Investors cut wagers on a rally in commodities by the most since November as signs of improving U.S. growth reduced demand for gold and rains in South America added to signs that crop harvests will be bigger.
Hedge funds and other large speculators reduced net-long positions across 18 U.S. futures and options in the week ended Feb. 12 by 15 percent to 757,060 contracts, the largest decline since Nov. 13, U.S. Commodity Futures Trading Commission data show. Bets on higher gold prices fell to the lowest since December 2008, while a measure for 11 farm goods slumped the most since November 2011.
Gold prices are down 3.9 percent since Dec. 31, the worst start to a year since 2001, as U.S. retail sales climbed for a third month in January and consumer confidence rose more than forecast in February. Combined soybean production in Argentina and Brazil will increase to a record and rising output of corn will help replenish global inventories after drought last year sent prices of both crops to a record.
“As confidence is building in an economic recovery that’s sustainable globally, you could lose a bid to gold,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $325 billion of assets. “Agricultural commodities to me are going to have a pullback year as weather normalizes.”
The Standard & Poor’s GSCI Spot Index of 24 commodities fell 0.3 percent last week, led by declines in silver and cocoa. The MSCI All-Country World Index of equities slid 0.2 percent, while the dollar rose 0.4 percent against a basket of six trading partners. Treasuries fell 0.1 percent, a Bank of America Corp. index shows.
An improving outlook in the U.S. and China has helped boost commodities most tied to economic growth this year, while damping demand for precious metals. The funds lifted wagers on a copper rally to an eight-week high. Bets on gains in gold fell 19 percent to 70,250 contracts, the lowest since December 2008, the CFTC data show. Bullish silver holdings declined 13 percent to 25,674 contracts, the biggest slide this year.
Retail purchases rose 0.1 percent last month, after increases of 0.5 percent in December and November, the Commerce Department said Feb. 13. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 76.3 this month from 73.8 in January, figures showed Feb. 15. The gauge was projected to rise to 74.8, according to the median of 65 forecasts in a Bloomberg survey.
Last week, bullion fell below $1,600 an ounce for the first time since August in New York. Billionaire investors George Soros and Louis Moore Bacon cut their stakes in exchange-traded products backed by the metal in the fourth quarter, government filings showed Feb. 14.
“People have become more risk-on,” said Dan Denbow, a fund manager at the $1.6 billion USAA Precious Metals & Minerals Fund in San Antonio. “Therefore, the more defensive aspects are seeing more money taken off the table. We’re seeing that in gold.”
Signs of a deepening recession in Europe may mean declines in demand for commodities as well, said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama.
The GSCI Spot Index of 24 raw materials is down 3.3 percent since reaching a six-month high in September as Europe’s leaders struggled to revive economic growth. The 17-nation euro area shrank the most in four years in the fourth quarter, official figures showed Feb. 14. The continent accounts for about 18 percent of copper demand and 14 percent of global energy consumption, Barclays and BP Plc data show.
Japan’s economy, the world’s third largest, is in recession after contracting at an annualized 0.4 percent in the fourth quarter, the Cabinet Office said Feb. 14. Last month, stockpiles of aluminum in the Asian country, among the top five global metals users, reached the highest in almost four years, signaling waning demand, according to Marubeni Corp.
“We saw some of the data coming out of Europe as being worse than expected,” Hellwig said. “The overall tenor of the global economy maybe wasn’t quite as strong as we thought, and as a result, that’s a headwind for commodities.”
Money managers pulled a net $13 million from commodity funds in the week ended Feb. 13, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. The declines were spurred by outflows from gold and precious-metals funds, which totaled $211 million, the sixth straight week of outflows, the longest stretch since the first quarter of 2011, he said.
Bets on a decline for sugar rose to 25,301 contracts, from a net-short position of 6,600 a week earlier. That’s the most-negative outlook since September 2007. Prices last week fell to the lowest since August 2010 on speculation that production will climb in Brazil, the world’s largest grower.
Cocoa net-long positions dropped 7.9 percent to 16,855 contracts, the seventh decline in eight weeks. Prices in New York last week fell to the lowest in seven months.
Bullish corn positions plunged 31 percent to 126,363 contracts, the biggest drop since June 5. Bets on a soybean rally slid 1.4 percent, the first drop in five weeks. Investors increased their wheat net-short holding, or wagers on a decline, to 32,415 contracts, the most bearish since May.
Warming equatorial waters in the Pacific Ocean are boosting precipitation in South America and the U.S., after dry weather scorched crops in 2012, Martell Crop Projections said in a report last week.
Corn export-sales for delivery before Sept. 1 are 53 percent lower than a year earlier, U.S. Department of Agriculture data show. Domestic inventories before the next harvest will be 5 percent larger than forecast a month earlier, the agency said Feb. 8.
“Inventory data for corn has improved, and export volumes have slowed,” said Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati who helps oversee $14.7 billion. “Some of the smart money that’s looking at bigger crops has started to come out, and that’s tripped a landslide. Some of these agriculture commodities may have moved too far, too fast, so we may see some bounce back, but it probably won’t be the start of another rally.”