Hedge Funds Cut Gold Bull Bets to Lowest Since June: Commodities

Sep 01, 2014 10:36 am ET

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Sept. 1 (Bloomberg) -- After gold’s rally in the first half of the year beat gains for commodities, equities and Treasuries, bullion is back to being out of favor with investors.

Hedge funds cut their bullish gold bets for the fourth week in five, sending holdings to a two-month low, U.S. government data show. Open interest in New York futures is the smallest in five years, and assets in global exchange-traded products backed by the metal in August posted the biggest monthly drop since May.

Gold prices fell 2.6 percent since June, heading for the first quarterly loss this year, as signs of faster U.S. economic growth bolstered the case for the Federal Reserve to raise interest rates, cutting demand for an inflation hedge. Holdings through ETPs slumped for the fourth time in five months as escalating violence from Ukraine to the Middle East wasn’t enough to revive buying.

“In an environment of sustainable growth, gold is not very attractive, and higher interest rates cannot be good for gold in the long term,” Jim Paulsen, who helps oversee $357 billion in assets as chief investment strategist at San Francisco-based Wells Capital Management Inc., said Aug. 29. “The days of extraordinary impact from military conflict has diminished.”

Price Declines

Futures dropped 7.8 percent in the past 12 months to $1,287.50 an ounce in New York. The Bloomberg Commodity Index of 22 raw materials fell 3 percent in that time, while the MSCI All-Country World Index of equities climbed 19 percent. The Bloomberg Dollar Index slid 0.5 percent.

The net-long position in gold declined 21 percent to 92,734 futures and options contracts, U.S. Commodity Futures Trading Commission data show. That was biggest decrease since June 3. Short holdings betting on a drop jumped 51 percent to 36,877, while long wagers retreated 8.3 percent.

The U.S. economy, the world’s largest, grew more than previously forecast in the second quarter, government data showed Aug. 28. Orders for durable goods jumped in July by the most on record, while consumer confidence climbed in August, separate reports showed last week. Holdings in the SPDR Gold Trust, the biggest ETP backed by the precious metal, dropped three times in the past four weeks.

Lacking Conviction

A “lack of conviction” is keeping investors on the sidelines, Suki Cooper, an analyst at Barclays Plc, said in a report on Aug. 25.

In 2013, gold slumped 28 percent, the most since 1981, as equities surged and the Fed started slowing the pace of monetary stimulus. The central bank reduced its monthly bond-buying program to $25 billion on July 30, the sixth consecutive cut of $10 billion since November. Chair Janet Yellen said Aug. 22 that if progress in labor markets “continues to be more rapid than anticipated,” interest rates may rise sooner than expected, and further increases could be more rapid.

Bullion rebounded 7.1 percent in 2014 as tensions in Eastern Europe, Iraq and the Middle East increased the appeal of the metal as a haven. Almost 2,600 people have died in the conflict between Russia and Ukraine, the United Nations said Aug. 29.

Consumer Spending

While there are some signs of improvement for the U.S. economy, the recovery is uneven, leaving room for the Fed to continue to hold borrowing costs near zero percent, according to Jeff Sica, who helps oversee $1 billion at Sica Wealth Management.

American consumer spending unexpectedly dropped in July, the first decline in six months, Commerce Department data showed Aug. 29. Gold jumped 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs at an all-time low.

“The Fed is not in a hurry to raise rates, and it is prudent to hold on to gold,” Sica, who is based in Morristown, New Jersey, said Aug. 28. “Gold’s gains will stick as the turmoil in Ukraine and Iraq shows no signs of coming to an end.”

Combined net-wagers across 18 U.S. traded commodities dropped 4.4 percent to 595,756 contracts as of Aug. 26, the CFTC data show. That’s the lowest since November.

Bets on higher oil prices rose 0.6 percent to 189,753 contracts, the first gain in five weeks. West Texas Intermediate climbed 2.5 percent last week, the most since June 13.

Copper Wagers

Copper holdings more than doubled to 17,411 contracts, the CFTC said. Inventories monitored by the London Metal Exchange tumbled 60 percent this year.

A measure of net-long positions across 11 agricultural products slid 0.8 percent to 248,335 contracts, the government data show. It was the smallest decline since holdings rose in the week ended June 24.

Bets on higher prices on coffee rose 3.4 percent to 43,090 contracts, the highest since March. Prices jumped 15 percent in the past two months. A prolong drought in Brazil, the world’s biggest producer, means output in the country is headed for the first three-year decline since 1965.

The net-short position betting on a decline for wheat was at 46,798 contracts, down from 50,668 a week earlier. Prices climbed 6.3 percent in Chicago last month. Russia and Ukraine will account for almost a fifth of global wheat exports this year, the U.S. government estimates.

“Wheat is reacting to the situation in Ukraine and people are concerned that supplies will be restricted from the region,” Jim Russell, who helps oversee $120 billion as a senior equity strategist at U.S. Bank Wealth Management in Cincinnati, said Aug. 28. “Coffee, on the other hand, has suffered because of the drought in Brazil, and going forward prices will be hinged on the weather cycle.”