Bulls Proven Wrong as Prices Slump Into Bear Market: Comm

Speculators increased bets on a rally in commodities for a second consecutive week, just as prices tumbled into a bear market after the Federal Reserve refrained from expanding monetary stimulus.

Hedge funds and other money managers raised net-long positions across 18 U.S. futures and options by 7 percent to 628,560 contracts in the week ended June 19, Commodity Futures Trading Commission data show. That’s the highest in four weeks and the first consecutive gain since the end of February.

Commodities slumped into a bear market June 21, a day after the Fed extended its Operation Twist program while refraining from a third round of debt buying known as quantitative easing. Reports last week showed that Americans filed for more jobless claims than forecast, sales of previously owned U.S. homes fell in May and manufacturing in the Philadelphia region contracted this month at the fastest pace in almost a year.

“People were thinking that we’d see the next stimulative event, and they started to front-run the trade, and that got reversed quickly,” said Jeffrey Sherman, who helps manage $37 billion of assets for DoubleLine Capital in Los Angeles. “We’re in for a volatile time in commodities as people try to ascertain what’s going to drive growth.”

Weekly Slump

The Standard & Poor’s GSCI Spot Index of commodities fell 3.2 percent last week, leaving the gauge down 21 percent from this year’s closing high in February. The MSCI All-Country World Index of equities retreated 0.3 percent, and the U.S. Dollar Index, a measure against six trading partners, gained 0.8 percent last week. Treasuries dropped 0.4 percent, a Bank of America Corp. index shows.

Sixteen of the 24 commodities tracked by S&P dropped last week. Declines were led by silver, which slumped 7 percent, the most since mid-December. Cotton plunged 6.9 percent on June 21, the biggest loss since 1991. The GSCI rose 0.6 percent to 567.28 at 2:45 p.m. in New York.

The Fed expanded its program to replace short-term bonds with longer-term debt, known as Operation Twist, by $267 billion through the end of the year, policy makers said at the end of a two-day meeting on June 20. The program should have been extended through 2013 to better shore up growth, according to Kathy Jones, a fixed-income strategist in New York for Charles Schwab Corp., which has $1.76 trillion in client assets.

Bundesbank Objections

Europe’s leaders are struggling to contain a debt crisis that forced Spain to call for a rescue, making it the fourth euro member to need external funding as borrowing costs surge. Germany’s Bundesbank said June 22 it’s opposed to the European Central Bank’s decision to relax some rules on the collateral that banks can offer in exchange for central bank loans.

“The fact that the Fed is doing anything implies that the economy is weak, which isn’t good for commodities,” said Janna Sampson, who helps manage about $2.8 billion of assets at Oakbrook Investments in Lisle, Illinois. “The outlook is very dependent on Europe. Europe will have to stabilize before the U.S. sees strong growth.”

Policy makers may be able to help stem declines through stimulus measures, said Jeffrey Sica, the president of SICA Wealth Management who helps oversee $1 billion of assets. A cash injection would make commodities attractive as alternative assets amid the threat of accelerating inflation, he said.

$2.3 Trillion

The S&P GSCI surged 92 percent from the end of December 2008 through June 2011 as the Fed kept interest rates near zero percent and bought $2.3 trillion in government and housing debt.

“As we hear more talk of stimulus, that will give commodities some price appreciation,” Sica said from Morristown, New Jersey. “There’s still tremendous demand for certain raw materials, such as grains. Their prices may not explode like they did in years past, but they’re still going to go up.”

A measure of 11 U.S. farm goods showed speculators raised bullish bets in agricultural commodities by 13 percent to 428,734 contracts, the most since May 22. Corn surged 9.5 percent last week in Chicago, the most in 13 months, as dry weather threatened U.S. Midwest crops. The grain jumped 7.2 percent today, heading for the biggest advance in two years.

Investors added $1.16 billion to commodity funds in the week ended June 20, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows. The gain was all attributable to gold and precious-metals funds, which took in $1.2 billion, the most in 20 weeks, said Cameron Brandt, the director of research for EPFR.

Gold Bets

Wagers on rising gold prices gained 5 percent to 104,646 contracts, the CFTC data show. That’s the highest since May 1 and the fourth straight gain, the longest bullish streak since early February. Net-long silver positions climbed 2.4 percent to 7,490 contracts, CFTC data show.

Gold tumbled 3.8 percent last week, the biggest loss this year, as investors dumped the metal after the Fed’s announcement. Futures gained as much as 1.4 percent today.

Investors became less bearish on copper before signs of slowing growth in the U.S., China and Europe sent prices down 2.2 percent last week, the seventh decline in eight weeks. Funds cut their net-short position, or bets on a decline, to 11,897 contracts from 13,346 a week earlier.

China’s manufacturing may shrink for an eighth month in June, matching the streak during the global financial crisis, according to the preliminary reading for a purchasing managers’ index last week. German business confidence fell to the lowest in more than two years this month, a gauge from Munich-based Ifo institute showed on June 22.

“The Fed has thrown a wet blanket on U.S. growth expectations,” said Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $115 billion. “Until there’s a committed fiscal thrust from China, as well as a renewed interest from the Fed to monetize debt, I’d stay on the sidelines.”

To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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