Gold Bulls Bet Wrong on Fed Easing

Photographer: Andrew Harrer/Bloomberg

Janet Yellen, chair of the U.S. Federal Reserve. Close

Janet Yellen, chair of the U.S. Federal Reserve.

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Photographer: Andrew Harrer/Bloomberg

Janet Yellen, chair of the U.S. Federal Reserve.

Gold speculators misjudged prices for a second consecutive week as the prospect of less stimulus from the Federal Reserve pushed futures lower.

Money managers raised their net-long position by the most since February in the week ended May 6. The next day, prices fell the most three weeks after Fed Chair Janet Yellen said the U.S. central bank’s four cuts in monthly bond purchases since November were “appropriate” because there is “sufficient underlying strength” in the domestic economy.

In the 14 weeks since January, investors have a track record of 50 percent, betting wrong on gold seven times. Prices that reached a six-month high on March 17 have retreated as much as 8.9 percent. Yellen told Congress on May 7 that while borrowing costs will be close to zero for a “considerable time,” policy makers will continue to reduce the pace of asset purchases in “measured steps.”

“There are real mixed messages from the Fed,” Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which manages about $160 billion, said May 8. “If you’re a gold investor and you’re looking for the Fed to talk incredibly dovishly, you may be disappointed.”

Futures dropped 1.2 percent to $1,287.60 an ounce last week, trimming this year’s rally to 7.1 percent on the Comex in New York, and closed at $1,295.80 at 1:49 p.m. local time. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 0.6 percent last week, while the MSCI All-Country World Index of equities declined 0.3 percent. The Bloomberg Treasury Bond Index was little changed.

Bullion Bets

The net-long position in gold climbed 14 percent to 102,895 futures and options as of May 6, a five-week high, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a decline fell 1.3 percent to 28,320.

Fed policy makers cut monthly bond purchases in April by $10 billion to $45 billion. Gold lost 28 percent in 2013, ending its 12-year rally, partly on the outlook for less stimulus. Prices will have a “slow grind” down, reaching $1,050 by the end of the year as the economy strengthens, Goldman Sachs Group Inc. said May 5.

U.S. jobless claims fell 26,000 to 319,000 in the week ended May 3, a bigger decline than projected, the Labor Department said May 8. Holdings in exchange-traded-products backed by bullion have slumped for eight straight weeks, the longest slide since January.

Geopolitical Tensions

Bullion climbed 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs near zero percent. While the pace of bond buying is slowing, Yellen said May 7 the U.S. economy still requires a “high degree of monetary accommodation,” citing the slowdown in housing as a risk as well as “heightened geopolitical tensions.”

Gold prices reached a three-week high May 5 on increased demand for the precious metal as a haven amid tension between Ukraine and pro-Russian separatists. The government in Kiev and its allies in the U.S. and Europe contend that Russian President Vladimir Putin is creating unrest in eastern Ukraine, after annexing the Crimean peninsula in March.

“The move in the gold market has been very much predicated as on the whims of Vladimir Putin,” Jeffrey Sica, who helps oversee more than $1 billion of assets as president of Sica Wealth Management in Morristown, New Jersey, said May 9. “That hasn’t created an easy ride for gold investors, because no one really knows 100 percent what’s going to happen one minute to the next.”

Crude, Copper

Combined net-wagers across 18 U.S. traded commodities declined 5.8 percent to 1.63 million contracts as of May 6, the CFTC data show. That was the biggest drop since January.

Bets on rising oil prices slumped 9.4 percent to 299,543 contracts as of May 6, the biggest decline since June. U.S. oil supplies reached a record 399.4 million barrels last month.

Wagers on higher copper prices fell 86 percent to 698 contracts. Futures in New York climbed 0.4 percent last week. Inventories of the metal tracked by the Shanghai Futures Exchange have dropped to a two-year low.

A measure of net-long positions across 11 agriculture products fell 4.7 percent to 1.02 million contracts, the biggest drop since January. Bullish farm bets have increased more than fivefold this year. The S&P GSCI Agriculture Index of eight crops jumped 18 percent in 2014.

Bullish bets on cattle futures rose to 136,483 contracts, a five-week high. Prices in Chicago surged 15 percent in the past 12 months.

Shrinking Herds

Shrinking livestock herds in the U.S. are sending meat prices to all-time highs, and extreme weather in Brazil, the world’s top coffee grower, threatened crop prospects. Consumers in the U.S. are projected to face the fastest food inflation this year since 2011, the Department of Agriculture has said.

“Anyone who’s tracking momentum is selling gold and buying agriculture,” Jack Ablin, the chief investment officer at BMO Private Bank in Chicago, who helps manage $66 billion of assets, said May 8. “Tapering is coming. If there’s any hint that interest rates will rise, then gold is not as valuable. Agriculture is much better.”

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.net Patrick McKiernan

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