Hedge funds cut wagers on a gold rally for the first time in three weeks on mounting speculation central banks will curb record stimulus and as this year’s slump in bullion spurred losses for billionaire John Paulson.
The funds and other large speculators lowered their net-long position by 4.1% to 54,779 futures and options by June 11, U.S. Commodity Futures Trading Commission data show. Net-bullish wagers across 18 U.S.-traded commodities rose 0.1%. Bearish copper bets more than doubled as the metal had its longest slump since November. Cocoa holdings advanced to the highest since 2008 before the biggest weekly slide since January.
The Bank of Japan left a lending program unchanged on June 11 and refrained from expanding its toolkit for tackling volatility in bonds. Federal Reserve policy makers meeting this week may discuss slowing $85 billion of monthly debt purchases amid signs of a sustained economic recovery. Gold surged 70% as the Fed bought $2.3 trillion of debt from December 2008 through June 2011. Paulson’s Gold Fund tumbled 13% in May, extending this year’s loss to 54%.
“There’s definitely a concern that if the Fed starts to remove the monthly purchases, that’s certainly signaling a strengthening in conditions, and that puts a bid into the dollar and certainly at the margin hurts gold,” said Ted Harper, a fund manager at Frost Investment Advisors LLC in Houston, who helps manage more than $9 billion of assets. Paulson’s “returns are emblematic of the difficult environment that gold investors have been facing,” he said.
Bear Market
Gold futures tumbled into a bear market in April and are now down 17% since the start of the year at $1,384.70 an ounce, heading for the first annual decline since 2000. Bullish bets slumped 78% from a record in August 2011 and the metal is 28% below its all-time high of $1,923.70 reached in September 2011. Prices advanced 0.3% last week.
The Standard & Poor’s GSCI Spot Index of 24 commodities rose less than 0.1% last week, while the UBS Bloomberg CMCI gauge of 27 raw materials lost 0.8%. The MSCI All- Country World Index of equities fell 0.7% and the dollar was down 1.2% against six major trading partners. A Bank of America Corp. index shows Treasuries returned 0.3%.
Asset Purchases
Fed Chairman Ben S. Bernanke said last month the central bank could curtail its bond purchases if the U.S. employment outlook shows a sustainable improvement. Policy makers will trim purchases to $65 billion a month in October, the median of 59 economist estimates compiled by Bloomberg this month shows.
Gold traders turned bearish for the first time in a month, with 18 analysts surveyed by Bloomberg anticipating declining prices this week. Fourteen were bullish and four neutral, the largest proportion of bears since May 17.
Assets in global exchange-traded products backed by bullion fell 20% this year as some investors lost faith in the metal as store of value. U.S. consumer prices climbed 1.1% in the 12 months through April, according to a measure watched by the Fed that excludes food and fuel. That matches the smallest increase since records began in 1960. The World Bank raised its 2013 U.S. growth forecast to 2% on June 12, from a January prediction of 1.9%.
Paulson & Co.
Paulson & Co. said it has no intention of closing down its Gold Fund even after this year’s losses, according to a letter to investors obtained by Bloomberg News. The company recommended investors stay invested as valuations provide “significant upside.” Paulson is the biggest investor in the SPDR Gold Trust, the largest bullion ETP.
St. Louis Fed President James Bullard said June 10 that inflation below the central bank’s 2% target may warrant prolonging bond buying. The International Monetary Fund sees the Fed maintaining large monthly bond purchases until at least the end of this year and urged the central bank to carefully manage its exit plan to avoid disrupting financial markets in its annual assessment of the U.S. economy released June 14.
“If quantitative easing does continue for too long, that could certainly lead to inflation,” said Christopher Burton, a fund manager at Credit Suisse Asset Management in New York who helps oversee $10.8 billion in commodity related assets. That “would generally correspond to higher commodity prices,” he said.
Total outflows from commodity funds were $315 million in the week ended June 12, according to Ian Wilson, a managing director for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Investors withdrew $277 million from gold funds, according to EPFR.
Goldman Sachs
Gold will continue to slide over the medium term on a “re- acceleration” in U.S. growth and a further unwinding of ETF positions, Goldman Sachs Group Inc. said in a report June 12. The bank sees the metal trading at $1,345 in 12 months.
Bullish bets on crude climbed 9.5% to 232,273 contracts, the highest since March 27, 2012, CFTC data show. Crude prices added 1.9% last week, the second consecutive gain. Palladium holdings climbed for a fifth week, the longest streak since February. Prices in New York slumped 3.9% last week, the most since April.
Investors increased their net-short position in copper to 18,772 contracts, from 6,626 a week earlier, CFTC data show. Prices fell for a fifth week, the longest slump since Nov. 9. Supplies will outpace demand by 162,000 metric tons this year, from a surplus of 41,000 tons in 2012, Barclays Plc said June 14.
Farm Bets
A measure of net-long positions across 11 agricultural products climbed 5.9% to 321,537 futures and options, as soybean and cotton holdings gained. The S&P’s Agriculture Index of eight commodities dropped 6.3% last week, the biggest slide since September 2011.
Bullish corn positions fell 9.3% to 82,517 contracts, a three-week low, the CFTC data show. Prices lost 4.6% last week. U.S. production will jump 30% this year and more than double inventories before the harvest in 2014, government data showed June 12. Soybeans dropped 2.4% last week and July wheat futures declined 2.2%.
“There is a glut of supply,” said Stanley Crouch, who helps oversee $2 billion as chief investment officer at New York-based Aegis Capital Corp. “There’s still pretty slack demand. We’re going to have to grow our way into more demand. You’re not going to see the shortages that were feared.”
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