Hedge Funds Raise Gold Bets as Goldman Sees Decline

Date: Monday, July 29, 2013
Author: Joe Richter, Bloomberg

Hedge funds raised wagers on a gold rally as speculation that the Federal Reserve will hold off on curbing stimulus drove prices toward the biggest gain in 18 months. Goldman Sachs Group Inc. expects the rally to reverse.

Money managers increased their net-long position by 26 percent to 70,067 futures and options as of July 23, U.S. Commodity Futures Trading Commission data show. The fourth consecutive weekly gain is the longest streak since October. Bullish wagers across 18 U.S.-traded commodities gained 7.4 percent to 615,140. Investors more than doubled bets on lower corn prices to a record net-short holding.

Gold futures rose 9 percent in July, heading for the largest monthly gain since January 2012, as Fed Chairman Ben S. Bernanke damped speculation that a cut in bond purchases is imminent. The metal remains in a bear market reached in April and is heading for the first annual loss in 13 years after some investors lost faith in bullion as a store of value. Goldman said July 22 that prices are likely to decline.

“Buyers are expecting that the tapering program that’s been much ballyhooed won’t begin quite as soon as a lot of people anticipated,” said Mark Luschini, the chief investment strategist of Janney Montgomery Scott, which oversees about $58 billion of assets. “It’s been a good month in a bad year.”

Gold Gains

Gold climbed 2.2 percent to $1,321.90 an ounce on the Comex in New York last week, the third consecutive gain, and advanced to $1,334.20 today. The Standard & Poor’s GSCI Spot Index of 24 commodities dropped 2.1 percent, while the MSCI All-Country World index of equities rose 0.3 percent. A Bank of America Corp. Index shows Treasuries lost 0.2 percent.

More Americans than forecast filed for unemployment benefits last week and sales of previously owned U.S. homes unexpectedly fell in June, underscoring speculation that growth is not yet strong enough for the Fed to pull back from its asset purchases. Ending the $85 billion in monthly bond buying will depend on the performance of the economy, Bernanke said during testimony to Congress July 17.

The metal more than doubled from the end of 2008 to an all-time high of $1,923.70 in September 2011 as the Fed cut interest rates to a record low and bought debt. Russia and Kazakhstan expanded their bullion reserves for a ninth straight month in June, International Monetary Fund data showed July 25. Central banks will buy about 400 metric tons in 2013, after adding almost 535 tons last year, the most since 1964, according to the London-based World Gold Council.

Goldman View

Prices will decline as the U.S. economy improves, prompting a “less accommodative monetary policy stance,” Goldman analysts led by Jeffrey Currie, the bank’s head of commodities research in New York, wrote in a July 22 report. The metal will drop to $1,050 by the end of next year, the bank forecasts. Confidence among American consumers reached a six-year high in July, a private report showed July 26.

Traders are the least bullish on bullion in four weeks as jewelry purchases slowed during this month’s rally. Thirteen analysts surveyed by Bloomberg expect prices to rise this week, 10 were bearish and seven neutral, the lowest proportion of bulls since June 28.

“Gold has made a terrific recovery, but there’s going to be resistance from people who got caught before, so there’s not too much to the upside for now,” said Donald Selkin, who helps manage about $3 billion of assets as the New York-based chief market strategist at National Securities Corp. “People are going to wait and see what the Fed is going to do.”

Miner Writedowns

Prices dropped in eight of the past nine months as the dollar rallied and equity markets gained, curbing demand for the metal as an alternative asset. The declines forced mining companies, including Barrick Gold Corp. and Newmont Mining Corp. (NEM), to announce at least $15 billion of writedowns in the past two months.

Billionaire John Paulson’s PFR Gold Fund tumbled 23 percent in June, extending this year’s loss to 65 percent. He owns the largest stake in the SPDR Gold Trust (GLD), the biggest exchange-traded product backed by bullion. Holdings in global ETPs retreated 25 percent this year to the lowest since May 2010, erasing $57.3 billion from the value of the assets.

Paulson & Co. has reiterated its commitment to investing in bullion and stocks of gold producers to hedge against currency debasement as central banks pump money into economies. Accelerating inflation is a risk and gold is an important part of any portfolio, Paulson said July 17 at the CNBC Institutional Investor Delivering Alpha Conference in New York.

$280 Million

Money managers withdrew $280 million from gold funds in the week ended July 24, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Outflows from commodity funds were $344 million, according to EPFR.

Goldman pared its 12-month commodity-return forecast to 0.1 percent on July 22. That compares with an expected gain of 2.3 percent over 12 months made in a June 12 report. Agriculture and precious metals will lead the declines, the bank said.

Net-long positions in crude oil climbed 9.8 percent to 334,094 contracts, the highest since the CFTC data begins in June 2006. Prices fell 3.1 percent last week, the first drop in more than a month, as China announced plans to cut excess manufacturing capacity.

Copper Bets

Investors trimmed the net position in copper to a short holding of 12,974 contracts, from 15,673 a week earlier. Prices are down 13 percent this year on signs of slowing economic growth in China, the world’s top metals consumer. Supplies will exceed demand by 107,000 tons this year, and the surplus will expand to 387,000 tons in 2014, Barclays Plc said July 18.

A measure of net-long positions across 11 agricultural products tumbled 34 percent to 106,968 futures and options, the lowest since April 23. The S&P’s Agriculture Index of eight commodities fell to the lowest since August 2010.

Corn holdings expanded to a net-short position of 83,361 contracts from 37,262 a week earlier. That’s the most bearish since the data begins in 2006. The soybean net-long wagers dropped 12 percent to 109,642, the lowest since May 21. The U.S. government forecasts American farmers will harvest record crops.

“Supplies are high in a lot of commodities, and there’s an economic slowdown that’s manifesting itself and accelerating worldwide,” said Jeff Sica, who helps oversee more than $1 billion of assets as the president of Sica Wealth Management in Morristown, New Jersey. “These are major issues that are going to affect commodities prices.”