Hedge funds raised bets on a gold rally by the most in two months as the U.S. economy expanded less than previously estimated, boosting speculation the Federal Reserve will maintain the pace of stimulus.
Speculators raised their net-long position by 35 percent to 48,096 futures and options by May 28, the biggest gain since March 19, U.S. Commodity Futures Trading Commission data show. Most of the gain came from a drop in short bets, which reached a record a week earlier. Net-bullish wagers across 18 U.S.-traded commodities climbed 13 percent to a nine-week high of 652,708 contracts, led by gains in corn and natural gas.
The U.S. economy grew at a 2.4 percent annualized rate in the first quarter, the Commerce Department said May 30, cutting its previous estimate of 2.5 percent. Fed Chairman Ben S. Bernanke said May 22 that ending the central bank’s stimulus program prematurely could endanger the recovery. Bullion surged 60 percent since the end of 2008 as central banks printed money on an unprecedented scale to boost growth.
“Gold continues to be useful as an insurance policy in people’s portfolios to guard against uncertainty and possibly some economic dislocation,” said Michael Cuggino, who manages about $14 billion of assets at Permanent Portfolio Family of Funds Inc. in San Francisco. “You have a lot of monetary creation going on, and while inflation is not a current threat, that doesn’t mean it’s not a threat at some point.”
Gold futures rose 0.4 percent last week, for a second weekly gain. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 1.4 percent, the most in six weeks. The MSCI All-Country World of equities dropped 1.4 percent, while the dollar weakened 0.4 percent against six major trading partners. A Bank of America Corp. index shows Treasuries lost 0.7 percent. Gold futures for August delivery rose 1.4 percent today to $1,411.90 an ounce on the Comex in New York.
Bankers advising the Fed said they expect the record stimulus to last as long as three years, according to minutes of a May 17 meeting released last week. The Fed is buying $85 billion of assets a month. Japan is making monthly bond purchases of more than 7 trillion yen ($69.7 billion).
Demand in India, the world’s largest bullion buyer, is poised for a quarterly record as imports reach 300 to 400 metric tons, the World Gold Council said May 29. That’s equal to almost half last year’s total purchases. The U.S. Mint’s sales of American Eagle gold coins reached 70,000 ounces last month, 32 percent more than a year earlier. Sales doubled in the first five months of 2013.
Traders are divided in their outlook for prices, with 15 analysts surveyed by Bloomberg expecting the metal to rise this week. Thirteen were bearish, and five neutral. Investors cut their short holdings by 10 percent to 71,311 contracts, the biggest drop since March 19.
Short wagers may keep declining after prices rallied 2.3 percent in the two days after the cut-off date for the CFTC data. A drop in contracts outstanding on the Comex also “likely reflects bouts of short covering,” Edel Tully and Joni Teves of UBS AG said in a report. Gold open interest dropped more than 8 percent last month, bourse data through May 30 show.
Holdings in exchange-traded products backed by gold retreated for a fifth month in May, dropping 5.6 percent to 2,148 tons, the lowest since May 2011. The value of the assets tumbled $44.2 billion this year as some investors lost faith in the metal as a store of value. Billionaire George Soros joined funds managed by Northern Trust Corp. and BlackRock Inc. in cutting holdings of ETPs in the first quarter, filings with the Securities & Exchange Commission show.
“Physical demand for gold has been good, but it hasn’t been enough to offset the losses coming out of ETFs,” said Timothy Hoyle, the director of research at Radnor, Pennsylvania-based Haverford Investments, which oversees about $6 billion of assets. “Gold has been in a decade-long bull market, and I could see gold continue to tread water for a while now or even trade down. Things really need to go wrong in the economy for gold to go up.”
Investors pulled $1.03 billion from gold funds in the week ended May 29, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $1.24 billion, according to EPFR.
Wagers on a rally in crude oil dropped 6.2 percent to 217,531 contracts, the first decline since April 23, the CFTC data show. Platinum holdings fell for a second week to 18,873 contracts, the lowest since August. Bets on higher cotton prices tumbled 21 percent, the most since investors were net short in November.
The funds trimmed their net-short position in copper to 8,872 contracts from 9,033 a week earlier. Speculators have been betting on a decline since the end of February. Prices in New York dropped 8.8 percent this year on signs that supplies will exceed demand. The International Monetary Fund on May 29 cut its forecast for expansion this year and next in China, the world’s biggest consumer of commodities from cotton to soybeans to zinc.
A measure of net-long positions across 11 agricultural products gained 28 percent to 293,716 contracts, paring this year’s drop to 27 percent. The S&P Agriculture Index of eight commodities declined 4.4 percent since the start of January.
“As long as the economic growth picture in China and Europe remains in question, we think there’s not a compelling case for commodities,” said Jim Russell, a senior equity strategist in Cincinnati at U.S. Bank Wealth Management, which oversees about $110 billion in assets. “We view it as a macro-economic supply-demand type dynamic, and right now it feels like the demand is maybe slipping away a little.”