advantage of the low price point.

Central banks, however, appear divided on whether the current market prices are inexpensive enough to increase investment. Since 2009, central banks around the world have been net-buyers of gold, adding to their already impressive reserves. As some of the biggest buyers around, central banks themselves have the capacity to influence the gold price higher and many central banks routinely do not post changes in their reserves. Central banks that do publicize their reserve holdings, including Russia, Turkey, Venezuela, and others have been publishing large increases in holdings for several years.

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