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Hedge Funds Cut Gold Bets in Longest Slide of 2014: Commodities

By Debarati Roy
April 21, 2014 4:20 PM EDT 85 Comments
Bars of gold.
Photographer: Dario Pignatelli/Bloomberg
Bars of gold.

Hedge funds lowered bullish bets on gold for a fourth week, the longest streak this year.

The net-long position contracted to the lowest since mid-February as speculators sold bullion on signs of accelerating U.S. economic growth. The investors more than doubled bets on lower prices in the past month while reducing wagers on a rally in six of the past seven weeks.

Prices fell 7.5 percent since reaching a six-month high in March after tension in Ukraine eased and U.S. equities rallied to a record. The number of Americans filing for unemployment insurance payments held last week near the lowest level in almost seven years and retail sales in March increased more than economists forecast. Bullion plunged 28 percent in 2013 as some investors lost their faith in the metal as a store of value.

The Epic Boom and Bust in Gold

“It is very difficult for gold to sustain the panic that makes it a good safe-haven trade,” said Frances Hudson, a strategist at Standard Life in Edinburgh, which oversees $294 billion of assets. “I see demand for gold remaining non-enthusiastic. Things are looking better in the U.S. and Europe. It’s not that both these economies are racing ahead, but they are gradually improving.”

Gold Slide

Futures declined 1.9 percent to $1,293.90 an ounce last week in New York. The Standard & Poor’s GSCI Spot Index of 24 commodities advanced 1.4 percent, while the MSCI All-Country World Index of equities rose 1.7 percent. The Bloomberg Dollar Index rose 0.4 percent, and the Bloomberg Treasury Bond Index retreated 0.5 percent. Bullion settled at $1,288.50 today in New York.

The net-long position in gold fell 8.5 percent to 90,137 futures and options in the week to April 15, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop jumped 15 percent.

The U.S. consumer-price index rose 0.2 percent in March, topping the 0.1 percent forecast in a Bloomberg survey of economists, government data showed April 15. Gold tumbled 2 percent that day, the most in 16 weeks. Rising prices give the Federal Reserve more leeway to decrease monetary stimulus, after policy makers debated whether to signal a concern with too-low inflation when they met March 18-19.

The central bank in March reduced the monthly pace of bond purchases by $10 billion to $55 billion, and signaled additional cuts in “further measured steps.” Gold jumped 70 percent from December 2008 to June 2011 as the Fed bought debt and cut interest rates to a record in a bid to boost the economy.

Inflation Expectations

Bullion climbed 6.8 percent in the first quarter as Russia annexed Ukraine’s Crimea region and emerging-market currencies slid. Minutes from the Fed’s March meeting showed that several officials said projections for an increase in U.S. borrowing costs might be overstated.

Inflation expectations, measured by the five-year U.S. Treasury break-even rate, jumped 7.1 percent last week, the most since July.

“The long-term investors will gradually accumulate gold as they want to hedge against future inflation,” said Jeffrey Sherman, who helps manage more than $49 billion of assets for DoubleLine Capital in Los Angeles. “Gold has found a floor because of Ukraine and turmoil in emerging countries. While it may not make money in the short term, it’s a good diversifier.”

Holdings in gold-backed exchange-traded products fell 0.4 percent last week, down for a fifth straight week and reached the lowest since mid-February, data compiled by Bloomberg show. Demand in China, the biggest buyer, may be limited this year, the London-based World Gold Council said April 15. India, the second-largest consumer, will probably keep restrictions on imports to control the current account deficit and defend the rupee, according to Rajesh Khosla at MMTC-PAMP India Pvt., the nation’s top refiner.

Commodity Wagers

Combined net-wagers across 18 U.S. traded commodities rose 0.2 percent to 1.69 million contracts as of April 15, the CFTC data show. Investors withdrew $25.79 million from U.S.-based ETFs tracking commodities in the five days through April 17, led by an outflow of $475.73 million from precious-metal funds, data compiled by Bloomberg show.

Commodity prices have again become negatively correlated to equities, and investors need to take “seriously” the role of raw materials as a diversifier for portfolios, Citigroup Inc.’s Ed Morse said in a April 14 report.

Wagers on rising oil prices increased 3.1 percent to 341,477 contracts as of April 15, the CFTC data show. Prices in New York climbed 0.5 percent last week. U.S. fuel consumption increased in March to the highest for the month since 2011, the American Petroleum Institute said April 17.

Copper Holdings

Net-short bets on copper reached 14,892 futures and options, compared with a bet on price declines of 13,419 a week earlier, the government said. China’s expansion moderated to the weakest pace in six quarters and property construction plunged, the statistics bureau said April 16. The nation is the biggest metals consumer.

A measure of net-long positions across 11 agricultural products slid percent 1.6 to 1.06 million contracts. The S&P GSCI Agriculture Index of eight crops capped a second straight gain last week and is up 18 percent this year.

Bullish bets on coffee gained 2 percent to 38,143 contracts. The wagers have more than doubled since mid-February as drought hampered crops in Brazil, the biggest grower and exporter. Prices surged 80 percent this year.

Crop losses may rise as high as 35 percent in southern Minas Gerais, the leading state producer, according to Christian Wolthers, the president of Wolthers Douque, an importer in Fort Lauderdale, Florida.

“We think there is continued demand for commodities like coffee and cocoa,” said Dan Heckman, a Kansas City-based national consultant for U.S. Bank Wealth Management, which oversees about $115 billion. “Besides drought conditions it’s also being helped by changes in lifestyle and in demographics. Some of the commodities have strong fundamentals backing them, but gold is not our favorite place.”

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.net Joe Richter

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