Bullish Gold Bets by Funds Slump on Worst Price Slide Since 1997

Date: Monday, January 24, 2011
Author: Bloomberg.net

Hedge funds are unloading bullish bets on gold as a slide in prices sends the metal to its worst start to a year since 1997. Holdings in silver dropped to the lowest since February.

Managed-money funds held net-long positions, or wagers on rising prices, totaling 134,473 contracts on the Comex in New York as of Jan. 18, U.S. Commodity Futures Trading Commission data showed on Jan. 21. The gold holdings have plunged for three straight weeks, dropping 21 percent since the end of December, while net-long positions in silver are down 24 percent.

Gold has fallen 5.7 percent this month, which would be the worst start to a year since a 6.3 percent drop in January 1997. The metal rose every year for the past decade, reaching a record of $1,432.50 an ounce on Dec. 7 as central banks kept interest rates low and Europe’s debt crisis spurred demand for the metal as a haven. Silver climbed 84 percent last year and reached a 30-year high of $31.275 an ounce in New York on Jan. 3.

“From a technical standpoint, we’ve a strong rally in silver and gold, and when you have that type of performance, it prompts profit-taking,” said Brian Hicks, who helps manage $1 billion in the Global Resources Fund at U.S. Global Investors Inc. in San Antonio. “Money is going elsewhere to the more traditional areas of the equity market.”

Gold for February delivery settled on Jan. 21 at $1,341, the lowest closing price since Nov. 17. The Standard & Poor’s 500 Index of U.S. equities has gained 8.7 percent since the end of November and touched a 28-month high on Jan. 18.

Bets on a rally in silver totaled 20,318 contracts, down 11 percent from the previous week. Silver settled at $27.427 an ounce on the Comex on Jan. 21, capping three straight weeks of losses that was the longest slump since March.

Appeal of Metals

The slide in gold and silver may not last, Hicks said. Prices may rebound on concern that Europe’s debt crisis will spread, and that record-low U.S. interest rates and the biggest budget deficit ever will fuel inflation, Hicks said.

“Prices are close to a short-term oversold area,” Hicks said of the decline in gold and silver. “We’re starting to become interested at these levels. The perfect storm is continuing to build for precious metals.”

Managed-money positions include hedge funds, commodity- trading advisers and commodity pools. Analysts and investors follow changes in speculator positions because such transactions may reflect an expectation of a shift in prices.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net