Gold Set for First Annual Loss in 13 Years – by Matt Day (Wall Street Journal – December 19, 2013)

Precious Metal on Track to End a 12-Year Bull Run

Gold prices slid to three-year lows Thursday, effectively closing the book on a historic rally that lured investors on both Wall Street and Main Street.

Barring a rebound of unprecedented scale, the price of gold is set to notch its first annual decline in 13 years and its biggest drop since 1981. Gold is down 29% year-to-date.

On its way up, gold attracted legions of investors large and small, including big-name hedge-fund managers such as Paulson & Co.’s John Paulson, Greenlight Capital Inc.’s David Einhorn and Third Point LLC’s Dan Loeb. They bet that the Federal Reserve’s extraordinary stimulus launched after the financial crisis would weaken the dollar and stoke inflation, raising gold’s value as a form of protection.

Many investors got burned this year when Fed officials began to hint at scaling back the central bank’s bond-buying program designed to boost growth. Inflation had remained subdued even after the Fed pumped more than $3 trillion into the economy. The dollar weakened in 2009 and much of 2011 but strengthened again.

The Fed’s decision on Wednesday to begin trimming bond purchases further undermined an investing thesis that was already on precarious ground, market experts say.

Gold prices on Thursday fell 3.3% to $1,195 an ounce, the lowest close since August 2010.

“The reasons to own gold have just evaporated,” said Jeffrey Sherman, commodities portfolio manager with DoubleLine Capital LP, a Los Angeles money manager that oversees $53 billion. Mr. Sherman said DoubleLine sold its gold holdings at a loss after a steep drop in prices this past spring.

Other fund managers are exiting as well. Third Point sold a long-held gold position in the second quarter. Earlier this month, hedge funds and other money managers as a group held the smallest bet on rising gold prices since 2007, according to data from the U.S. Commodity Futures Trading Commission.

Representatives for Third Point and Greenlight Capital declined to comment.

Mr. Paulson is one of the most high-profile casualties of gold’s selloff. Known for reaping billions from wagers against the housing market, Mr. Paulson started a gold fund in January 2010 when the metal was trading around $1,100 an ounce and marching higher. He even offered investors in other funds shares that were denominated in gold.

Mr. Paulson’s gold fund is down 63% this year through October, according to documents presented at his annual investor day last month. The fund managed $370 million as of last month compared with about $1 billion near the start of the year.

The firm, however, added in the materials that its “thesis remains intact” and that it considered 2013 a “pause mode” in a long-term upward trend. A representative for Paulson declined to comment on Wednesday.

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