Investors are exiting the gold market on speculation that signs of sustained U.S. economic growth will push the Federal Reserve closer to raising interest rates, cutting demand for bullion as an inflation hedge.
Hedge funds reduced their bullish gold bets for the third time in four weeks, and open interest in New York futures and options are near the lowest in five years, U.S. government data show. Prices tumbled 2 percent last week, the most since late May, erasing $1.2 billion from the value of exchange-traded products backed by bullion.
Gold has dropped 5.1 percent from 16-week high in mid-July on gains for U.S. housing and manufacturing. Federal Reserve Chair Janet Yellen said Aug. 22 that if economic progress “continues to be more rapid than anticipated,” an interest- rate increase could come sooner than currently expected. Bullion tumbled 28 percent last year as the central bank started reducing bond buying.
“Gold bugs are on the run, and we believe that prices will continue a long-term downward trend,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said. “In quiet times, when the pendulum seems to be improving, or the global economy improves and news flow is bright, gold loses its bid immediately.”
Futures dropped 8.2 percent in the past 12 months to $1,278.50 an ounce in New York. The Bloomberg Commodity Index of 22 raw materials fell 4.7 percent, while the MSCI All-Country World Index of equities climbed 15 percent.
The net-long position in gold declined 13 percent to 116,916 futures and options contracts, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop jumped 17 percent to 24,442, while long wagers retreated 8.5 percent to 141,358, the biggest drop since March.
The aggregate number of gold futures and options contracts yet to be closed, liquidated or delivered dropped 1.2 percent to 574,443 contracts on Aug. 19, CFTC data show. Open interest reached 563,036 on Aug. 5, the lowest since September 2009.
Fewer Americans than forecast applied for unemployment benefits last week, while housing starts surged in July to the highest in eight months. Minutes of the July Fed policy meeting released Aug. 20 showed some officials “were increasingly uncomfortable” with the central bank’s forward guidance that calls for keeping its benchmark interest rate low for a “considerable time.”
Gold jumped 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs at an all-time low. The central bank reduced its monthly bond-buying program to $25 billion on July 30, making a sixth consecutive cut of $10 billion.
Bullion has rallied 6.5 percent in 2014, beating gains for broad measures of commodities, global equities and Treasuries. Investors returned to the metal as spreading violence in Eastern Europe and the Middle East boosted demand for a haven.
Sunni lawmakers last week quit talks on forming a new Iraqi government after gunmen killed scores of worshipers at a Sunni mosque in a province neighboring Baghdad, sending sectarian tensions soaring.
Holdings in global gold-backed ETPs climbed for 10 straight sessions through Aug. 22, the longest stretch since December 2012. The assets rose by 15.01 metric tons last month, the most since November 2012, even as New York futures declined 3 percent.
“The safe-haven aspects of gold demand particularly relate to the Middle East,” Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments Ltd., which oversees $333.6 billion, said. “Political risk remains high, but it’s stabilized at a high level.”
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