Hedge Funds Long Positions Reach Six Month High

August 26, 2013 at 09:42

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Hedge funds and other speculators raised bets on higher gold prices to the most in six months as signs of slowing U.S. growth drove bullion above $1,400 an ounce for the first time since June.

The net-long position increased 29 percent to 73,216 futures and options by Aug. 20, U.S. Commodity Futures Trading Commission data show. Short contracts fell for a second week and to the lowest since Feb. 12. Net-bullish holdings across 18 U.S.-traded commodities jumped 34 percent, the most since July 2010, as wagers on copper and soybeans more than doubled.

Gold, down 27 percent from its record high, has rallied 18 percent from a 34-month low in June. Asian demand for jewelry surged as prices tumbled into a bear market. Sales of new homes in the U.S. declined more than 13 percent in July and consumer confidence fell in the week ended Aug. 18, increasing speculation the Federal Reserve will look for more signs of growth before easing stimulus that debases the dollar.

“Physical demand is very strong, and that is lending support to prices, and we think it’s time to increase our holdings,” said Michael Mullaney, the Boston-based chief investment officer for Fiduciary Trust Co., which manages about $10 billion of assets. “The economy is improving, but there are some misses, which intensify the debate on tapering and increases demand for gold as a safe-haven investment.”

Policy makers are weighing when to begin curbing $85 billion of monthly bond purchases that they pledged to maintain until the job market improves. Gold rose 70 percent from December 2008 to June 2011 as the U.S. central bank pumped more than $2 trillion into the financial system by purchasing debt, increasing investors’ concern about currency debasement and accelerating inflation.

Fed Bank of St. Louis President James Bullard, who has supported record Fed stimulus, said on Aug. 23 the central bank should pledge not to raise record-low interest rates as long as inflation is below 1.5 percent. The metal may rally to $1,482 as soon as October if Fed tapering is delayed to December, Barclays Plc said Aug. 23.

Gold’s rally probably will fade by the end of the year as the dollar strengthens, bond yields rise and investor faith in the metal as a store of value wanes, Morgan Stanley said in a report dated Aug. 22. Prices fell 17 percent this year, heading for the first annual decline since 2000.

“It’s hard to be bullish on gold when there is no inflation and the global economy is healing,” said John Stephenson, who helps oversee about C$2.7 billion ($2.6 billion) at First Asset Investment Management Inc. in Toronto.

The minutes of the Federal Open Market Committee policy meeting in July, released Aug. 21, said central bankers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves. The officials are scheduled to meet next in September.

Twelve analysts surveyed by Bloomberg expect gold to fall this week, eight were bullish and two neutral. That’s the highest proportion of bears since June 21, a week before prices plunged to $1,179.40, the lowest since August 2010.

Investors sold 684.64 metric tons of gold held in exchange-traded products this year, erasing $54.3 billion from the combined value of the funds. The decline may reach 700 tons in 2013, Barclays estimates.

As gold dropped into a bear market during the second quarter, billionaires George Soros and Daniel Loeb sold their entire investments in the SPDR Gold Trust, the largest ETP, filings to the U.S. Securities and Exchange Commission showed Aug. 14. Paulson & Co., the largest investor in the fund, cut its stake by 53 percent, the data show.

The slump in prices forced mining companies to announce at least $26 billion of writedowns in the past two months, and Toronto-based Barrick Gold Corp., the biggest producer, said Aug. 1 it may sell, close or curb output at 12 mines from Peru to Papua New Guinea.

The drop in prices spurred a surge in demand for gold in Asia, helping bullion to rally for a second month. Sales of jewelry, coins and bars will reach as much as 1,000 tons in both India and China in 2013, valued at a combined $87.6 billion, the World Gold Council estimates. That would beat China’s 2011 record of 778.6 tons and be near India’s all-time high of 1,006.5 tons in 2010.

Bank of America Corp. predicts a fourth-quarter average of $1,495 and JPMorgan Chase & Co. anticipates rising averages in every quarter through the end of next year.

Money managers added $421 million to precious-metal funds in the week ended Aug. 21, the most in 33 weeks, according to Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Commodity funds had inflows of $583 million.