The funds trade many things
in many markets worldwide but the impact they can have on a single commodity
or currency they may target is immense. George Soros’s Quantum Fund is often
credited with stimulating the gold price rise from $330 to over $400 per ounce
in 1993. Equally, the funds can build large short
positions, thus dragging down the price, as happened in the gold
price collapse of mid-1997.
The rapid expansion of the
OTC options market has been of particular help to the funds because their operations
are concealed, whereas on an exchange like
COMEX, the size of their position
would soon be transparent (although that is not to stop them using the exchange
precisely to create an effect). COMEX reflected the funds’ importance by removing
its position limit of 6,000 contracts (600,000 ounces), enabling larger positions
to be run at the discretion of the exchange.
The funds are heavy users
of options (hence the term managed future
funds being rather dated) and their decisions are technically driven by mathematical
models, which are often programmed for multiple speed entry and exit from a
particular commodity, currency or financial future. See also Commodity
Trading Advisors, Gold Funds.
Hedge Funds
Hedge funds or managed futures
funds have become a driving force in the gold market of recent years. In the bull
market in gold of the 1970s they were still in their infancy, with perhaps $500
million among them. By the 1990s they not only had at least $25 billion under
management but a huge range of derivatives to choose from, especially in the over-the-counter
(OTC) market. The leverage value thus offered
added to their importance.