Hedge Funds Trim Gold Bets on Stimulus Speculation

Date: Monday, August 12, 2013
Author: Tony C. Dreibus, Bloomberg

Hedge funds cut bullish gold bets by the most since June amid speculation about whether the Federal Reserve will begin trimming its monthly bond purchases.

Money managers cut their net-long position by 27 percent to 48,103 futures and options by Aug. 6, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts rose 26 percent. Net-bullish bets across 18 U.S.-traded raw materials dropped 19 percent to the lowest since March and a measure of wagers across agricultural commodities turned negative for the first time on record.

Gold fell into a bear market in April as some investors lost faith in the metal as a store of value and inflation failed to accelerate amid unprecedented money printing by central banks. Charles Evans, Sandra Pianalto and Richard Fisher, regional Fed presidents in Chicago, Cleveland and Dallas, said last week that policy makers may be closer to tapering debt buying as the labor market recovers. U.S. jobless claims fell in the four weeks ended Aug. 3 to the lowest since November 2007.

“We expect the global inflationary environment to remain subdued, so we would not rush into buying gold,” said Jim Russell, a Cincinnati-based senior equity strategist who helps oversee about $110 billion of assets at U.S. Bank’s wealth management group. “Inflation has not played out as anticipated, and we don’t think it’s going to.”

Bullion Slumps

Gold futures tumbled 21 percent since the start of January, heading for the first annual loss in 13 years. Fourteen analysts surveyed by Bloomberg expect the metal to fall this week, with a further nine bullish and seven neutral. That’s the largest proportion of bears since June 21.

The Standard & Poor’s GSCI Spot Index of 24 commodities lost 1.8 percent this year. The MSCI All-Country World Index of equities rose 11 percent. The Bloomberg Dollar Index, a gauge against 10 major trading partners, gained 3.4 percent and the Bloomberg U.S. Treasury Bond Index dropped 2.5 percent.

The Fed’s Evans, among the most vocal proponents of record monetary stimulus, said Aug. 6 that the labor market showed “good improvement,” and he indicated a cut in debt purchases may begin in September. Holdings in global exchange-traded products backed by gold dropped 26 percent this year to the lowest since May 2010, erasing $58.7 billion of value.

Largest Stake

Gold probably won’t see any “lasting gains” until investors stop selling ETP holdings, Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt, said Aug. 8. Holdings fell by 8.5 metric tons on Aug. 7, the most in a month, data compiled by Bloomberg show. A ton is valued at $42.6 million.

Slumping prices hurt producers including Melbourne-based Newcrest Mining Ltd., Australia’s largest bullion miner, which said Aug. 8 that it will write down the value of its assets by about A$6.2 billion ($5.7 billion). Billionaire John Paulson owns the largest stake in the SPDR Gold Trust, the biggest ETP. His PFR Gold Fund tumbled 23 percent in June, extending this year’s loss to 65 percent.

Futures rose 0.1 percent last week. The Bloomberg Dollar Index fell for six straight sessions through Aug. 9, the longest slump since April 2011. Physical demand is rebounding after gold fell below $1,300, Standard Bank Group said in a report Aug. 7. Bullion on the Shanghai Gold Exchange was about $26 more expensive than in London on Aug. 6, compared with a premium of less than $15 the previous week, the bank said.

Central Banks

Bank of Japan Governor Haruhiko Kuroda’s board said last week it will stick with an April pledge to expand the monetary base by 60 trillion yen ($622 billion) to 70 trillion yen per year. Bullion rose 70 percent from December 2008 to June 2011 as the Fed bought more than $2 trillion of debt.

“There’s a case to be made for gold, but it’s a volatile asset class,” said Bernie Williams, a San Antonio-based money manager at USAA Investments, which oversees over $54 billion. “Gold tends to hold up over time, it has a place in a portfolio for preservation of capital and to offset currency debasement.”

Money managers withdrew $922 million from precious-metal funds in the week ended Aug. 7, according to Adam Longenecker, the director of quantitative research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Commodity funds had outflows of $924 million, he said.

Net-long positions in crude oil dropped 2.5 percent to 310,827 contracts, a second straight decline, the CFTC data show. The International Energy Agency trimmed its 2014 global oil demand-growth estimate by 100,000 barrels from last month amid slowing expansion in China.

Copper Wagers

Investors trimmed their short holding in copper to 14,660 contracts, from 26,924, the CFTC said. Prices jumped 4.2 percent last week. The increase is an “opportunity to short sell,” Barclays Plc said in an Aug. 9 report.

Funds are holding a net-short bet of 9,713 contracts across 11 agricultural products, compared with a net-long holding of 57,552 a week earlier, the CFTC figures show. That’s the first bearish outlook since the data begins in 2006. The S&P GSCI Agriculture Index of eight commodities dropped 19 percent since the start of January.

Investors are holding a record net-short position in corn of 113,072 contracts. Prices in Chicago dropped 2.3 percent last week, reaching a 35-month low on Aug. 9. Increased seeding and improved soil moisture may boost production in the U.S., the world’s biggest grower and exporter, to a record in the year that starts Sept. 1, according to the Department of Agriculture.

Food Declines

Bullish soybean holdings are at the lowest since February 2012, and investors are betting on declines for wheat, coffee, sugar and soybean oil. Global food costs have dropped 13 percent since reaching a record in February 2011, according to data from the United Nations’ Food & Agriculture Organization in Rome.

“When it comes to the food commodities, there’s been a drastic increase in supply, especially for corn,” said Jeff Sica, who helps oversee more than $1 billion of assets as the president of Sica Wealth Management in Morristown, New Jersey. “The only way we’re going to see an increase in commodities is if we see an increase in quantitative easing. Unless that happens, commodities are going to have a hard time improving.”