Gold Wagers Slump

June 24, 2013 at 07:26

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Hedge funds cut bets on a gold rally by the most since February after the Federal Reserve laid out plans for reducing stimulus and this year’s drop in the value of exchange-traded products extended to $55 billion.

Speculators reduced their net-long position by 29 percent to 38,951 futures and options by June 18, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts jumped 14 percent, the most in eight weeks. Net-bullish wagers across 18 commodities slid 2.2 percent as investors became more bearish on copper and wheat.

Fed Chairman Ben S. Bernanke said last week that the central bank may slow its bond-buying program if the U.S. economy continues to improve, driving bullion to its lowest price since 2010. Gold, which tumbled into a bear market in April, is poised for more declines, according to Credit Suisse Group AG and Societe Generale SA. Investors cut their holdings through ETPs by 20 percent this year, on pace for the first annual drop since the products were introduced in 2003.

“There’s certainly a rush to the exits in gold,” said Jim Russell, a senior equity strategist in Cincinnati at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “The nudge up in the Fed’s expectations economically suggests they may unwind their program a little quicker than investors thought.”

Gold futures dropped 6.9 percent last week, the most since April, and were at $1,289.60 an ounce at 10:54 a.m. in Singapore after losing 0.2 percent. Prices reached $1,268.70 on June 21, the lowest since Sept. 16, 2010. Traders are the most bearish in 3 1/2 years, with 15 analysts surveyed by Bloomberg expecting prices to fall this week. Six were bullish and five neutral, the largest proportion of bears since January 2010.

The Standard & Poor’s GSCI Spot Index of 24 commodities retreated 3.4 percent for the week and the MSCI All-Country World Index of equities fell 3.2 percent. The dollar gained 2 percent against a basket of six currencies. A Bank of America Corp. Index shows Treasuries lost 1.7 percent.

Policy makers may begin tapering asset buying this year and end the program in 2014 should the economy and labor market continue to improve, Bernanke said at a press conference June 19. The Fed will cut its monthly bond purchases of $85 billion by $20 billion at its September meeting, according to 44 percent of economists in a Bloomberg survey following Bernanke’s remarks. Gold as much as doubled from the end of 2008 to a record $1,923.70 in September 2011 as the Fed cut interest rates to a record low and bought debt.

Gold holdings in global ETPs dropped 533.3 metric tons this year. Investors may sell a further 285 tons in 2013, Societe Generale said in a June 17 report. Assets in the SPDR Gold Trust, the biggest bullion ETP, slumped below 1,000 tons for the first time since February 2009 last week. Prices will drop to an average of $1,200 in the fourth quarter, Societe Generale forecasts. Credit Suisse sees the metal at $1,100 in 12 months, Ric Deverell, head of commodities research at the bank, said on June 20.

Inflation will remain a threat even with the end of the Fed’s bond buying because of the unprecedented money printing by central banks around the world, boosting the appeal of gold, said John Kinsey, who helps manage about C$1 billion ($964.7 million) of assets at Caldwell Securities Ltd. in Toronto.

Japan is making monthly bond purchases of more than 7 trillion yen ($71.67 billion). European Central Bank President Mario Draghi cut the euro region’s main interest rate in May to a record 0.5 percent and said policy makers were considering a negative deposit rate. Gold priced in yen reached the highest since March 1980 in April.

“Most of the reasons for gold as a reserve currency, as a hedge against inflation, are still there,” Kinsey said. “Everybody is stimulating and everybody has debt problems, and if the economies gain some traction, I think you’re going to see inflation come back.”

Money managers withdrew $506 million from gold funds in the week ended June 19, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $374 million, according to EPFR.