Hedge Funds Cut Bullish Gold Wagers as Rally Snaps: Commodities

Jul 21, 2014 3:29 pm ET

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July 21 (Bloomberg) -- Hedge funds cut bets on a gold rally for the first time in six weeks as prices snapped the longest stretch of gains since August 2011.

Money managers trimmed their net-long position by 8.5 percent in the week through July 15, U.S. government data show. Prices dropped 2 percent last week, the first loss since May and helping to erase $1.38 billion from the value of exchange-traded products backed by the metal.

Gold climbed 9.4 percent this year, outpacing gains for commodities, equities and Treasuries, partly as tensions between Ukraine and Russia increased demand for a haven. The rally is set to reverse as the economy improves and the Federal Reserve “eventually” increases U.S. interest rates, the World Bank said in a report July 17.

“We’ve probably already seen the extremes of positive sentiment in the gold market,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $120 billion, said July 16. “We see the direction for gold is generally down, just because of the pace of economic growth improving. We see the Fed is going to actually start raising rates sooner than the market expects, probably sometime in the second quarter of next year.”

Futures fell 0.5 percent since the end of June to $1,315.50 an ounce in New York. The Bloomberg Commodity Index of 22 raw materials dropped 3.9 percent, while the MSCI All-Country World Index of equities was little changed. The Bloomberg Treasury Bond Index gained 0.1 percent.

Short Holdings

The net-long position in gold fell to 131,971 futures and options contracts as of July 15, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop surged 32 percent, the biggest gain in seven weeks.

While Fed Chair Janet Yellen has said she expects borrowing costs to remain low for a considerable time, analysts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. have brought forward estimates for when the central bank will boost rates. The Fed may have to raise rates more quickly than planned as unemployment falls and inflation quickens, James Bullard, president of the St. Louis Fed, said July 17. He doesn’t vote on monetary policy this year.

Bullion tumbled 28 percent in 2013, the most in three decades, as a stronger U.S. economy and the prospect of less monetary stimulus curbed demand for alternative assets. Payrolls rose in 33 states in June and the unemployment rate fell in 22, government data showed July 18. Prices will decline to an average $1,230 next year from $1,250 in 2014 and $1,411 in 2013, the World Bank estimates.

Jet Crash

Investors are still adding to holdings through ETPs, as the assets increased for four straight weeks, the longest stretch since 2012. Some traders are seeking a hedge against escalating turmoil in Eastern Europe and the Middle East.

Gold futures on July 17 posted the biggest gain in four weeks, after 298 people were killed in a jet crash near the border between Ukraine and Russia. President Barack Obama said the next day the U.S. had concluded that a surface-to-air missile launched from insurgent-held territory in eastern Ukraine brought down the Malaysia Airlines jetliner.

In the Middle East, intensified fighting in the Gaza Strip saw the Palestinian death tally rise past 500, according to the Gaza Health Ministry. Twenty Israelis have also died.

“You tend to see gold go up when people are worried,” Quincy Krosby, a market strategist at Newark, New Jersey-based Prudential Financial Inc., which manages more than $1 trillion, said July 18. “A belief that geopolitical events will gather center stage again, either in Ukraine and/or the Middle East, would be rationale for continued purchases.”

ETF Flows

In the five days through July 17, investors added about $251 million to exchange-traded funds that track commodities, including a $187.6 million gain to those backed by precious metals.

Gold futures fell 0.6 percent a day after the jetliner crash, and U.S. stocks rallied as investors refocused on economic prospects after sales topped analyst estimates at Google Inc., the world’s third-largest company.

Combined net-wagers across 18 U.S. traded commodities fell 15 percent to 999,921 contracts as of July 15, the lowest since February, the CFTC data show.

Bets on rising oil prices declined 15 percent to 259,259 contracts. West Texas Intermediate climbed 2.3 percent last week. The U.S. and the European Union widened sanctions on Russian banks, energy and defense firms, including OAO Rosneft, Russia’s largest oil company.

A measure of net-long positions across 11 agricultural products tumbled 18 percent to 422,799 contracts, the largest decline since January.

Corn Yields

Corn yields in the U.S., the world’s largest grower, will climb to the highest ever, Commodity Weather Group said July 17, citing current crop conditions and recent weather patterns. Rising U.S. production will help global inventories climb to a 15-year high before the start of the 2015 harvest, Department of Agriculture data show.

The corn net-long holding fell 13 percent to 93,101. Prices entered a bear market in Chicago this month and posted four straight weekly losses. Higher temperatures will “help push crops along” in the U.S. Midwest in the next week, Dan Hicks, senior meteorologist at Freese-Notis Weather in Des Moines, Iowa, said July 18.

“The growing season has just been perfect for grains,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said in June 17. “The estimated harvests keep rising, and that’s a real headwind.”