Hedge funds and other speculators added to bullish gold bets before the metal slumped into a bear market and Goldman Sachs Group Inc. warned the retreat is accelerating after the longest rally in nine decades.
The investors increased net-long positions by 19 percent to 56,084 futures and options in the week ended April 9, the first gain in three weeks, U.S. Commodity Futures Trading Commission data show. That contrasts with a 7.9 percent decline in bullish wagers across 18 U.S.-traded raw materials, which fell to a five-week low of 431,581 contracts. Holdings in agriculture dropped to the lowest since September 2006.
The turn in the gold cycle is quickening and investors should sell the metal, Goldman Sachs said in an April 10 recommendation that returned 5.4 percent in three days. Gold retreated as the Standard & Poor’s GSCI Index of 24 raw materials fell to a nine-month low, extending a slump that Citigroup Inc. said marks the “death bell” for the supercycle, or longer-than-average period of rising prices. Global equities advanced to the highest since June 2008 as U.S. stocks reached a record.
“Anybody who did some buying before this big drop is probably in some pain,” said Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York. “The perception is that gold is not really needed as a safe haven. People are looking at the stock market and they’re stunned, and there’s no inflation. So people are saying ‘What do we need gold for?’”
Spot gold fell 6.2 percent to $1,483 an ounce last week, the biggest drop since December 2011. The S&P GSCI retreated 0.8 percent, reaching its lowest since July. The MSCI All-Country World Index of equities climbed 2.5 percent and the dollar slid 0.2 percent against a basket of six trading partners. Treasuries lost 0.2 percent, a Bank of America Corp. index shows. Gold lost as much as 9.9 percent to $1,335.75, the lowest since February 2011, and settled at $1,347.95.
Investor Jim Rogers, who predicted the start of the commodity rally in 1999, said gold was in need of a correction, and that he will start to buy it if it goes down enough. He didn’t say at what price he would start to buy.
A European Commission debt assessment dated April 9 said Cyprus had committed to selling around 400 million euros ($524 million) of “excess” gold reserves. The Cypriot central bank said it hadn’t discussed such plans. Cyprus has 13.9 metric tons of reserves, ranking it 61st globally with an amount equal to about 2 percent of daily trade in the London market.
Goldman cut its three-month target to $1,530 an ounce from $1,615 and lowered the 12-month forecast to $1,390 from $1,550, analysts Damien Courvalin and Jeffrey Currie said in a report April 10. Gold is in a “bubble,” Societe Generale SA said April 2. Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached 1,158.6 tons on April 12, the lowest since late April 2010.
Central-bank stimulus programs will help buoy gold prices, said Jeffrey Sica, who helps oversee more than $1 billion in assets as the president at Sica Wealth Management LLC in Morristown, New Jersey.
The Federal Reserve is buying $85 billion of debt a month and has said further improvement in the labor market is needed to consider reducing its record monetary stimulus known as quantitative easing. Payrolls grew by 88,000 in March, the least in nine months, the Labor Department said April 5. Confidence among consumers fell in April to the lowest since July, a private report showed April 12.
Bank of Japan Governor Haruhiko Kuroda reiterated last week a pledge for all necessary steps to meet a goal of 2 percent inflation in two years. The central bank will boost its monthly bond purchases to 7 trillion yen ($76 billion) to fight deflation and revive the economy, he said April 4.
“I see gold being much more stable,” Sica said. “The Fed will not stop printing money, and the quantitative easing will go on until at least the end of the year. What Japan is doing and what the U.S. is doing will continue to support gold prices in the future.”
The Fed, BOJ and European Central Bank have more than doubled the combined size of their balance sheets since the global financial crisis erupted in 2007.
Gold has ceased to be the haven for investors after it fell when the euro was close to collapse last year, billionaire investor George Soros said in an interview with the South China Morning Post published April 8. Soros cut his stake in the SPDR gold fund by 55 percent in the fourth quarter, a filing with the Securities & Exchange Commission shows.
Money managers took $1.39 billion from commodity funds in the week ended April 10, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Outflows from gold and precious-metals funds totaled $1.26 billion, he said.
UBS AG said April 2 that the commodities supercycle has ended and that returns are unlikely to match the performance of the past decade, joining Citigroup, which called the end to the cycle in November. There will be “many more losers than winners” for commodities this quarter, Citigroup analysts including Edward L. Morse, the bank’s global head of commodities research, said in an April 12 report.
The S&P GSCI gauge surged 170 percent from the end of 1999 to Dec. 31, 2009, the most of any decade since the data begins in 1971. China’s economy expanded almost fivefold and mining companies, farmers and energy producers struggled to keep up. Prices are now dropping as supply surpluses emerge in everything from copper to sugar to cotton.
Wagers on a rally in crude oil slid 4.4 percent to 196,330 contracts, the first drop in four weeks, the CFTC data show. Bullish platinum holdings slumped 12 percent to 22,053, the lowest since September. Those for palladium retreated 18 percent, the most since October.
A measure of net-longs for 11 U.S. farm goods tumbled 45 percent to 56,404 contracts, the lowest since Sept. 19, 2006, CFTC data show. Investors are holding a net-short position of 83,340 contracts in sugar, the most since at least 2006, when the data begins.
Corn to Soybeans
Bullish corn positions plunged 46 percent to 50,977 contracts, the lowest since June. Soybean wagers dropped 19 percent to 62,600 futures and options, the least since January 2012. Investors are holding a net-short position for wheat of 22,094 contracts, compared with 35,026 a week earlier. The funds have bet on declines since mid-December.
World stockpiles of wheat before this year’s Northern Hemisphere harvest will total 182.26 million tons, more than the 178.23 million forecast in March, the U.S. Department of Agriculture said April 10. Analysts surveyed by Bloomberg expected 178.82 million. Prices have plunged into a bear market on signs that global demand is slowing and farmers will boost output in the next year.
“Commodities are falling from worry about demand globally,” said Dan Denbow, a fund manager at the $1.6 billion USAA Precious Metals & Minerals Fund in San Antonio. “The faithful have been pulling back a bit. Prices are going to be dominated by what’s going on with the economic releases and what’s going on with the Fed. Gold is caught between being a safe-haven asset and a stable-value asset.”