Hedge funds increased bets on a gold rally by the most in three weeks as central banks signaled no end to economic stimulus, driving prices higher just as analysts and traders turned the most bearish in three years.
The funds and other large speculators raised their net-long position by 19 percent to 54,762 futures and options as of April 30, U.S. Commodity Futures Trading Commission data show. Holdings of so-called short contracts retreated 9.2 percent, the most since March 19. Net-bullish wagers across 18 U.S.-traded raw materials jumped 28 percent to 550,182, the biggest increase in seven weeks, led by gains in soybeans, cocoa and crude oil.
Gold rallied 4.9 percent in the past two weeks after entering a bear market April 12. The Federal Reserve raised the prospect of increasing its monthly bond buying on May 1 and the European Central Bank cut borrowing costs to a record low the next day. Billionaire investor Warren Buffett said the metal has no appeal even after the slump, and a weekly Bloomberg survey of analysts and traders was the most bearish since February 2010.
“It’s reasonable to say that the currency debasement and easing measures will support gold,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management, which oversees about $48 billion of assets. “The bulls still have to prove a lot. There is lot of skepticism surrounding gold. We have to watch to see if prices have found a near-term bottom.”
Futures climbed 0.7 percent to $1,464.20 an ounce on the Comex last week. Prices rebounded 11 percent since reaching a two-year low on April 16. The Standard & Poor’s GSCI Spot Index of 24 commodities rose 1.4 percent last week, and the MSCI All-Country World of equities gained 1.7 percent. The dollar slid 0.5 percent against a basket of six major peers, and a Bank of America Corp. Index shows Treasuries fell 0.4 percent. Gold settled 0.3 percent higher at $1,468 today.
The Fed said at the end of a two-day policy meeting in Washington last week it’s “prepared to increase or reduce the pace of its purchases” of $85 billion in debt a month. Gold surged 66 percent since the end of 2008 as the Fed was joined by central banks in Europe and Japan in printing unprecedented amounts of money, almost doubling sovereign debt to more than $23 trillion, a Bank of America index shows.
The flood of cash spurred investors including billionaire John Paulson to hold the metal as a hedge against inflation. Gold remains the best store of value in an uncertain economy, Elliott Management Corp. told clients even as the $21.8 billion hedge-fund firm founded by Paul Singer lost money on its position this year. Threadneedle Investments, a London-based fund with $131 billion in assets, remains bullish on gold as central banks stick with printing money to weaken their currencies and revive growth.
Some investors’ faith in the metal has waned as inflation fails to accelerate even as central banks add liquidity. Global holdings of the metal through exchange-traded funds slumped to the lowest since October 2011 after touching an all-time high in December. Buffett, the third-richest person in the Bloomberg Billionaires Index, said last year in his annual letter to shareholders that investors should avoid gold.
“If it went to $800, I wouldn’t be a buyer,” Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., told reporters in Omaha, Nebraska, on May 2. “It just sits there, and you hope somebody pays you more for it.”
Money managers withdrew $1.67 billion from commodity funds in the week ended May 1, 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 $1.79 billion, he said.
Gold prices had the biggest two-day drop in more than three decades last month, and a majority of the 38 analysts surveyed by Bloomberg said the metal’s 12-year winning streak is over. While the hedge funds’ short holdings declined in the week through April 30, they are still more than triple the average since 2006, when the data begins. Goldman Sachs Group Inc. said April 23 the precious metal may slide to $1,390 in 12 months, and Deutsche Bank AG predicts a drop to as low as $1,050.
“There are no inflationary worries, and gold is responding to the global deflationary pressure,” said Jim Russell, a senior equity strategist in Cincinnati at U.S. Bank Wealth Management, which oversees about $110 billion in assets. “There are no catalysts for gold to rise at the moment.”
Last month’s declines attracted retail buyers. Sales of gold coins by the U.S. Mint in April rose to the highest since December 2009, while the U.K. Mint said it is increasing output after demand more than tripled. Australia’s Perth mint has stayed open through the weekend to meet orders that reached a five-year high. Physical flows into India, the biggest consumer, climbed to at least five times the average of the past 12 months, UBS AG said May 3.
Central banks are still adding to gold reserves that are now at an eight-year high, according to International Monetary Fund data. Banks bought 534.6 metric tons last year, the most since 1964, according to the London-based World Gold Council. They are on pace to exceed that this year, Jason Toussaint, the managing director of investments at the council, said April 30.
Investors raised their bets on a rally for crude oil by 6.3 percent to 193,962 contracts, the first gain in three weeks, the CFTC data show. The funds increased platinum holdings by 17 percent to 22,355, the biggest gain since January. Palladium and silver wagers also increased.
A measure of speculative positions across 11 agricultural products surged 86 percent to 197,692 contracts. The funds narrowed their bets on a decline in wheat to a net-short position of 5,779 contracts, from 20,870 a week earlier. Bullish corn holdings more than tripled to 45,497.
Wheat output in Kansas, the biggest U.S. grower of winter varieties, will fall 18 percent in 2013 to 313.1 million bushels after drought last year was followed by an April freeze, surveys from a three-day annual crop tour showed.
“Weather conditions could push wheat prices higher, and it could outperform other agriculture commodities,” said Nic Johnson, who helps manage $30 billion of commodity assets at Pacific Investment Management Co. in Newport Beach, California. “It’s not a one-way direction for gold. While many have changed their minds and gone bearish, we stick to the fact that gold prices will likely go higher.”