Hedge funds made their biggest cut of the year in bullish gold wagers as prices tumbled to the lowest since 2010.
The net-long position in New York futures and options contracted 36 percent as long holdings fell the most in almost two years, U.S. government data show. Investors sold 14.4 metric tons of bullion held through exchange-traded products last week, trimming assets to the least since August 2009.
Gold dropped 15 percent from this year’s high in March as signs of a stronger U.S. economy drove the dollar to a five-year high and fueled speculation that the Federal Reserve is moving closer to raising interest rates. Lower oil costs are helping to keep inflation in check and U.S. equities touched records.
“There’s just not one typical investment idea that’s supportive to gold right now,” George Zivic, a New York-based portfolio manager at OppenheimerFunds Inc., which oversees $245 billion, said by phone Nov. 5. “With the potential of rates increasing, dollar appreciation, it becomes synthetically expensive to hold gold as some sort of a portfolio hedge. And then you have the reality of no real concerns of inflation.”
Futures fell 0.2 percent last week to $1,169.80 an ounce on the Comex in New York, after reaching $1,130.40 on Nov. 7, the lowest since 2010. The Bloomberg Commodity Index of 22 raw materials slipped 0.1 percent last week as the MSCI All-Country World Index of equities fell 0.4 percent. The Bloomberg Dollar Spot Index rose 1 percent.
The net-long position in gold fell by 25,226 contracts to 45,072 futures and options in the week ended Nov. 4, according to U.S. Commodity Futures Trading Commission data published three days later. Long holdings tumbled 12 percent, the biggest drop since December 2012.
Assets in the SPDR Gold Trust, the biggest bullion ETF, dropped 1.9 percent last week, a third straight decline. Inflation expectations, measured by the five-year Treasury break-even rate, fell 12 percent this year, set for the biggest annual drop since 2008.
The chances are increasing that gold will drop to $1,000 as the cost of oil tumbles, Societe Generale SA’s Michael Haigh said Oct. 30.
Purchases in Asia will help support prices, Standard Chartered Plc has said. While surging equities and tame inflation have eroded gold’s appeal as a hedge, prices are nearing the lows forecast by banks including Goldman Sachs Group Inc., which reiterated in September its outlook for bullion to decline to $1,050 by the end of 2014. Demand in China will rise 20 percent in three years, the World Gold Council estimates.
Gold’s 14-day relative-strength index was below 30 in the five sessions through Nov. 6, a level that suggests to some traders who study technical charts that prices may be poised to rebound. The gauge climbed to 36 the next day as futures rose.
The Fed has said faster progress toward its goal of full employment and stable prices could prompt policy makers to raise rates sooner than currently anticipated. Higher borrowing costs make gold less attractive because bullion generally offers investors returns only through price gains.
While the U.S. unemployment rate in October dropped to the lowest in six years, job gains still trailed analyst forecasts, Labor Department data showed Nov. 7. Gold jumped 2.4 percent that day, the biggest gain since June.
Central banks in Europe and Japan are boosting stimulus in a bid to shore up growth. While spot gold fell 2 percent this year in dollar terms, bullion sold in yen has climbed 6.6 percent, while its price in euro is up 8 percent.
“We do still have quantitative easing going on in Europe and we’ve seen a massive step up from Japan last week that was ignored by the gold space,” Dan Denbow, a portfolio manager at the $800 million USAA Precious Metals & Minerals Fund in San Antonio, said in a Nov. 6 telephone interview. “As you start seeing more stimulus from other economies, long-term that should be supportive for gold prices.”
Gold surged 70 percent from December 2008 to June 2011 as global central banks increased money supplies on an unprecedented scale, spurring inflation concerns. The metal tumbled 28 percent in 2013, the biggest drop in three decades, after some investors lost faith in bullion as a store of value.
Net-bullish holdings across 18 U.S.-traded commodities rose 6.6 percent to 614,715 contracts as of Nov. 4, the CFTC data show.
Investors got more bearish on copper, taking their net- short position to 5,961 contracts, compared with 1,246 contracts a week earlier.
A measure of net-long positions across 11 agriculture commodities jumped 14 percent to 419,306 contracts, the highest since July. Bullish bets on corn rose 15 percent to 163,673 contracts, a five-month high.
In China, the largest producer after the U.S., the harvest will drop 3.6 percent to 210.6 million metric tons, the biggest decline in a decade, according to SGS SA, which interviewed 307 farmers in China’s top growing regions for Bloomberg during September and October. Output is falling from a record after drought hurt crops.
“Investors are sophisticated enough to appreciate that there’s an annual supply cycle, heavily contingent upon weather,” Gillian Rutherford, a Newport Beach, California-based commodities portfolio manager at Pacific Investment Management Co. which oversees $1.87 trillion, said Nov. 5. “While we have plentiful grain supply now, that’s not a guarantee for the future. And so while we’ve been able restock our inventories, weather or acreage declines, with lower prices, could result in materially tighter stocks in the future.”
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