Hedge Funds Bought Gold in Biggest Rally Since 2011

July 15, 2013 at 08:04


Hedge funds raised bets on higher gold prices for a second week as comments from Federal Reserve Chairman Ben S. Bernanke damped expectations for an imminent tapering of stimulus. Futures rose the most since 2011.

Speculators increased their net-long position by 4.1 percent to 35,691 futures and options, U.S. Commodity Futures Trading Commission data for July 9 show. Net holdings expanded even as speculators increased short bets to a record. Net-bullish wagers across 18 U.S.-traded commodities retreated 3.4 percent as investors became the most bearish ever on corn. They were more bullish on silver and palladium.

The U.S. needs “highly accommodative monetary policy for the foreseeable future,” Bernanke said July 10. Minutes from the Fed’s June policy meeting showed many officials wanted a stronger labor market before tapering bond purchases. Gold more than doubled from 2008 to a record $1,923.70 an ounce in September 2011 as the Fed cut interest rates to a record low and bought debt. Prices plunged into a bear market in April as some investors lost faith in the metal as a store of value.

“Bernanke’s comments put some positive feeling back into gold and into all commodities,” said Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio. “The Fed has been working hard to show that taking back a little bit of bond buying isn’t removing accommodation, and Bernanke was very firm on that. There was a bit of a sentiment shift.”

Gold futures gained 5.4 percent to $1,277.60 on Comex in New York last week, the most since October 2011. Traders are the most bullish in five weeks, with 19 analysts surveyed expecting prices to rise this week. Nine were bearish and three neutral.

The Standard & Poor’s GSCI Spot Index of 24 commodities percent added 1.7 percent last week, reaching a three-month high on July 11. The MSCI All-Country World index of equities gained 3.4 percent. The Bloomberg Dollar Index, which tracks the greenback against 10 major trading partners, fell 1.6 percent, the most in a month. A Bank of America Corp. Index shows Treasuries returned 0.6 percent.

Last week’s rally means gold has now reversed most of the losses made after Bernanke said June 19 that the central bank may start paring the pace of bond buying this year and end the purchases around the middle of next year if the economy improves. The metal is still down 24 percent for the year.

Bullion’s drop to a 34-month low in June is spurring demand from buyers of physical metal and jewelry. The cost of borrowing gold reached a 4 1/2-year high in London last week, and may be a “bullish signal,” Standard Chartered Plc said in a report July 10. The bank said gold may rally above $1,400 by the end of the year. A scarcity of liquidity in leasing can lead to high lease rates and negative forward rates, according to the London Bullion Market Association.

While Deutsche Bank AG said July 8 that the worst of the selloff may have passed, banks including Goldman Sachs Group Inc. and Credit Suisse Group are forecasting more declines.

Money managers’ holdings of short contracts reached 80,147 last week, the highest since the CFTC data begins in 2006. That can also magnify any rally as speculators close out bearish bets by buying contracts.

Assets in exchange-traded products backed by bullion have plunged 25 percent this year, wiping $59.7 billion from the value of the funds.

Gold entered a bear market in April as U.S. inflation failed to accelerate as much as some bullion buyers had anticipated and equity markets rallied. The prospect of higher interest rates and a stronger dollar mean the recent gains may be short-lived, said John Goldsmith, the deputy head of equities with Montrusco Bolton Investments in Toronto.

“Gold may have gotten oversold and was due for a bounce, but a bounce doesn’t a bull market make,” said Goldsmith, whose company manages C$5.50 billion ($5.28 billion) of assets. “There’s upward pressure on rates and on the dollar.”

Money managers withdrew $1.42 billion from gold funds in the week ended July 10, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $1.68 billion, according to EPFR.

Net-long positions in crude oil climbed 6.9 percent to 281,918 contracts, the highest since May 2011, the CFTC data show. Prices climbed for three weeks, the longest rally since May, and on July 11 reached a 15-month high. U.S. inventories fell 5.1 percent in two weeks, the biggest plunge since at least 1982, Energy Information Administration data show.