Hedge funds are making the biggest bet ever against gold prices, signaling continued volatility for the metal after prices entered a bear market last month.
The CHART OF THE DAY shows that gains in so-called short contracts are usually followed by increases in a gauge of price swings for the SPDR Gold Trust, the biggest bullion-backed exchange-traded fund. Yesterday, the value of the SPDR Gold ETF climbed as much as $1.5 billion before ending the day down $418 million.
Bullion has tumbled 18 percent this year as some investors lost faith in the metal as a store of value and amid concern that the Federal Reserve may scale back economic stimulus. Prices in New York yesterday rose as much as 2.6 percent before settling down 0.7 percent as Fed Chairman Ben S. Bernanke testified before Congress.
“Higher volatility is positively correlated to a declining market,” Edward Lashinski, the Chicago-based director of global strategy for futures trading at RBC Capital Markets LLC, said in a telephone interview. “The momentum is strongly negative. The market understands that gold is no longer a safe haven.”
Hedge funds and other large speculators held 74,432 so-called short contracts on May 14, U.S. Commodity Futures Trading Commission data show. That’s the highest since the data begins in June 2006. The Chicago Board Options Exchange Gold ETF Volatility Index, which tracks the cost of options on the SPDR fund, has surged 92 percent this year. Gold futures for June delivery settled at $1,367.40 an ounce yesterday on the Comex in New York.
Bullion’s slump “has been faster than we expected,” Goldman Sachs Group Inc. analysts led by Jeffrey Currie wrote in a May 14 report. The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.