The rout in gold that drove the metal into a bear market cut the number of hedge funds investing in bullion to the lowest level since 2010 as assets slumped 31 percent this year on losses and redemptions.
Performance declines tied to volatility and withdrawals led either to closures or a shift in strategies, Farhan Mumtaz, an analyst at EurekaHedge Pte Ltd., the Singapore-based fund-research company, said in an interview. The number of funds investing in gold fell to 290 globally by May compared with 310 in December, and their assets shrank to $22.2 billion from $32.1 billion in the same period, he said on June 5. EurekaHedge has tracked gold-investing hedge funds for 10 years, he said.
Gold sank into a bear market in April, after rising for 12 years, as an improving U.S. economy spurred a rally in equities and undermined some investors’ faith in the metal as a store of value. While the slump prompted a surge in coin and jewelry buying, investors have withdrawn holdings from gold-backed exchange-traded products at a record pace. Bullion may drop to $1,100 in a year, Credit Suisse Group AG forecast last month.
“This is a story of an extremely popular trade that is going very poorly,” said London-based Warren Rogers, a portfolio manager at Duet Asset Management Ltd., which has been betting on declines. “People forget that at the end of the day gold is a commodity, and that this is how commodities behave. They become crowded, they run out of steam and they fall dramatically.”
Spot gold traded at $1,385.18 an ounce today in London, down 17 percent this year. The price, which rose as much as sevenfold in the 12 years to 2012, fell 14 percent in two sessions through April 15. The Standard & Poor’s 500 Index of U.S. equities rallied to a record in May as the economic outlook improved and European policy makers tried to stem the longest recession in the region’s history.
Bullion dropped in seven of the past eight months in part on speculation that the U.S. Federal Reserve may taper stimulus. Fed Bank of Dallas President Richard Fisher and Fed Bank of Kansas City President Esther George separately called for a reduction in the central bank’s debt-buying this week.
Investors sold 495 metric tons from ETPs valued at about $22 billion this year through to yesterday, according to data compiled by Bloomberg. Holdings in the SPDR Gold Trust, the biggest such ETP, plunged 25 percent. Gold demand contracted 13 percent in the first quarter to a three-year low, according to the London-based World Gold Council.
John Paulson, the top investor in the SPDR Gold Trust, maintained a stake of 21.8 million shares in the first quarter, a filing showed May 15. The billionaire is standing by the metal even after his Gold Fund saw declines this year, two people familiar with the matter said last month.
Gold remains the best store of value in an uncertain global economy, Elliott Management Corp. told clients in April even as the hedge-fund firm founded by Paul Singer lost money on its bullion position this year. Elliott, based in New York, said that gold will rebound as governments haven’t found a real solution to reduce the debt they have accumulated.
Not all investors are fleeing gold, said Ben Davies, co-founder of Hinde Capital Ltd. and manager of the Hinde Gold Fund in London, which runs a so-called long-only fund and allocates 95 percent of its $60 million assets to physical bullion. Long bets refer to wagers on gains.
“We did see redemptions but those are replaced at this level,” said Davies, whose fund started in 2007. “There are people who understand gold fundamentals, given the shortage of physical metal in London.” Still, his company’s assets dropped from about $100 million last year.
While investors sold ETP holdings, central banks have bought bullion for their reserves. Nations from Brazil to Russia added 534.6 tons last year, the most since 1964, and may buy 450 to 550 tons this year, the World Gold Council forecast.
Gold will drop as inflation fails to accelerate and risks to the global economy subside, Ric Deverell, head of commodities research at Credit Suisse, said last month. Nouriel Roubini, professor of economics and international business at New York University, has forecast a drop toward $1,000 by 2015.
European Central Bank President Mario Draghi vowed last July to do “whatever it takes” to defend the euro, defusing speculation that the currency union may fragment. Last month, the ECB reduced borrowing costs to a record low.
“There was an accumulation of very big positions by speculators and people realized that, because of what Draghi has said, the euro will not collapse, the U.S. is doing whatever it can to reduce unemployment,” said Gabriel Garcin, a portfolio manager Europanel Research & Alternative Asset Management in Paris, which manages $550 million. “If you are buying it for safe-haven reasons, then you should be selling now.”