Gold investors who pulled money out of U.S. exchange-traded products through the first half of 2014 rushed back in July, just as prices resumed a decline that Barclays Plc and Goldman Sachs Group Inc. say will get worse.
ETPs backed by precious metals took in $540.7 million this month through yesterday, a 1 percent gain for funds that saw a net outflow of $319 million in six months through June, data compiled by Bloomberg show. This month’s 3 percent drop in futures left prices down 7.9 percent from a 2014 peak in March.
The appeal of gold as a haven increased since Russia backed a rebellion in Ukraine and as violence escalated in the Middle East and North Africa. While the metal has outperformed equities and bonds so far this year -- gains that Citigroup Inc. says will hold -- analysts in a Bloomberg survey predict prices will drop in the fourth quarter as economic growth spurs a shift to U.S. equities already at all-time highs.
“Some people moved into gold because of the political turmoil, but the interest may wane as the longer-term fundamentals are not very helpful,” Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York, said July 29. “Expectations of higher interest rates and strength in the equity market may dash all hopes of gold rising.”
Gold futures fell 1.1 percent to settle at $1,282.80 an ounce today on the Comex in New York. This month, the Bloomberg Spot Commodity Index of 22 raw materials dropped 5 percent, while the MSCI All-Country World Index of equities fell 1.3 percent. Bloomberg’s Treasury Bond Index declined 0.1 percent.
The July slump for gold was fueled partly by concern that the Federal Reserve will raise U.S. interest rates, after easing monetary stimulus the central bank created since 2008 to spur economic growth. Yesterday, the central bank reduced monthly bond purchases to $25 billion, capping six straight cuts of $10 billion each since November.
Last year, prices tumbled 28 percent, the most in three decades. Some investors had lost faith in the metal as a store of value as inflation remained in check, economic growth showed signs of recovering and equity markets rallied.
The Standard & Poor’s 500 Index of equities is up 4.5 percent this year, following a 30 percent rally in 2013, and reached a record high on July 24. There has been an inflow of $59.2 billion for U.S. ETPs backed by equities so far this year, compared with $202 billion added last year.
Gold will average $1,252 in the fourth quarter, down 2.4 percent from today’s close, according to the median of 33 estimates in a Bloomberg survey of analysts. Open interest in Comex futures fell 13 percent from this year’s high.
Holdings in global ETPs backed by gold fell 29 metric tons this year, with Barclays expecting the drop to reach 100 tons this year. In 2013, more than $73 billion was wiped from the value of funds as investors sold 869 tons and prices fell.
Not everyone is convinced gold will falter. Money managers raised bets on higher prices in six of the past seven weeks through July 22, U.S. Commodity Futures Trading Commission data show. The net-long position in 136,120 futures and options contracts is almost four times what it was at the end of 2013.
Prices are up 6.8 percent this year, touching a 16-week high of $1,346.80 on July 10 as violence escalated in Ukraine and in the Gaza Strip. The European Union and U.S. on July 29 expanded sanctions against Russia for its role in Ukraine, while Israeli Prime Minister Benjamin Netanyahu told his country to brace for an extended military campaign in Gaza.
For the year, investors added $221.7 million through yesterday to U.S. ETPs backed by precious metals, including an increase of $100.5 million in June, data compiled by Bloomberg show. The two straight months of inflows follow two months of outflows.
Bullion will trade between $1,290 and $1,350 for the rest of the year amid increased geopolitical violence and concern that inflation will accelerate, according to Aakash Doshi, a vice president at Citigroup Global Markets in New York.
“Gold is a cheap way of hedging against the economic risk, and it also does not hurt to hedge against violence in the Middle East and eastern Europe,” Frances Hudson, a strategist in Edinburgh, U.K.-based Standard Life Investments Ltd., which oversees about $305 billion, said July 29. “People want a safe haven to guard against something going wrong.”
Paul Singer, founder of the $24.8 billion Elliott Management Corp., said in a letter to investors dated July 28 that gold presents a “unique and not really very expensive” trading opportunity, anticipating prices may rise on mounting inflation concerns.
U.S. consumer prices rose 2.1 percent in the 12 months from June, up from a 1.1 percent rate in February, government data showed last week. Fed Chair Janet Yellen on July 2 affirmed U.S. borrowing costs will remain low, boosting demand for gold as an alternative investment. The central bank has kept its target for overnight bank lending in a range of zero percent to 0.25 percent since December 2008 to spur a recovery.
The U.S. equity market also may be on the verge of a bubble or is already in one, according to three in five people surveyed in a Bloomberg Global Poll of investors, analysts and traders conducted July 15-July 16. Wall Street strategists are cautious with forecasts implying the S&P 500 will rise about 1 percent by year-end to 1,986, the average from a Bloomberg survey of 19 investment firms showed.
While flows into ETPs are up, demand from retail buyers has been slowing. Sales of gold coins at the U.S. Mint, the world’s largest, are heading for the worst month since March, while purchases by China, the world’s biggest user, fell 19 percent in the first six months of the year.
Prices will drop to $1,050 in 12 months, Goldman analysts reiterated in a July 23 report, unchanged from their outlook at the start of the year, as the U.S. economic recovery accelerates. While growth will slow this year to 1.7 percent from 2.2 percent in 2013, the economy will expand 3 percent next year, according to the median estimate of 84 economists surveyed by Bloomberg.
“It was the same story of gold finding followers in times of political crisis and upheaval, but once that ends, people feel safe to invest in other assets,” Sameer Samana, a senior international strategist at Wells Fargo Advisors LLC in St. Louis, which oversees $1.4 trillion, said yesterday. “People look at economic news for guidance on gold prices, and in a growth environment, gold may not do so well.”
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