Gold Bulls Bet Right as Prices Rally Most Since ’11: Commodities

Photographer: Junko Kimura/Bloomberg

Gold rebounded 11 percent since reaching a 34-month low on June 28 as the declines spurred physical demand. Tanaka Kikinzoku Kogyo K.K., Japan’s biggest gold retailer, said July 18 that its sales tripled in the second quarter from the previous three months. Close

Gold rebounded 11 percent since reaching a 34-month low on June 28 as the declines... Read More

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Photographer: Junko Kimura/Bloomberg

Gold rebounded 11 percent since reaching a 34-month low on June 28 as the declines spurred physical demand. Tanaka Kikinzoku Kogyo K.K., Japan’s biggest gold retailer, said July 18 that its sales tripled in the second quarter from the previous three months.

Hedge funds raised bets on a gold rally before prices capped the biggest two-week gain in 20 months as Federal Reserve Chairman Ben S. Bernanke damped speculation that a cut in stimulus is imminent.

Speculators increased their net-long position by 56 percent to 55,535 futures and options by July 16, the highest since June 4, U.S. Commodity Futures Trading Commission data show. Short contracts fell the most since November after reaching a record the previous week. Net-bullish wagers across 18 U.S.-traded commodities jumped 28 percent, the biggest gain since March.

Gold surged 6.7 percent in two weeks, the most since November 2011, as Bernanke signaled that decreases to bond purchases aren’t imminent. It’s “way too early to make any judgment” as to whether the Fed will start winding down its stimulus program in September, he said while testifying before the Senate July 18. Bullion fell into a bear market in April as some investors lost faith in the metal as store of value.

“We are seeing some support for gold as Bernanke’s statements tell us that the Fed wants to see a visible improvement in economic conditions before they begin tapering,” said Michael Cuggino, who manages $12 billion of assets at Permanent Portfolio (PRPFX) Family of Funds Inc. in San Francisco. “The longer-term reasons for owning gold, like capital preservation, remain as easy money will continue to flow into the system.”

Gold Survey

Futures gained 1.3 percent to $1,294 an ounce on the Comex last week, and extended that rally today, rising as much as 3.2 percent to $1,335.70, the highest since June 20. Traders are bullish for a fourth week, the longest run since the bear market began in April, with 15 analysts surveyed by Bloomberg expecting prices to rise this week. Nine were bearish and five neutral.

The Standard & Poor’s GSCI Spot Index of 24 commodities percent added 0.9 percent last week, the fourth gain and the longest rally since February. The MSCI All-Country World index of equities rose 1 percent as the S&P 500 Index reached a record July 18. The Bloomberg Dollar Index, which tracks the currency against 10 major trading partners, fell 0.5 percent. A Bank of America Corp. Index shows Treasuries returned 0.6 percent.

Bernanke’s remarks come after he said June 19 that the central bank may start paring the pace of bond buying this year and end the purchases around the middle of next year if the economy improves. The Fed purchases $85 billion of debt each month. Bullion more than doubled from 2008 to a record $1,923.70 in September 2011 as the central bank bought more than $2 trillion of debt.

Japan Buying

Gold rebounded 13 percent since reaching a 34-month low on June 28 as the declines spurred physical demand. Tanaka Kikinzoku Kogyo K.K., Japan’s biggest gold retailer, said July 18 that its sales tripled in the second quarter from the previous three months. Imports by India may climb to more than 900 metric tons in 2013 from 860 tons last year, and China’s purchases may top 1,000 tons, up from 817 tons, the London-based World Gold Council said July 17.

Most of the gain in the net-long position last week was attributable to a retreat in short holdings, which slumped to 61,002 contracts from 80,147. Long contracts increased 0.6 percent. The record-large bearish position had left prices vulnerable to a “short squeeze,” which can magnify any rally as speculators close out bets on a decline by buying back contracts, UniCredit SpA (UCG) said in a report July 17.

China ETFs

Holdings in exchange-traded products backed by bullion plunged 25 percent this year, erasing about $57.7 billion from the value of the funds. China’s first two gold ETFs last week raised less money than planned. Prices are down 21 percent this year. The declines signal investors see a reduced need for “disaster insurance,” Bernanke said July 18.

“It’s not as if the market has turned bullish suddenly,” said Nic Johnson, who helps manage $30 billion of commodity assets at Pacific Investment Management Co. in Newport Beach, California. “The longs have not raced higher. The shorts in gold were at a record, and some covering was bound to happen. People had become very complacent in gold as it went up for so long, and now the bears feel very vindicated.”

Money managers withdrew $436 million from gold funds in the week ended July 17, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $354 million, according to EPFR.

Commodity AUM

Commodity assets under management fell to a 32-month low of $349 billion in June, from $367 billion in May, driven by decreases in bullion ETPs, according to Barclays Plc. Precious-metal assets fell to $132 billion from $147 billion.

Net-long positions in crude oil climbed 8 percent to 304,383 contracts, the highest since April 2011, the CFTC data show. Prices climbed for four weeks, the longest rally since March. U.S. supplies tumbled by 27.1 million barrels in the three weeks ended July 12, the most in data starting in 1982.

Funds trimmed the net position in copper to a short holding of 15,673 contracts, from 26,284 a week earlier. China took steps last week to give banks more freedom to set borrowing costs, a sign that the government wants to spur economic growth in the world’s biggest metal-consuming country.

A measure of net-long positions across 11 agricultural products jumped 28 percent to 162,264 futures and options. Investors trimmed their bearish corn holdings to 37,262 contracts from 55,767 a week earlier, which was the highest level since data begins in 2006. Wheat net-shorts totaled 34,261, down from 47,844.

U.S. wheat sales to foreign buyers jumped 44 percent to 11.7 million tons in the marketing year that started June 1, compared with a year earlier, government data show.

“Demand for commodities is gradually seeing a turnaround,” said Joe Heider, a principal at Rehmann Financial Group, which manages about $2.2 billion of assets. “Clearly, the U.S. is doing well, and opportunities for growth remain in China, even though it has slowed down.”

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

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

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