Hedge funds lifted their bets on a gold rally as signs of an improving U.S. economy drove prices lower in the longest slump since April, while this year’s bullion declines spurred losses for billionaire John Paulson.
Money managers increased their net-long positions in gold by 9.9 percent to 34,301 futures and options as of July 2, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts climbed 1.4 percent to 78,148, the second-highest on record. Net-bullish bets across 18 U.S.-traded commodities dropped 17 percent as investors grew more bearish on wheat and soybean oil.
U.S. payrolls rose by 195,000 in June, beating analyst forecasts, government data showed July 5. Federal Reserve Chairman Ben S. Bernanke has said the central bank will begin trimming its $85 billion in monthly bond purchases if the economy continues to improve. Gold lost 26 percent in 2013, heading for the biggest annual drop since 1981 and poised to snap 12 years of gains. Paulson’s PFR Gold Fund tumbled 23 percent in June, extending this year’s loss to 65 percent.
“People want to own gold for a myriad of reasons, but they’ve all been disappointed in the last couple of months,” said Jeffrey Sherman, who helps manage more than $57 billion of assets for DoubleLine Capital in Los Angeles. “The lack of inflation and a strong dollar are headwinds that gold faces, and they’re not going to change anytime soon. The signs of improvement in the U.S. economy just add to the list.”
Gold futures dropped 13 percent in the previous three weeks in the longest slide since April 19. Prices that more than doubled from the end of 2008 to a record $1,923.70 an ounce in September 2011 are down 35 percent from the all-time high as some investors lost faith in the metal as a store of value. Bullish bets are down 66 percent since the end of December.
The Standard & Poor’s GSCI Spot Index of 24 commodities slid 1.4 percent this year. The MSCI All-Country World Index of equities rose 6.7 percent and the dollar climbed 6.1 percent against six major trading partners. A Bank of America Corp. index shows Treasuries lost 3.1 percent.
The unemployment rate held at 7.6 percent last month, close to a four-year low, Labor Department data show. Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said after the figures that the Fed will begin tapering its stimulus sooner than they had projected. Gold rose 70 percent from December 2008 through June 2011 as the central bank bought $2.3 trillion of debt.
The dollar climbed to a three-year high today, cutting the appeal of gold as an alternative investment. Holdings in global exchange-traded products backed by the metal are down 24 percent this year and below 2,000 tons for the first time since 2010, helping to erase about $61.3 billion from the value of the assets. Paulson is the largest holder in the SPDR Gold Trust, the biggest bullion ETP.
Paulson & Co. reiterated its commitment to investing in bullion and stocks of gold producers to hedge against currency debasement as global central banks pump money into the economy. Investing in the firm’s gold funds offers the “potential for outsized returns” if investors have a long-term view, according to a copy of a July 3 letter to investors obtained by Bloomberg News.
Gold investors may see better returns in the rest of 2013, as gains averaged 1.3 percent in the second half from 1981 to 2000, when bullion endured a two-decade bear market, data compiled by Bloomberg show. First-half losses averaged 3.9 percent in the period. India’s demand for jewelry is set to pick up before the Diwali festival, Catherine Raw, portfolio manager of BlackRock World Mining Trust, said in a e-mailed statement yesterday. While the holiday begins in November, bullion buying usually starts in August, she said.
“India is a major user of gold for jewelry and other items, so that certainly could give us a short-term lift,” said Peter Jankovskis, who helps oversee about $3.5 billion of assets as co-chief investment officer at Lisle, Illinois-based Oakbrook Investments LLC. “You will probably see a greater demand out there. It’s going to have a very muted effect on price. There’s going to be plenty of sellers.”
Total outflows from commodity funds were $834 million in the week ended July 3, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Investors withdrew $636 million from gold funds, according to EPFR.
Bullion will probably extend its losses, according to Societe Generale SA. Prices may average $1,150 next year, according to Michael Haigh, the head of the bank’s commodities research who correctly forecast the metal’s rout in April. Goldman projects gold will reach $1,050 by the end of 2014, and Credit Suisse Group AG forecasts a $1,150 in about a year.
The S&P GSCI commodity index climbed as much as 0.4 percent today, heading for a sixth straight gain and the longest rally since September. The gauge is up 4.7 percent since mid-April.
Net-long positions in crude oil jumped 14 percent to 263,643 contracts, the biggest gain since March, the CFTC data show. Prices reached a 14-month high yesterday on signs of improving U.S. growth and as protests in Egypt fanned concern that supplies from the Middle East will be disrupted.
Investors increased their platinum holdings by 1.6 percent to 17,591, the first gain in three weeks. Anglo American Platinum Ltd., the world’s top producer of the metal, said yesterday 11 percent of its workers went on strike to protest the suspension of union officials and demand a halt to job cuts.
The funds reduced their bearish copper outlook to a net-short position of 26,963 contracts from 32,599 a week earlier. The decade-long bull market in commodities may extend for an additional 15 to 20 years, driven by urbanization and growing populations in countries including China and India, Societe Generale’s Haigh said in Singapore yesterday.
A measure of net-long positions across 11 agricultural products tumbled 43 percent to 179,194 futures and options. The U.S. government said yesterday that exporters sold 840,000 metric tons of soft, red winter wheat to China for delivery before May 31. From June 1 to June 27, combined sales and shipments were five times bigger than a year earlier.
“We have ample supply, but a little better demand takes away a little bit of that supply and puts upward pressure on prices,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “We’re seeing the U.S. accelerate, and I think we’re going to see better economic growth for the rest of the world as well.”