Hedge funds raise odds on gold rally in weeks

Date: Tuesday, May 7, 2013
Author: Debarati Roy, Bloomberg

Hedge funds have raised bets on a gold rally within three weeks as central banks signal no end to economic stimulus, driving prices higher just as analysts and traders have turned the most bearish in three years.

The funds and other large speculators raised their net-long position by 19% to 54,762 futures and options from April 30, data from the US Commodity Futures Trading Commission shows.

Holdings of short contracts retreated 9.2%, the most since March 19. Net-bullish wagers across 18 US-traded raw materials jumped 28% to 550,182, the biggest increase in seven weeks, led by gains in soya beans, cocoa and crude oil.

Gold rallied 4.9% in the past two weeks after entering a bear market on April 12. The US Federal Reserve raised the prospect of increasing its monthly bond-buying on May 1 and the European Central Bank cut borrowing costs to a record low the next day. Billionaire investor Warren Buffett said the metal had no appeal even after the slump, and a weekly Bloomberg survey of analysts and traders was the most bearish since February 2010.

"It is reasonable to say that the currency debasement and easing measures will support gold," said Alan Gayle, senior strategist at RidgeWorth Capital Management.

"The bulls still have to prove a lot. There is a lot of sc epticism surrounding gold. We have to watch to see if prices have found a near-term bottom," he said.

Futures climbed 0.7% to $1,464.20 an ounce on the Comex last week. Prices rebounded 11% since reaching a two-year low on April 16. The Standard & Poor’s GSCI spot index of 24 commodities rose 1.4% last week, and the MSCI all-country world of equities index gained 1.7%. The dollar slid 0.5% against a basket of six major peers, and a Bank of America index shows treasuries fell 0.4%. Gold was 0.6% higher at $1,472.90 yesterday.

The Fed said at the end of a two-day policy meeting in Washington last week it is "prepared to increase or reduce the pace of its purchases" of $85bn in debt a month.

Gold surged 66% since the end of 2008 as the Fed was joined by central banks in Europe and Japan in printing unprecedented amounts of money, almost doubling sovereign debt to more than $23-trillion, a Bank of America index shows.

The flood of cash spurred investors including billionaire John Paulson to hold the metal as a hedge against inflation.

Gold remains the best store of value in an uncertain economy, Elliott Management Corporation told clients even as the $21.8bn hedge fund firm lost money on its position this year.

Threadneedle Investments, a London-based fund with $131bn in assets, remains bullish on gold as central banks stick with printing money to weaken their currencies and revive growth.

Some investors’ faith in the metal has waned as inflation fails to accelerate even as central banks add liquidity. Global holdings of the metal through exchange-traded funds slumped to the lowest since October 2011 after touching a record high in December. Mr Buffett, the chairman and CEO of Berkshire Hathaway, said last year investors should avoid gold. And on Thursday said: "If it went to $800, I wouldn’t be a buyer."

Money managers withdrew $1.67bn from commodity funds in the week ended May 1, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global. Outflows from gold and precious-metals funds totalled $1.79bn, he said.

While the hedge funds’ short holdings declined in the week to April 30, they are still more than triple the average since 2006, when the data begins.

Goldman Sachs said on April 23 gold may slide to $1,390 in 12 months, and Deutsche Bank predicted a drop to as low as $1,050.

"There are no inflationary worries, and gold is responding to the global deflationary pressure," said Jim Russell, a senior equity strategist in Cincinnati at US Bank Wealth Management.

"There are no catalysts for gold to rise at the moment."

Last month’s declines drew retail buyers. Sales of gold coins by the US Mint last month rose to the highest since December 2009, while the UK Mint said it was increasing output after demand more than tripled.

Australia’s Perth mint has stayed open through the weekend to meet orders that reached a five-year high. Physical flows into India, the biggest consumer, climbed to five times the average of the past 12 months, UBS said on Friday.