Hedge Fund Gold Wagers Defy Worst Slump in 33 Years

Date: Monday, April 22, 2013
Author: Joe Richter, Bloomberg

Hedge funds increased bets on gold rallying after prices plunged the most in 33 years, underscoring billionaire John Paulson’s view that bullion will rebound.

Fund managers and other speculators increased net-long positions in gold by 9.8 percent to 61,579 futures and options in the week ended April 16, U.S. Commodity Futures Trading Commission data show. Investors turned bullish on silver for the first time in three weeks. Wagers on higher prices across 18 U.S.-traded raw materials climbed 5.1 percent to 453,467 contracts, the first gain in three weeks.

A two-day, 13 percent drop in gold through April 16 drove prices to a two-year low, erasing $560 billion from the value of central-bank reserves since the metal peaked in 2011. Official- sector purchases and demand in Asia will support bullion, Paulson & Co. said in a letter to clients last week, joining BlackRock Inc. (BLK), the world’s biggest money manager, in predicting a rebound. The U.S. Mint’s sales of American Eagle gold coins surged eightfold this month from a year earlier.

“Given the price action, this rise in holdings was pretty surprising,” said Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio. “People may have been looking to get back into the market and are taking advantage of the price to do so. There are people who still have a long-term belief in it. Physical buyers have also stepped up.”

Prices Slump

Gold futures slumped 7 percent to $1,395.60 an ounce on the Comex in New York last week, the biggest drop since September 2011. The Standard & Poor’s GSCI Spot Index of 24 raw materials fell 2.5 percent. The MSCI All-Country World Index of equities slid 2.2 percent and the dollar rose 0.5 percent against a basket of six trading partners. Treasuries rose 0.1 percent, a Bank of America Corp. index shows. Bullion for June delivery gained 2.7 percent to $1,433.10 an ounce on the Comex in New York by 6:44 a.m. local time.

Since reaching $1,321.50 on April 16, the lowest since January 2011, bullion rebounded 8.4 percent. The China Gold Association said retail sales surged April 15 and 16. Imports by India may jump by 36 percent in the three months through June compared with a year earlier, the Bombay Bullion Association Ltd. said April 18. The U.S. Mint sold 167,500 ounces so far in April, heading for the biggest monthly total since May 2010.

Paulson View

Central-bank stimulus will “eventually lead to inflation,” Paulson & Co. said in a letter to clients obtained by Bloomberg News, reiterating a bullish outlook for bullion. The hedge fund is the biggest shareholder in the SPDR Gold Trust, the largest exchange-traded fund backed by the metal. The price plunge was a “panic event,” Catherine Raw, a fund manager in London at BlackRock, which oversees about $3.8 trillion, said in an interview April 16 on Bloomberg Television.

While the net-long position in gold climbed last week, most of the gain was attributable to a retreat in short holdings rather than an increase in long wagers. The divergence shows that the gain in the net position may reflect short traders taking profit, rather than investors becoming more bullish, according to Stanley Crouch, who helps oversee $2 billion as chief investment officer at New York-based Aegis Capital Corp.

“Sometimes you have to peel the onion when you look at this data,” Crouch said. “It looks like that after such a big drop, people who were short were ready to take their gains. That might also be why the price stabilized, and it could mean that it’s even more vulnerable now.”

Short Holdings

Short positions narrowed 8.2 percent to 59,742 contracts, and longs gained 0.1 percent to 121,321. The short holdings reached a record 70,126 in the week ended March 12, and are still more than triple the average since 2006, when the CFTC data begins.

Assets in ETPs backed by the metal tumbled 11 percent this year as investors shunned the metal in favor of equities and inflation remained subdued. Societe Generale SA said April 2 that the metal was in bubble territory and would fall to $1,375 this year, when it was $200 higher. Goldman Sachs Group Inc. advised traders on April 10 to sell the metal. Prices may need to drop to as low as $1,050 after gold entered a “new reality,” Deutsche Bank AG said April 18.

“This drop happened so fast and so violently,” said Mary Ann Bartels, the chief investment officer of portfolio strategies at Merrill Lynch Wealth Management, which oversees more than $2.2 trillion in assets. “People are asking ‘Why do I have this in my portfolio?’ But when we run the analysis, nothing has changed, gold adds diversification. Unfortunately, sometimes a diversifying asset doesn’t go up.”

Central Bank

Central banks are divided on whether the metal is cheap enough to increase investment. Sri Lanka’s central bank governor said April 16 falling prices are an opportunity for nations to raise reserves. Reserve Bank of Australia’s assistant governor, Guy Debelle, said at a lunch in Canberra the same day that gold has no “intrinsic value.”

Money managers took $3.7 billion from commodity funds in the week ended April 17, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Outflows from gold and precious-metals funds totaled $3 billion, he said.

Investors are holding a net-long position in silver of 7,694 contracts, the CFTC data show. That compares with a short position of 560 a week earlier and is the most bullish outlook since Feb. 26. The funds trimmed their net-short holding in copper to 27,412, from 32,850 a week earlier.

Crude Wagers

Wagers on a rally in crude oil slid 6.8 percent to 183,032 contracts, the second consecutive drop, the CFTC data show. Bullish platinum holdings slumped 9.3 percent to 20,005, the lowest since August. Those for palladium retreated 16 percent to the lowest since mid-January.

A measure of speculative positions across 11 agricultural products surged 87 percent to 105,246 contracts, the biggest jump since September 2006. Holdings a week earlier reached the lowest in more than six years. Soybean wagers jumped 19 percent to 74,569, the largest gain since Feb. 5, and hog holdings are at the highest in seven weeks. Bullish corn bets gained for the first time in three weeks.

Cold, wet weather delayed corn and soybean planting across the U.S. Midwest. Sowing of the grain on April 14 was 2 percent completed, the slowest since 1993, government data show. U.S. soybean sales since Sept. 1 are 13 percent higher than a year earlier. China is the largest buyer of the oilseed, used to make cooking oil and animal feed.

“Agriculture is going to be very weather-dependent, and the change in diet in China will support demand,” said Jeffrey Sica, who helps oversee more than $1 billion as the president of SICA Wealth Management in Morristown, New Jersey. “For gold, until we see a meaningful decrease in the short positions, it’s going to be very volatile. It’s no longer a safe haven, but a momentum investment.”