Hedge Funds Reduced Bullish Gold Bets Before Rally

September 23, 2013 at 08:30

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Hedge funds cut bullish gold bets, reducing long contracts to the lowest since June, before prices rose the most in a month as the Federal Reserve unexpectedly decided not to taper stimulus.

The net-long position held by speculators fell 17 percent to 70,113 futures and options in the week ended Sept. 17, U.S. Commodity Futures Trading Commission data show. Long wagers fell 6.8 percent to 109,217, the fewest since June 25, and short bets rose 21 percent. Net-bullish holdings across 18 U.S.-traded commodities dropped for a third week as investors turned bearish on copper and added to wagers on declining corn prices.

Bullion is heading for the first annual decline since 2000 after some investors lost faith in the metal as a store of value amid evidence of faster economic growth. The Fed said Sept. 18 it needs to see more signs of sustained labor-market gains before reducing its $85 billion of monthly bond purchases. The move surprised analysts who had forecast a $5 billion cut and bolstered demand for gold as a hedge against inflation. Futures surged 4.7 percent the next day, the most since March 2009.

“A lot of people got caught offside with the Fed’s lack of action,” said Michael Mullaney, the Boston-based chief investment officer for Fiduciary Trust Co., which manages $10.7 billion of assets. “Precious metals had been falling like a stone. The Fed factor has been taken off the table for now, which will be bullish for gold.”

Inflation expectations as measured by the break-even rate for five-year Treasury Inflation Protected Securities jumped 5.9 percent, the most since July 5. Sixteen analysts surveyed by Bloomberg expect gold to rise this week, with five bearish and five neutral. It was the most-bullish survey in three weeks.

Gold more than doubled from 2008 to an all-time high of $1,923.70 in September 2011 as the Fed cut interest rates to a record and bought debt, pumping more than $2 trillion into the financial system. Fed Chairman Ben S. Bernanke said last week the decision on cutting asset purchases depends on economic data, and there is no set timetable for tapering.

Bullion gained 13 percent since reaching a 34-month low on June 28, less than two weeks after Bernanke said policy makers may slow bond buying this year and end the program in 2014. Gold rebounded partly as the Fed chief said tapering will depend on economic performance, including during testimony to Congress July 17. Prices climbed 7.3 percent that month and 6.3 percent in August, the biggest two-month increase since August 2011.

The Fed’s decision last week and a debate among U.S. lawmakers about whether to raise the nation’s $16.7 trillion debt ceiling “leaves risks to gold prices as skewed to the upside in the near term,” Goldman Sachs Group Inc. said in a report Sept. 18. The bank restated that bullion will resume a drop into 2014. Citigroup Inc. expects the price to average $1,250 next year from $1,405 in 2013, while Morgan Stanley said today it is maintaining a “fairly pessimistic outlook” on the metal because of prospects that easing may end.

The U.S. central bank may trim bond buying in October after last week’s “borderline decision” not to taper, Fed Bank of St. Louis President James Bullard said Sept. 20. Bullard, a voter on policy this year who has backed record stimulus, spoke in a Bloomberg Television interview. Gold tumbled 2.7 percent that day, the most in 11 weeks.

Investor holdings of gold through exchange-traded products fell 26 percent this year, erasing $59.3 billion from the value of the funds, data compiled by Bloomberg show. John Paulson, the billionaire hedge fund manager and biggest investor in the SPDR Gold Trust, the largest bullion ETP, cut his stake by 53 percent last quarter, a government filing showed. This year’s price slump forced Newcrest Mining Ltd. and other producers to announce at least $26 billion in writedowns.

The Fed’s latest move “doesn’t change the longer-term picture,” said Jack Ablin, the Chicago-based chief investment officer of BMO Private Bank, which oversees about $66 billion of assets. “Anyone who believes that the Fed can’t keep doing this forever should also believe that gold can’t keep running at this pace forever. Unless fundamentals catch up, we’re due for a pullback in a lot of assets, and in gold in particular.”

Money managers added $850 million to gold funds in the week ended Sept. 18, the most since October, according to Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Inflows for commodity funds were $1.2 billion, the most since November, EPFR said.

Gold rebounded last week as the Dollar tumbled to a seven-month low on Sept. 19, boosting the appeal of the metal as a protection against currency debasement. Japan’s gold imports more than tripled to 14.2 metric tons in the seven months through July 31 from a year earlier as Prime Minister Shinzo Abe worked to battle deflation.

Clive Capital LLP, the $1 billion commodity hedge-fund firm founded by Chris Levett, plans to close after posting more than two years of investment losses, according to a letter to clients obtained by Bloomberg News Sept. 20. Assets managed by commodity hedge funds have fallen 5 percent since the end of 2012 to $75 billion, according to Evestment, an Atlanta-based data provider. The S&P GSCI dropped 1.2 percent this year.